2025 (1) TMI 826 - HC - Income Tax

Reopening of assessment u/s 147 - notice beyond a period of four years - reasons to believe - HELD THAT - On a perusal of the reasons recorded, there is no allegation as to what are the material facts which the petitioner failed to disclose at the time of his assessment. Mere reproducing the wordings of the proviso does not satisfy the jurisdictional condition which the AO is required to satisfy prior to reopening the case. Having said so, the reasons themselves record that the same is based on the case records of the petitioner. Therefore, if based on these case records which case records are filed by the petitioner- assessee during the course of the assessment proceedings and are forming part of the assessment records, if a reopening is sought to be done after a period of four years then that would be wholly without jurisdiction in the absence of satisfaction of the condition prescribed in first proviso to Section 147 of the Act. The reasons recorded clearly proves that condition as per first proviso are not satisfied. In the reasons recorded there is no mention as to what are the material facts which the petitioner-assessee ought to have disclosed and which came to the notice of the AO post the assessment order from any source outside the assessment records. Co-ordinate Bench of this Court in the case of Hindustan Lever Ltd. 2004 (2) TMI 41 - BOMBAY HIGH COURT have observed that the reasons should disclose as to which fact or material was not disclosed by the assessee fully which was necessary for assessment so as to establish the vital link between the reasons and evidence. Mere mentioning that there was a failure to disclose fully and truly material facts does not confer jurisdiction on the Assessing Officer to reopen the case after the expiry of four years. The original assessment of the petitioner was selected for limited scrutiny which was converted into complete scrutiny to examine the transactions of capital gains. The petitioner in the course of the assessment proceedings gave the details of long term capital gain and short term capital loss including the date of acquisition and date of transfer. The petitioner also gave details of loss on transfer of mutual funds. It is only after examining all the details relating to capital gain and capital loss that an assessment order came to be passed u/s 143 of the Act. In our view, based on these very details, the present proceedings have been initiated which is impermissible since it does not satisfy the pre-condition prescribed under the first proviso to Section 147 of the Act, it would amount to review of the assessment order which is not permissible. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, was justified beyond the four-year limitation period.
Whether the petitioner had failed to disclose fully and truly all material facts necessary for the assessment year 2015-16.
Whether the Assessing Officer (AO) followed due process in providing reasons for the reassessment notice under Section 148 and addressing the petitioner's objections.
Whether the reliance on Explanation 1 to Section 147 by the respondents was appropriate in the context of this case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Reopening the Assessment

Relevant legal framework and precedents: The reopening of an assessment under Section 147 is permissible if the AO has reason to believe that income has escaped assessment. The first proviso to Section 147 restricts reopening beyond four years unless there is a failure by the assessee to disclose fully and truly all material facts.
Court's interpretation and reasoning: The court emphasized that reopening beyond four years requires specific identification of undisclosed material facts. Mere repetition of statutory language does not meet this requirement.
Key evidence and findings: The reasons for reopening were based on the petitioner's case records, indicating no new material facts were discovered post-assessment.
Application of law to facts: The court found that the reopening was based on existing records, which were already part of the original assessment, thus failing to satisfy the conditions for reopening after four years.
Treatment of competing arguments: The petitioner argued that all relevant facts were disclosed, and the reopening was unjustified. The respondents relied on Explanation 1 to Section 147, which the court found inapplicable.
Conclusions: The court concluded that the reopening was unjustified as it did not meet the statutory requirements, rendering the proceedings without jurisdiction.

Issue 2: Disclosure of Material Facts

Relevant legal framework and precedents: Full and true disclosure of material facts is a prerequisite for reopening an assessment beyond four years.
Court's interpretation and reasoning: The court noted the absence of specific allegations regarding undisclosed material facts in the reasons recorded for reopening.
Key evidence and findings: The reasons for reopening were based on the petitioner's existing records, which were disclosed during the original assessment.
Application of law to facts: The court found no failure on the part of the petitioner to disclose material facts, as the reopening relied on already available records.
Treatment of competing arguments: The petitioner maintained that all facts were disclosed, while the respondents failed to identify any specific undisclosed facts.
Conclusions: The court concluded that the petitioner had disclosed all material facts, and the reopening was not justified.

Issue 3: Due Process in Providing Reasons and Addressing Objections

Relevant legal framework and precedents: The AO is required to furnish reasons for reopening promptly and address objections before proceeding with the assessment.
Court's interpretation and reasoning: The court criticized the AO for providing reasons at the last minute and hastily proceeding with the assessment.
Key evidence and findings: The AO furnished reasons almost a year after the initial request, leaving inadequate time for the petitioner to respond.
Application of law to facts: The court found the AO's actions unfair and unreasonable, violating procedural fairness.
Treatment of competing arguments: The petitioner argued that the delayed provision of reasons and rushed assessment process were unfair. The respondents did not effectively counter this argument.
Conclusions: The court deemed the AO's process unconstitutional and invalidated the proceedings on this ground.

Issue 4: Appropriateness of Relying on Explanation 1 to Section 147

Relevant legal framework and precedents: Explanation 1 clarifies that mere production of account books does not constitute full disclosure if material evidence is embedded within.
Court's interpretation and reasoning: The court found that Explanation 1 did not apply as no new material was discovered beyond what was already disclosed.
Key evidence and findings: The assessment relied on records already available during the original proceedings.
Application of law to facts: The court concluded that the respondents' reliance on Explanation 1 was misplaced.
Treatment of competing arguments: The petitioner argued that all material was disclosed, while the respondents' reliance on Explanation 1 was deemed inappropriate by the court.
Conclusions: The court held that Explanation 1 did not justify the reopening, supporting the petitioner's position.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Mere mentioning that there was a failure to disclose fully and truly material facts does not confer jurisdiction on the Assessing Officer to reopen the case after the expiry of four years."
Core principles established: Reopening an assessment beyond four years requires specific identification of undisclosed material facts. Procedural fairness demands timely provision of reasons and addressing objections.
Final determinations on each issue: The court quashed the reopening notice, order on objections, assessment order, and demand notice, concluding that the reopening was unjustified and procedurally flawed.

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