AO Can't Reopen Scrutinised Issue On Mere Change Of Opinion Without Tangible Material: Gujarat High Court

The Gujarat High Court on 19 August held that an Assessing Officer (AO) cannot reopen an assessment on an issue already specifically examined during the original scrutiny merely on a change of opinion, unless fresh tangible material shows that income had escaped assessment because of suppression of material facts.

A Division Bench of Justices A.S. Supehia and Vaibhavi D. Nanavati allowed a writ petition filed by Loonchand Dhanraj HUF and quashed the reassessment proceedings initiated through a notice dated 29 March 2019 under Section 148 of the Income Tax Act, along with the subsequent order rejecting its objections. The judges held:

“Thus, for the self-same reasons, which were already examined in the scrutiny assessment proceedings, the reopening of the assessment is resorted to by the Assessing Officer, which is nothing but a mere change of opinion.”

Loonchand Dhanraj HUF had disclosed its investment in and sale of 3.10 lakh equity shares of Prissm Remedies Pvt. Ltd. in its return and audit report for Assessment Year 2012-13.

During the original scrutiny assessment under Section 143(3) of the Income Tax Act, the AO specifically sought details of the purchase and sale transactions, including broker invoices, Demat entries, share prices, valuation and the circumstances in which the shares were sold at a lower price. Loonchand Dhanraj HUF furnished its bank statement, share certificates, Form No. 2 for allotment of shares, Board resolutions, valuation reports and calculations based on book value and net worth. After considering the documents and explanations, the AO completed the scrutiny assessment on 9 March 2015.

The Revenue subsequently issued a notice under Section 148 of the Income Tax Act (which allows reassessment where income chargeable to tax is believed to have escaped assessment) and again questioned the same share transaction. Relying on information received from the Deputy Director of Income Tax (Investigation), it alleged that the shares purchased for Rs. 3.41 crore were sold for Rs. 34.10 lakh after a 1:10 share split, resulting in an alleged bogus capital loss of Rs. 3.06 crore.

The High Court noted that the AO had already examined the lower sale price, valuation of the shares and the resulting capital loss during the original scrutiny assessment and that Loonchand Dhanraj HUF had furnished supporting evidence. It held that the Department could not reopen the assessment merely because it subsequently took a different view of the same material. It observed:

“...as per settled legal precedent, such an exercise of reopening assessment is impermissible unless it is shown that the revenue is in possession of fresh tangible material showing that the income chargeable to tax has escaped assessment and there has been suppression of material facts by the petitioner.”

Accordingly, the High Court allowed Loonchand Dhanraj HUF's writ petition and quashed the notice dated 29 March 2019 and the order dated 4 October 2019 rejecting its objections to the reassessment proceedings.

Counsel for the Petitioner: Sudhir M. Mehta and Shailee S. Mehta, Advocates

Counsel for the Revenue: Dev D. Patel, Advocate