2015 (1) TMI 825 - HC - Income Tax

Reopening of assessment - whether the second reassessment notice in fact was an impermissible change of opinion ? - Held that - Second reassessment notice was based upon re-appreciation of the original record. This Court notices that the CIT as well as ITAT have concurrently ruled that whatever material or explanation in respect of the issues sought to be raised in the second reassessment notice to the assessee were part of the record and could have been noticed in the first reassessment proceedings. The reason to believe on which a reassessment can be validly ordered should necessarily be based on tangible material which an A.O. comes by after the assessment. Necessarily such material is outside the record. Straying from this clear path would be sliding down the slippery slope into a quagmire of re-appreciation of existing material and -even the process of reasoning which is impermissible as it is a forbidden merits review . Reassessment if permitted in such instances would be a route which (to borrow the phrase from another context) unlocks the gate which shuts the A.O s review on merits. Appeal dismissed. - Decided against revenue.

Summary

Issues:
1. Validity of the second reassessment notice under Section 147 of the Income Tax Act.
2. Permissibility of "change of opinion" in the reassessment proceedings.
3. Adequacy of disclosure of material facts by the assessee in the original assessment.
4. Application of the "reason to believe" principle in reassessment proceedings.

Analysis:
1. The High Court addressed the issue of the validity of the second reassessment notice under Section 147 of the Income Tax Act. The Revenue challenged the ITAT's decision affirming the CIT(Appeals) order that deemed the second reassessment notice impermissible. The Court noted that the second notice included additional amounts beyond the first reassessment, such as prior period expenses and deferred expenditure. The CIT(Appeals) and ITAT found the additions unjustified, emphasizing the impermissible "change of opinion" in the reassessment process. The Court concurred with this view, highlighting that the material in the second notice was part of the original record and should have been addressed in the initial assessment.

2. Regarding the permissibility of a "change of opinion," the Court examined the assessee's response to the questionnaire during the scrutiny assessment. It was revealed that the assessee had not initially claimed certain allowances but did so in a revised return. The assessing officer, based on this, issued the second reassessment notice under Section 147. However, the Court emphasized that without fresh tangible material or a valid reason, the AO could not rely on the existing record for reassessment, as it would amount to impermissible re-appreciation of the original material.

3. The Court analyzed the adequacy of the assessee's disclosure of material facts in the original assessment. It was observed that the assessee had fully and truly disclosed all relevant facts during the initial assessment. The CIT(Appeals) and ITAT extensively reviewed the additions sought by the assessing officer and concluded that the efforts to tax those amounts were unwarranted. The Court cited precedents emphasizing the importance of tangible material for a valid reassessment, preventing a merits review based on existing records.

4. Lastly, the Court applied the "reason to believe" principle in reassessment proceedings. Referring to legal precedents, the Court reiterated that a valid reassessment must be based on tangible material discovered after the original assessment. Straying from this principle could lead to impermissible re-evaluation of existing material, constituting a forbidden merits review. The Court upheld the decisions of the CIT(Appeals) and ITAT, dismissing the appeal and affirming the validity of the impugned order.