Mere Change Of Opinion Cannot Be A Ground For Reopening Of Assessment Under Income Tax Act: SC

The Supreme Court held that a mere change of opinion cannot be a ground for reopening of assessment. It answered whether the reopening of a concluded assessment i.e., reassessment under Section 147 of the Income Tax Act, 1961 (ITA) following the issuance of notice under Section 148 of ITA is legally sustainable or bad in law. 

The Court was deciding a batch of civil appeals relating to the case in which the Income Tax Appellate Tribunal (ITAT), Cochin Bench, had decided in favour of the assessee by setting aside the orders of reassessment. However, the Kerala High Court in appeals filed by the revenue under Section 260A of ITA, reversed the findings of the Tribunal by deciding the appeals preferred by the revenue in its favour.

The two-Judge Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed, “We may also mention that while framing the initial assessment orders of the assessee for the three assessment years in question, the assessing officer had made an independent analysis of the incomings and outgoings of the assessee for the relevant previous years and thereafter had passed the assessment orders under Section 143(3) of the Act. We have already taken note of the fact that an assessment order under Section 143(3) is preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). If that be the position and when the assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the assessing officer that income of the assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This is nothing but a mere change of opinion which cannot be a ground for reopening of assessment."

The Court noted that the assessee had filed its regular balance sheet while filing the return of income for the assessment year 1986-87 and that the next balance sheet filed was for the assessment year 1993-94.

"No balance sheet was filed in the interregnum as according to the assessee, it could not maintain proper books of account as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. It was not possible for it to obtain ledger balances to be brought down for the succeeding accounting years. As regards the balance sheet as on 31.03.1989 filed by the assessee before the South Indian Bank and which was construed by the assessing officer to be the balance sheet of the assessee for the assessment year 1989-90, the explanation of the assessee was that it was prepared on provisional and estimate basis and was submitted before the South Indian Bank for obtaining credit and therefore could not be relied upon in assessment proceedings”, it said.

The Bench added that the assessing officer could not have placed reliance on such balance sheet submitted by the assessee allegedly for the assessment year 1989-90 to the South Indian Bank for obtaining credit and that dehors such balance sheet, there were no other material in the possession of the assessing officer to come to the conclusion that income of the assessee for the three assessment years had escaped assessment.

Senior Advocate Raghenth Basant appeared for the appellant/assessee while Advocate Shyam Gopal appeared for the respondent/revenue.

Facts of the Case -

The assessee was a partnership firm and was carrying on the business of publishing newspaper, weeklies, and other periodicals in several languages under the brand name ‘Mangalam’ and prior to assessment year 1994-95 including the assessment years under consideration, the status of the assessee was that of a firm, being regularly assessed to income tax. The assessee filed a return of income in 1991 showing loss of Rs. 5,99,390/- and subsequently it filed a revised computation showing income at Rs. 5,63,920. It did not file any balance sheet along with the return of income on the ground that the books of account were seized by the Income Tax Department.

Objection of the assessee that the aforesaid balance sheet was prepared only for the purpose of obtaining loan from the South Indian Bank and therefore could not be relied upon for income tax assessment was brushed aside. Against the reassessment orders, the assessee preferred three appeals before the first appellate authority i.e., Commissioner of Income Tax (Appeals), in short ‘CIT(A)’ but it rejected all the contentions urged by the assessee. Against the total escaped income as quantified by the assessing officer, CIT(A) enhanced and redetermined such income. Thereafter, the assessee approached the ITAT which allowed its appeals and set aside the reassessment orders. However, the High Court reversed the findings of ITAT.

The Supreme Court in view of the above facts said, “Assessee did not submit regular balance sheet and profit and loss account for the three assessment years under consideration on the ground that books of account and other materials/documents of the assessee were seized by the department in the course of search and seizure operation which were not yet returned to the assessee. In the absence of such books etc., it became difficult for the assessee to maintain yearwise regular books of account etc. … What the assessing officer did was to cull out the figures discernible from the balance sheet for the assessment year 1989-90 obtained from the South Indian Bank and compared the same with the balance sheet submitted by the assessee before the assessing officer for the assessment year 1993-94 and thereafter arrived at the aforesaid conclusion.”

The Court further noted that Section 139 of ITA places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax and that the assessee is under obligation to disclose all material facts necessary for his assessment for that year fully and truly.

“However, as has been held by the constitution bench of this Court in Calcutta Discount Company Limited (supra), while the duty of the assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the assessee, the burden shifts onto the assessing officer. … We have already taken note of the fact that an assessment order under Section 143(3) is preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). If that be the position and when the assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the assessing officer that income of the assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment”, it said.

It held that ascertaining the defects and intimating the same to the assessee for rectification, are within the realm of discretion of the assessing officer and it is for him to exercise the discretion.

"The burden is on the assessing officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the assessing officer had issued any declaration that the returns were defective”, it further noted.

The Court, therefore, concluded that the Tribunal was correct in observing that the reassessments for the three assessment years under consideration were not justified and that the High Court erred in reversing such findings of the Tribunal.

Accordingly, the Apex Court allowed the appeals, set aside the order of the High Court, and restored the order of the Tribunal.

Cause Title- M/s Mangalam Publications, Kottayam v. Commissioner of Income Tax, Kottayam (Neutral Citation: 2024 INSC 53)

Appearance:

Appellant: Advocates Kaushitaki Sharma and Prerna Acharya.

Respondent: ASG N. Venkataraman, Advocates Prahlad Singh, Shashank Bajpai, Suyash Pandey, Prashant Singh Ii, T. S. Sabarish, and AOR Raj Bahadur Yadav.

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