With technological synergies coupled with information gathered Annual Information returns and data mining the department is flooded with information overload about the undisclosed transactions of assessees which may or may not be inferring in tax evasion. To tap the unexplored potential tax evasion the chief weapon in armoury of exchequer is power to reopen the cases. The power to reopen is a special power which is given with great responsibility to the Assessing Officer and has to be exercised judiciously and based on the precedents explaining the scope of such law. The casual and mechanical approach adopted by the Department of late has resulted in a deluge of notices more with an intention to carry out enquiries and investigations at the fag end of March for period getting lapsed in limitation. The Assessing Officer is empowered to reopen the case if he has reason to believe that income which has escaped assessment and not in any other case. Each and every word used has its relevance which have been dealt and explained by Courts and have evolved the law on this subject. In this article I have tried to discuss the recent developments in this subject with cardinal precedents. At the outset the procedure of making a valid reassessment is described as follows:

1. The initiation of reopening proceedings gets triggered when some new tangible material of income escaping assessment comes into knowledge of AO

2. Such information is perused and after necessary application of mind a belief is formed which is recorded as reasons for reopening on which necessary sanction of competent authority is taken.

3. Based on such reasons notice for reopening is issued under Section 148 within the limitation period and served in reasonable time to the right person.

4. In response to such notice return has to be filed by the assessee and then request to the AO to provide the reasons for reopening.

5. On receipt of return and request for providing reasons it is mandatory on part of AO to provide the verbatim copy of reasons for reopening.

6. The assessee has to peruse the reasons and file legal and factual objections against the reasons if the same is not acceptable.

7. The AO has to reject the objections by way of a speaking order and wait for the assessee for four weeks if assessee wants to challenge the rejection order in writ jurisdiction.

8. If the rejection of objections is not challenged in writ then the AO has to issue statutory notices and carryout the assessment to complete it within limitation period.

The above procedure has to be followed by the AO and Assessee in letter and spirit and any deviation could be prejudicial to their cases in law. Critical issues arising in the above procedure and the jurisprudence thereof is discussed hereinafter.

Sufficiency vs. Existence of Reasons

Once there exists reasonable grounds to form the subject belief, that would be sufficient to clothe him with jurisdiction to issue notice. The adequacy or sufficiency of reasons cannot be challenged in law, however, the existence of the belief can be challenged by the assessee. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the initiation of reopening proceedings in respect of income escaping assessment is open to challenge in a Court of law.

Providing reasons for reopening

It is an admitted concept that when the assessee makes a request to provide reasons for reopening it is mandatory for the AO to provide the reasons for reopening to the assessee after filing of return of income in response to Section 148 of the Act. The act of AO in not providing of such reasons would render the reassessment as invalid even in case when the assessor is stated to know the assessee.

Interestingly in case of Balwant Rai Wadhwa v. ITO (ITA 4806/Delhi/2010) it is held that despite service of s. 148 Notice on time, non-supply of ‘Reasons For Reopening’ within limitation period renders the reopening void.

Therefore if in a case reasons are given after a six years it can be contended that if the reasons are not provided immediately on filing of return the reassessment may get void.

Change of opinion

Indeed you won’t find anywhere in the bare statute to restrict reopening based on change of opinion, however, this is the most cited argument taken against reopening. This is a Judge made law which has its birth in the observations of Mr. Justice Rowlatt in Anderton and Halstead Ltd. v. Birrell [1932] 1 K.B. 271. The same was first cited in India by K. N. Rajagopala Sastri in the case of Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC). This concept is held to be an in-built test to check abuse of power by Assessing Officer and that the reasons must have a live link with formation of belief. Reason to believe and change of opinion are contrary and therefore the existence of words reasons to believe prohibits any review or change of opinion in an already completed assessment.

Most important decision on change of opinion is CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) where the concept of reason to believe was explained and it was observed that ‘Change of Opinion’ rebuts the formation of ‘Reason to Believe’ which is the crux. If there is “Change of opinion” it is essentially a review which cannot be done as it is a separate statutory process.

Very recently Supreme Court in case of ITO v. TechSpan India Private Ltd (order dated 24.04.2018) has laid down that what would be change of opinion. In order to constitute “change in opinion”, the assessment earlier made must either expressly or by necessary implication have expressed an opinion on the subject matter of reopening. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the AO any opinion on the questions that are raised in the proposed reassessment proceedings. The reassessment cannot be struck down as being based on “change of opinion” if the assessment order does not address itself to the aspect sought to be examined in the reassessment proceedings.

Similarly in case of Rajesh Jhaveri Stock Brokers Pvt. Ltd (291 ITR 500) the Apex Court has laid down that in summary assessment under Section 143(1) no opinion is formed and therefore the argument of change of opinion is not available in such cases. However this does not mean that reassessment can be done in all cases where no scrutiny assessment is done. This is dealt in detail in next para.

Reopening based on no new material/ facts

There are two arguments against reopening without any new material on record. First that the same is nothing but a change of opinion as held by Bombay High Court in case of Asian Paints Ltd. v. DCIT (308 ITR 195) (Bom) as it was merely a fresh application of mind by the AO to the same set of facts and that since the AO had failed to apply his mind to the relevant material while framing the assessment order u/s. 143(3), he could not take advantage of his own wrong and reopen the assessment under section 147 of the Act.

However another argument prevailing in cases where no scrutiny assessment is done coins that as per decision of SC in case of Kelvinator (supra) the term “reason to believe” means that there is “tangible material” and not merely a “change of opinion” and this principle will apply even to s. 143(1) Intimations. This principle is also explained in a third member decision (having judicial precedence equal to Special Bench) in case of Telco Dadajee Dhackjee Ltd v. DCIT that while in that case of a s.143(1) intimation, the assessee cannot challenge the reopening on the ground of ‘change of opinion”, he can challenge it on the ground that there were no “reasons to believe” that income had escaped assessment or that the said reasons did not have a live link with the formation of the belief. Even in the case of a s. 143(1) intimation, the AO must have “tangible material” that income has escaped assessment. Similarly Mumbai Tribunal accepting this proposition in case of Aipita Marketing Pvt. Ltd. v. ITO (21 SOT 302) has held that in the absence of any new material, the AO is not empowered to reopen an assessment irrespective of whether it is made under section 143(1) or 143(3)of the Act.

Reopening based on information from investigation wing

As stated earlier the challenge to reopening cannot be made on sufficiency of reasons but can be made to existence of reasons. One should be very careful to deal with cases where reopening is made based on information from investigation wing or similar cases. Any action taken in haste by challenging the initiation in writ may not yield desired results however systematic rebuttal and patient approach may bring success in such cases.

Recently many writ petitions were filed in cases where notice for reopening was issued based on information from wing however the same were rejected. In case of Yogendra Kumar Gupta vs. ITO [2014] 366 ITR 186 (Gujarat) such information was held to be a fresh information and reopening was upheld. Further in case of Jayant Security & Finance Ltd [2018] 91 taxmann.com 181 (Gujarat) a very clear message comes out that till the completion of reassessment it cannot be said that the AO has not applied his mind and reasons are merely on basis of information from wing. However where the reassessment gets completed it is easier to make an inference from the actions and proceedings as to whether the AO has applied his mind or not.

These kind of information whether or not sustainable on other counts does constitute failure on part of assessee to disclose any material facts and therefore in such cases where the reopening is beyond four years and case was assessed under Section 143(3) of Act the challenge would not sustain based on view taken in case of Phool Chand Bajrang Lal 203 ITR 456 (SC). The famous finding of this decision is reproduced herewith:

“One of the purposes of section 147 appears to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing’. It would, be travesty of justice to allow the assessee that latitude.”

Be that as it may, where after completion of reassessment it is demonstrated that the proceedings were completed based on information from investigation wing only but no further inquiry was undertaken by Assessing Officer, said information could not be said to be tangible material per se and, thus, reassessment on said basis was not justified as held by Delhi HC in case of PCIT v. RMG Polyvinyl (I) Ltd [2017] 83 taxmann.com 348 (Delhi). Similarly in case of PCIT v. Meenakshi Overseas (P.) Ltd. [2017] 82 taxmann.com 300 (Delhi) it was held that where reassessment was resorted to on basis of information from DIT (Investigation) that assessee had received accommodation entry but and there was no independent application of mind by AO to tangible material and reasons failed to demonstrate link between tangible material and formation of reason to believe that income had escaped assessment, reassessment was not justified.

Again in case of Haryana Acrylic Manufacturing Co. v. CIT [2008] 175 Taxman 262 (Delhi) Delhi High Court held that notice under section 148, giving reason that it had come to his notice that assessee had taken accommodation entries from ‘H’ during relevant year when assessee, in course of original assessment proceedings, had supplied all relevant details; in assessment order which were verified and moreover, in reasons supplied to assessee there was no allegation that it had failed to disclose fully and truly all material facts necessary for assessment and because of its failure there had been an escapement of income chargeable to tax, reopening of assessment after expiry of four years from end of relevant assessment year was without jurisdiction. In such case since the allegation of failure to disclose material fact on assessee was not made by the department therefore the ratio of Phoolchand Bajranglal (supra) did not save the case of department.

Belief of escapement of income

It is generally seen that the completed assessment are reopened based on the audit objections of the Revenue audit party. Admittedly where reopening cannot be done based on legal audit objections however the reopening based on factual audit objections may prevail. But the important aspect here is that the belief of escapement of income should be genuine. In most of the cases it is seen that on one hand the AO agitates against the audit objection, however, under pressure from audit party he has to reopen the case. The correspondences between audit party and AO forms internal correspondence however the same exists in the records which can be verified in inspection of file which is a right of assessee. Though the copy of such confrontation between AO and Audit party would obviously not be provided to assessee but if the assessee makes sure of such existence then the same records can be called before Appellate Authorities which would sufficiently strike down the purported reason to belief. Gujarat HC in case of Raajratna Metal Industries Ltd vs. ACIT (reported on itatonline.org) has categorically held for such cases that if AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void. Failure on part of the assessee to disclosed fully and truly all material facts beyond four years

Proviso to section 147 clearly provides that if the original assessment was completed u/s. 143(3), reassessment can be done only where there was a failure on part of the assessee to disclose fully and truly all material facts necessary for assessment. However many times it is seen that the reasons do not expressly allege or state about such failure on part of Assessee which is a sine qua non and absence thereof renders the reopening as void.

In case of HCL Technologies Ltd [2017] 397 ITR 469 (Delhi) it is held that for complying with the jurisdictional requirement under the first proviso to Section 147 of the Act, the reasons would have to show in what manner the Assessee had failed to make a full and true disclosure of all the material facts necessary for the assessment. Similarly in case of Vareli Weavers Pvt. Ltd. vs. DCIT (1999) 240 ITR 77 (Guj) the HC had quashed the notices under section 148 read with section 147 of the Act observing that there being no whisper in the reasons recorded by the AO about failure on the part of the assessee to disclose truly and fully all material facts. Also Delhi high Court in CIT v. DCM Ltd., (2009) 24 DTR(Del) 72 found that there was no allegation in this regard in the reasons recorded by the AO and thus the reopening of the assessment was not valid.

Invalid assumption of Jurisdiction u/s. 148 instead of Section 153C

Recently it is seen that reopening of cases follows as a consequence of search instead of express provisions of Section 153C in case of persons other than person searched. In case of incriminating material is found during search pertaining to another person the proceedings are required to be initiated under section 153C of the Act and not under Section 147 of the Act. This is due to the fact that Section 153C starts with the non obstante clause i.e. “Notwithstanding anything contained in section 139, section 147, section 148,…… where the Assessing Officer is satisfied………” Therefore the overriding provisions of Section 153C prevail over the Section 147 and the assumption of jurisdiction under Section 148 becomes invalid. This view has been upheld in case of Rajat Saurabh Chatterji v. ACIT (ITA 2430/Del/2015) and ACIT v. Arun Kapur – 140 TTJ 249 (Amritsar).

No reopening for roving enquiries or investigation

Section 147/148 of the Act is not meant for reopening an already concluded assessment by first issuing notice and then proceeding to investigate and find out if there was any lacuna in the accounts. If such further investigation, by reopening a concluded assessment, is permitted, it would give rise to fishing and roving enquiries, because, in every case, the Assessing Officer can then issue notice for the purpose of investigation, and thus reopen any concluded assessment. This principle is very relevant in today’s context where notices are issued to make inquiries and verify facts and details of investments in property or cash deposits as to whether they are commensurate with the income. This principle has been strongly laid down by Karnataka High Court in case of C M Mahadeva v. CIT and Bombay High Court in case of Bhor Industries Ltd. v. ACIT (2004) 267 ITR 161 and Hindutan Lever Ltd.’s case (2004) 268 ITR 332 (Bom).

Notice to non existent persons

A notice issued to a non-existent person is prima facie invalid. The existence has to be seen on the date of issue of notice. If a person is deceased on the date on which notice is issued the same would become invalid and void and a fresh notice would be required to be issued to legal heirs. The decisions of Vipin Walia v. ITO (Del HC) and Shaikh Abdul Kadar v. ITO, 34 ITR 451 (MP) have followed this view. However it is pertinent here to peruse the decision of Madhya Pradesh High Court in case of Smt. Kaushalyabai v. CIT, 238 ITR 1008 (MP) where the notice was issued to a deceased person however considering Section 292BB of the Act since the widow of deceased co-operated in the proceedings therefore the proceedings were held to be valid. All these decisions have been considered by the Agra Bench of Tribunal in case of ITO v. Sikandar Lal Jain (ITA Nos. 196, 197 and 405/Agra/2007) which explains the law on this subject and decides in favour of assessee. The correct approach arising from harmonious reading of these decisions comes out that the AO should be informed about the fact of death of the assessee prior to the issue of notice along with copy of death certificate and do not participate in such illegal proceedings till notice is issued to legal heirs within limitation period.

Very recently Supreme Court in case of Skylight Hospitality LLP v. ACIT (order dated 6-4-2018) has held that S. 148 notice issued in the name of a company which does not exist upon its conversion into a LLP is valid if there is material to show that the issue in the name of the company was a clerical mistake. The object and purpose behind s. 292-B is to ensure that technical pleas on the ground of mistake, defect or omission should not invalidate the assessment proceedings, when no confusion or prejudice is caused due to non-observance of technical formalities.

This was the case of conversion of company into LLP and the ratio may be extended by courts to the cases of successions like amalgamations, etc however the issue of notice to a deceased person cannot be considered akin thereto and would still be invalid in eyes of law.

Minimising the impact

Many a times on receipt of notice the assessee realises the mistake or mischief which he regrets but the notice is issued and there is no reversal. In such cases the last legal recourse is to offer such escaped income in response to the return filed in response to Section 148 of the Act. However the concern is regarding the levy of penal provisions under Section 271(1)(c) of the Act. In such cases it needs to be appreciated that the return is filed before the reasons are disclosed to the assessee and therefore it cannot be said to be in response to detection and any action to come forward and offer income may be considered as bonafide to not attract penalty. This contention has been accepted by various courts and can be helpful to those who want to avoid litigatious approach on debatable issues. In the following decisions it is held that penalty is not leviable when income is offered in response to Section 148 of Act and such income is accepted in assessment:

CIT v. Suresh Chandra Mittal 251 ITR 963 (SC)

Meeta Gutgutia ITA No. 327/Del/2014

CIT v. Rajiv Garg [2009] 313 ITR 256 (P&H)

Swati Pearls (ITA 1401/Hyd/2014)

Therefore it would be advisable in appropriate cases to offer the income in response to Section 148 of Act if the assessee is doubtful about the merits of the case or expects prolonged litigation based on risk appetite of assessee.


The above discussion highlights that the power to reopening is not fullproof and can be rebutted on various counts if due diligence is exercised at every stage by the assessee along with due legal recourse. At every stage assessee has to adopt a systematic approach and maintain proper records of all proceedings to take a conscious decision and decide the course of action in the proceedings.

Hope this article proves useful to all.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

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