Mere 'reason to believe' do not satisfy the condition for re-opening of the assessment

The Bombay High Court has ruled that the Income Tax Department cannot reopen an assessment beyond four years simply based on a 'reason to believe' that income has escaped assessment. The court clarified that for assessments made under Section 143(3) and reopened after four years, the department must demonstrate a failure by the assessee to fully and truly disclose material facts. Without meeting this specific jurisdictional condition, the reopening notice is invalid.

The Hon’ble Bombay High Court in Punia Capital Pvt. Ltd. v. the Assistant Commissioner of Income Tax and Ors. [Writ Petition No.1091 of 2022 dated February 15, 2023] quashed the notice and the consequential order of the Revenue Department forre-opening of assessment. Held that, the Revenue Department could only re-open an assessment beyond four years, if there was a failure on the part of the assessee to disclose material facts fully and truly and not on the basis of "reason to believe" without satisfying the jurisdictional condition required under the provisions of Section 147 of the Income Tax Act, 1961 ("the IT Act").

Facts

Punia Capital Pvt. Ltd. ("the Petitioner") had filed the Income Tax returns under the Section 139 of the IT Act for the Assessment Year ("A.Y.") 2015-16. The Revenue Department ("the Respondent") selected the case for scrutiny and issued a notice under Section 142 (1) of the IT Act, calling for the various details mentioned therein. The Petitioner replied to the notice, submitting its financial statements for the A.Y. 2015-16, and the assessment proceedings were completed under Section 143 (3) dated August 31, 2017 accepting the loss of INR 4,23,213/- declared in the Return of Income ("ROI").  

Subsequently, a notice dated March 31, 2021 under Section 148 of the IT Act ("the Impugned Notice") was issued by the Respondent, on the grounds that there was a reason to believe that income for A.Y. 2015-16 had escaped assessment as per Section 147 of the IT Act. The Petitioner, in response to the Impugned Notice, dated April 13, 2021, filed the ROI declaring the loss of INR 4,23,213/- and further requested for a copy of the reasons recorded for reopening the assessment, which was provided by the Respondent. 

The Petitioner raised the objections against the reasons for initiating the re-assessment proceedings, contending that the reasons reflected non-application of mind by the Respondent and were based upon an incorrect factual matrix, wherein, the loan had not been taken by the Petitioner, but rather advanced to M/s. Outstripe Suppliers Pvt. Ltd., on which the interest was also received, and details regarding the same were provided during the assessment proceedings. However, the objections were rejected by the Respondent vide order dated December 14, 2021 ("the Impugned Order").

Being aggrieved, this petition has been filed. 

Issue

Whether the re-opening of the assessment is sustainable?

Held

The Hon’ble Bombay High Court in Writ Petition No.1091 of 2022 held as under:

• Analysed Section 147 of the IT Act and noted that, if the Respondent had reason to believe in any A.Y. that any income chargeable to tax had escaped assessment, the Respondent may assess or reassess such income, as well as any other income chargeable to tax, which had escaped assessment and which came to its notice subsequently in the course of the proceedings, subject to the provisions of Sections 148 to 153 of the IT Act. 
• Further noted that, if an assessment under Section 143 (3) has been made for the relevant A.Y., no action shall be taken under Section 147 of the IT Act after the expiry of four years from the end of the relevant A.Y. unless any income chargeable to tax has escaped assessment for such A.Y. by reason of failure on the part of the Petitioner to disclose fully and truly all material facts necessary for its assessment for that assessment year.
• Observed that, the Respondent had reopened the assessment solely on the basis of "reason to believe" and not on the grounds of failure to disclose material facts fully and truly, which would have required satisfaction on the part of the Respondent, particularly since the re-opening pertained to a period beyond four years.
• Relied on the judgment in its earlier matter of Hindustan Lever Ltd. v. R.B. Wadkar, Assistant Commissioner of Income-tax [Writ Petition No. 1504 of 2003 dated February 25, 2004], wherein, the Court set aside the notice issued under Section 148 of the IT Act, on the grounds that the Revenue Department had not stated that there was failure on the part of the assessee to disclose fully and truly the material facts necessary for the assessment, without touching upon any of the other grounds.
• Held that, the Respondent’s manner of proceeding reflects a complete non-application of mind, which does not satisfy the jurisdictional condition required under Section 147 of the IT Act.
• Quashed the Impugned Notice and the Impugned Order.

Relevant Provisions

Section 147 of the IT Act

"Income escaping assessment

If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year). Explanation.-For the purposes of assessment or reassessment or re-computation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with."