Expression “reason to believe” in Section 147 means cause or justification. The AO need not have finally ascertained the fact by legal evidence or conclusion.
In a recent judgment, Hon’ble Supreme Court has held that the expression “reason to believe” in Section 147 of the Income Tax Act, 1961 means cause or justification. The AO must have tangible material having a rational connection or a live link with the formation of the belief that income has escaped assessment, and need not have finally ascertained the fact by legal evidence or conclusion.
ABCAUS Case Law Citation:
5254 (2026) (10) abacus.in SC
Important Case Laws relied upon by Parties:
Calcutta Discount Co. Ltd. v. ITO, reported in (1961) 41 ITR 191 (SC)
Narayannappa v. CIT, reported in (1967) 63 ITR 219 (SC)
Chhugamal Rajpal v. S.P. Chaliha (1971) 1 SCC 453
Sheo Nath Singh v. Appellate Assistant Commissioner of Income Tax
ITO vs. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)
Ganga Saran & Sons (P). Ltd. v. ITO (1981) 130 ITR 1 (SC)
Sanand Properties (P) Ltd. v. CIT (2026) 488 ITR 337
Phool Chand Bajrang Lal v. ITO (1993) 4 SCC 77
CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2008) 14 SCC 208
In the instant case the appellant assessee(s) had challenged the judgment of the High Court whereby the Hon’ble High Court High Court had dismissed the writ petition and upheld the reassessment proceedings under Sections 147 and 148 of the Income Tax Act, 1961 (the Act).
During the relevant Assessment Year, the appellant under a Share Purchase Agreements sold shares held by him in a company. Subsequently, the appellants jointly purchased an undivided and undefined 1/2 share in a residential property. The said property was purchased out of the capital gains arising in the hands of the appellants and from the sale of shares of the said companies within a period of 2 years, thereby entitling the appellant to the benefit of Section 54F of the Act.
For the relevant Assessment Year, the appellants vide notice under Section 142(1) of the Act, were asked for an explanation on the nature of the transaction with the buyer company. The Revenue also issued notice under Section 133(6) of the Act to the seller companies and the buyer company, calling for information in relation to the aforementioned transaction of sale of shares by the appellant(s). Both the notices were duly replied by the appellants. The returned income of the appellant was accepted vide the assessment under Section 143(3) of the Act.
Subsequent to the completion of the assessment, the Investigation Unit, conducted enquiries into the value of the shares of the companies and prepared an Investigation Report which concluded, prima facie, that the shares were overvalued when compared with the cost of their land and building, which was much lower than the transaction amounts. It was also noted that the source of the investment in residential property was shown to be from the proceeds of the said shares.
Accordingly, the notice u/s 148 was issued after recording the reasons. On rejection of the objections to the reopening, the appellants filed a Writ Petition in the Hon’ble High Court which came to be dismissed.
Before the Hon’ble Supreme Court, the appellants contended that the reasons recorded by the respondent for alleging escapement of income in their hands were legally unsustainable as the transaction was independently enquired into by the AO and confirmed by the said companies and the buyer company in the scrutiny assessment under Section 143(3) of the Act for both AYs. The reassessment of the buyer company on the same transaction also ended in acceptance of its returned income.
It was also submitted that in this case, reopening was permissible only if income had escaped assessment by reason of the failure of the assessee to disclose fully and truly all material facts necessary for assessment, and that in the absence of such failure during the earlier scrutiny proceedings, reassessment initiated after 4 years was illegal.
Reliance was placed on various decisions to fortify the submission that the respondent must come into possession of some fresh tangible information relating to a concluded assessment which exposes the falsity of the statement made by the assessee at the time of the original assessment.
It was also contended that the reassessment could be said to have been initiated on a mere change of opinion, without any allegation, let alone evidence, of a failure on the part of the appellant to disclose the primary facts.
On the other hand, the revenue’s stand was that it issued the impugned notice under Section 148 of the Act on the strength of the investigation report submitted by the DGIT Investigation Unit which constituted specific and tangible material on the overvaluation of shares. Thus, at the stage of issuing the notice, the only question that would be relevant is whether there was any credible material on which a reasonable person could form the requisite belief, the truth of the allegations being a matter for enquiry in the reassessment proceedings.
The Hon’ble Supreme Court observed that in view of the various judgments of the Apex Court broadly the following principles emerge for the purpose of construing the meaning and scope of the expression “reason to believe”:
Principles for the purpose of construing the meaning and scope of the expression “reason to believe”:
(i) (The word “reason” in the phrase “reason to believe” means cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said that he has reason to believe that income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion;
(ii) The AO may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed, or because some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available, but acting on fresh information. It would be immaterial whether the AO, at the time of making the original assessment, could or could not have found by further enquiry or investigation whether the transaction was genuine or not;
(iii) At the initiation stage, the final outcome of the proceeding is not relevant, and what is required is “reason to believe” but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage;
(iv) The words “reason to believe” are stronger than the words “is satisfied”. Accordingly, the belief entertained by the AO must not be arbitrary or irrational. It must be reasonable, or in other words, based on reasons which are relevant and material, and must be that of an honest and reasonable person based upon reasonable grounds. The expression does not mean a purely subjective satisfaction on the part of the AO. The reason must be held in good faith and cannot be merely a pretence;
(v) The AO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. A vague feeling that the transactions may be bogus does not fulfil the requirement, and the AO must give reasons for issuing a notice under Section 148 of the Act and must have some prima facie grounds before him for taking action. A conclusion that there is a case for investigating as to the truth of the alleged transactions is not the same thing as saying that there are reasons to issue the notice;
(vi) The reasons for the formation of the belief must have a rational connection with or a relevant bearing on the formation of the belief, and must not be extraneous or irrelevant for the purpose of the section. Rational connection here means that there must be a direct nexus or live link between the material coming to the notice of the AO and the formation of his belief that there has been escapement of the income of the assessee from assessment. It is not any and every material, however vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of income. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the AO could not have reason to believe that income had escaped assessment.
(vii) Whether the grounds or reasons are adequate or not is not a matter for the court to investigate, and the sufficiency of the grounds which induces the AO to act is not a justiciable issue. The court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the AO on the point as to whether action should be initiated for reopening the assessment.
(viii) However, it is open to the assessee to contend that the AO did not hold the belief, as the existence of the belief can be challenged but not the sufficiency of the reasons for the belief. It is open to the assessee to establish that there in fact existed no belief, or that the belief was not at all a bona fide one, or was based on vague, irrelevant and non-specific information. To that limited extent, the court can examine whether there was any material available on the record from which the requisite belief could be formed by the AO, and whether that material had any rational connection or a live link for the formation of the requisite belief. It is the duty of the assessee who wants the court to hold that jurisdiction was lacking to establish that the AO had no material at all before him for believing that there had been such non-disclosure.
(ix) To decide whether the AO has a reason to believe that income chargeable to tax has escaped assessment, only those materials which were before the AO at the time of initiating the proceedings are to be taken into account, and not any further materials which subsequently came to light in the course of the proceedings under Section 147 of the Act. A document not referred to in the reasons recorded under Section 148 of the Act cannot be used to justify the validity of the reopening, as the assessee must not be deprived of a fair opportunity to dispute such grounds.
(x) The words “reason to believe” have to be interpreted schematically, as a liberal interpretation would confer arbitrary powers on the AO, who may initiate reassessment proceedings merely on his change of opinion on the basis of the same facts and circumstances already considered by him during the original assessment proceedings, which could not be the intention of the legislature. Section 147 of the Act does not allow reassessment merely because the AO has a change of opinion with regard to the interpretation of law differently on facts that were well within his knowledge even at the time of assessment, as doing so would give the AO the power of review, whereas Section 147 confers the power to reassess and not the power to review.
(xi) The concept of “change of opinion” (which we shall discuss below) is an in-built test to check abuse of power by the AO. There has to be some “tangible material” to come to the conclusion that there is escapement of income from assessment, and the reasons must have a live link with the formation of the belief.
The Hon’ble Supreme Court further observed that in Kelvinator of India Ltd. it had explained the meaning and scope of the expression “change of opinion” wherein it was held that a mere change of opinion cannot, per se, be a reason to reopen an assessment.
The Hon’ble High Court further noted that in another case it held that, in order to determine whether a case is one of change of opinion or not, one has to look at its meaning in literal as well as legal terms. This Court observed that the words “change of opinion” imply the formulation of an opinion and then a change thereof, and that, in terms of assessment proceedings, it means the formulation of a belief by the AO resulting from what he thinks on a particular question, being a result of understanding, experience and reflection.
Principles on the expression “change of opinion” in the context of Section 147 of Income Tax Act 1961
In view of its judgments, the Hon’ble Supreme Court laid down the following principles on the expression “change of opinion” in the context of Section 147 of the Act:
(i) A mere change of opinion cannot, per se, be a reason to reopen an assessment, as the AO has the power to reassess and not the power to review. The concept is an in-built test to check abuse of power, and after 01.04.1989 the AO may reopen only if there is tangible material, with the reasons having a live link with the formation of the belief;
(ii) A change of opinion implies the formulation of an opinion and then a change thereof. It presupposes a conscious application of mind and the formation of an opinion during the original assessment proceedings;
(iii) The court must verify whether the earlier assessment has, either expressly or by necessary implication, expressed an opinion on the matter which is the basis of the alleged escapement of income;
(iv) If the assessment order is non-speaking, cryptic or perfunctory, it may be difficult to attribute any opinion to the AO, and every attempt to tax escaped income cannot be absorbed by judicial intervention on an assumed change of opinion. Where there is a perceptible lack of any inquiry on the specific aspect, the plea of change of opinion is legally untenable;
(v) Where no opinion was formed in the first instance, the revenue may reopen upon the discovery of facts suggesting that income has escaped assessment. But where the point was well considered in the original proceedings, reassessment merely because the AO now takes a different view on the same facts is a change of opinion.
In the instant case, the Hon’ble Supreme Court observed that on the strength of the trail of information from sale of shares to the purchase of residential property to claim deduction u/s 54F, the Revenue had recorded that the shares had been overvalued, that the capital gains were adjusted in future years and that deductions were also claimed on which the respondent recorded that he had reason to believe that a substantial amount had escaped assessment.
The Hon’ble Supreme Court opined that on the above material, the Revenue had prima facie reasons to believe that all material facts relating to the transaction had not been fully and truly disclosed in the original assessment, which is all that is required at this stage.
The Hon’ble Supreme Court pointed out that the AO has the jurisdiction to initiate reassessment proceedings relying on some fresh facts having surfaced which were not previously disclosed, or because information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts.
The Hon’ble Supreme Court further observed that it need not go into the adequacy or sufficiency of the grounds which induced the AO to issue the impugned notice under Section 148 of the Act as the same is not a justiciable issue. The courts have only to see whether there is a rational connection or a live link between the material and the formation of the belief. The reasons recorded indicate this link at each step.
The Hon’ble Supreme Court further observed that the assessment order under Section 143(3) of the Act, which stated that “after examination of the submissions of the assessee and discussion with the Authorised Representative of the assessee, assessed at loss of Rs. 90,37,369/- under Section 143(3) of the Act” had no discussion in it on the LTCG. Additionally, in the inquiry carried out by the AO, the factum of the undervaluation was suppressed, and it came to light only on the investigation carried out, which negates the case of “change of opinion”. Also, original assessment orders under Section 143(3) of the Act did not indicate that the AO formed any opinion on the matters which form the basis of the present reopening.
The Hon’ble Supreme Court held that the expression “reason to believe” in Section 147 of the Act means cause or justification. The AO must have tangible material having a rational connection or a live link with the formation of the belief that income has escaped assessment, and need not have finally ascertained the fact by legal evidence or conclusion. At the stage of the notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief, and the sufficiency of the reasons is not a justiciable issue.
It was further held that a mere “change of opinion” cannot be a reason to reopen, as the AO has the power to reassess and not the power to review.
A change of opinion presupposes a conscious application of mind and the formation of an opinion in the original assessment, which the court must verify, either expressly or by necessary implication, before interfering with the reopening.
On the facts of the case in hand the Hon’ble Supreme Court held that the impugned notice u/s 148 was issued on reasons duly recorded, based on the tangible material of the report of the Investigation Unit prepared after the assessment, and which had a rational nexus and a live link with the belief formed by the AO. The notice was therefore valid and no case of change of opinion is made out either.
Accordingly, the appeal was dismissed.
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