The Bombay High Court has quashed reassessment proceedings initiated against a taxpayer for Assessment Year 2016–17, holding that an issue thoroughly examined and accepted during the original scrutiny assessment cannot be reopened merely because the assessment order does not contain an elaborate discussion on it.
The Bench of Justice B.P. Colabawalla and Justice Farhan P. Dubash observed that when the Assessing Officer raises specific queries, considers the taxpayer’s responses and ultimately accepts the claim, an opinion must be regarded as having been formed. Reopening the assessment on the same facts would consequently amount to an impermissible change of opinion.
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The petitioner/assessee had filed his income tax return for AY 2016–17 on July 30, 2016. During the relevant financial year, he sold 345 shares of Concord Enviro Systems Private Limited to AF Holdings, Mauritius.
The shares were sold at ₹86,206.90 each, resulting in capital gains of approximately ₹2.97 crore. The petitioner invested the capital gains in a residential property in Mumbai and claimed exemption under Section 54F of the Income Tax Act.
His return was subsequently selected for limited scrutiny. A notice under Section 143(2) was issued on September 14, 2017, specifically to examine whether the exemption from capital gains had been correctly claimed.
During the scrutiny proceedings, the Assessing Officer issued several questionnaires under Section 142(1), seeking information concerning the acquisition and sale of the shares, the nature of the capital gains and the petitioner’s eligibility for exemption under Section 54F.
According to the petitioner, all relevant documents and explanations were furnished. The information included details concerning the valuation of the shares, the identity and creditworthiness of the Mauritius-based purchaser and the genuineness of the transaction.
After considering the material, the Assessing Officer passed an assessment order under Section 143(3) on June 26, 2019, accepting the returned income and making no addition.
Nearly six years after the end of AY 2016–17, the Income Tax Department issued the disputed show-cause notice under Section 148A(b).
The notice referred to information received through the Income Tax Department’s Insight Portal concerning the sale of the 345 shares to AF Holdings under a share purchase agreement dated August 7, 2015.
That agreement covered shares sold by the petitioner, Prerak Goel and India Waste Water Treatment Company. While the petitioner sold 345 shares, Prerak Goel sold 350 shares and India Waste Water Treatment Company sold 11,056 shares.
The Department alleged that the sale price was not supported by a valuation report and that the transaction lacked genuineness. It characterised the transaction as a make-believe arrangement intended to route the petitioner’s unaccounted money in the guise of consideration for the transfer of shares.
On this basis, the Department proposed to treat the entire sale consideration of ₹2,97,41,380 as the petitioner’s unaccounted income that had escaped assessment.
In his response, the petitioner pointed out that the same transaction had already been extensively examined during the original scrutiny proceedings. He also requested a copy of the information uploaded on the Insight Portal to determine whether any fresh tangible material existed to justify reassessment.
The Assessing Officer rejected the objections through an order under Section 148A(d). The officer reasoned that the original assessment order did not contain any discussion concerning the issue on which reassessment was proposed.
According to the officer, the absence of discussion meant that the original Assessing Officer had neither accepted nor rejected the petitioner’s claim and had, therefore, not formed any opinion on the matter.
The High Court rejected the Department’s reasoning after examining the notices, questionnaires and responses exchanged during the original assessment proceedings.
The Bench found that the acquisition and sale of shares, their pricing and valuation, the identity and creditworthiness of AF Holdings and the genuineness of the transaction had all been examined by the Assessing Officer.
The claim for exemption under Section 54F arising from the investment in residential property had also formed part of the original scrutiny.
The Court noted that the original assessment was not a perfunctory exercise. A detailed inquiry had been conducted, after which the Assessing Officer accepted the petitioner’s claim and concluded that no addition was required.
It held that an Assessing Officer is not required to elaborate on every issue in an assessment order when the taxpayer’s explanation has been accepted.
Once a query is raised during scrutiny, answered by the taxpayer and accepted while completing the assessment, the matter must be treated as having been considered. This remains the position even when the final assessment order does not specifically refer to or discuss the issue.
The Bench relied on the Bombay High Court’s decision in Knight Riders Sports Private Limited, which held that it would be practically impossible for an Assessing Officer to record detailed reasons concerning every query on which the taxpayer’s explanation was found satisfactory.
The Court accordingly concluded that the original Assessing Officer had formed an opinion on the share transaction and the associated tax exemption. The subsequent attempt to reopen the assessment on the same set of facts was merely a change of opinion.
The Assessing Officer had relied on the Supreme Court’s ruling in Income Tax Officer v. TechSpan India Private Limitedto contend that no opinion could be attributed to the officer when the original assessment order was non-speaking or cryptic.
The High Court, however, observed that the Supreme Court’s decision had, in fact, ultimately ruled in favour of the taxpayer and affirmed that reassessment based on a change of opinion was invalid.
The relevant question was whether the issue had been considered expressly or by necessary implication in the original proceedings. In the present case, the contemporaneous assessment record established that detailed questions had been raised and answered.
Therefore, the Department could not rely solely on the absence of discussion in the final assessment order to claim that no opinion had been formed.
During the High Court proceedings, the Department also questioned the petitioner’s Section 54F exemption on the ground that his share in the residential property had allegedly been acquired from his mother through a notarised agreement executed on stamp paper of ₹500.
It argued that the transaction was not supported by a duly stamped and registered conveyance deed and that the petitioner was consequently ineligible for the exemption.
The Court refused to accept this argument because the show-cause notice issued under Section 148A(b) did not contain such an allegation. The notice only questioned the genuineness and valuation of the share transaction and did not raise any objection concerning the documentation used to acquire the residential property.
The Bench held that the reasons recorded for reopening an assessment must be considered as they were originally stated. They cannot subsequently be substituted, expanded or supplemented through an affidavit or oral submissions before the Court.
Relying on its ruling in Hindustan Lever Limited v. R.B. Wadkar, the Court said that the recorded reasons must be clear, unambiguous and self-explanatory. They must disclose the Assessing Officer’s mind and establish a vital link between the evidence and the conclusion that income escaped assessment.
The Court clarified that these principles continue to apply under the reassessment regime introduced through Section 148A. Under the new framework, the show-cause notice issued under Section 148A(b) effectively contains the reasons for proposing to reopen the assessment.
Any deficiency in those reasons cannot be repaired when the matter reaches the Court.
Holding that the proceedings were founded on an impermissible change of opinion, the High Court quashed the March 31, 2023 show-cause notice under Section 148A(b), the April 20, 2023 order under Section 148A(d), and the consequential reassessment notice issued under Section 148.
The petitioner had separately argued that the Section 148 notice was barred by limitation because it was issued beyond six years from the end of AY 2016–17. According to him, the six-year outer limit expired on March 31, 2023, whereas the reassessment notice was issued on April 20, 2023.
Since the Court allowed the petition on the ground of change of opinion, it did not decide the limitation issue or the petitioner’s other grounds of challenge. Those questions were expressly left open.
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