Reassessment Must Be Based On AO's Independent 'Reason To Believe,' Not Borrowed: Delhi High Court

The Delhi High Court has dismissed the Income Tax Department's appeals against NTPC Ltd., holding that reassessment proceedings cannot be initiated merely on the basis of an audit objection and that the statutory requirement of “reason to believe” must be from independent satisfaction of the Assessing Officer (AO).

A Division Bench of Justices Dinesh Mehta and Vinod Kumar observed,

“the provision expressly used the language 'reason to believe' and the same has been interpreted by Hon'ble the Supreme Court and this Court that 'reason to believe' must be of the AO himself and must be based on sound reasoning. The reason and satisfaction has to be that of the authority exercising jurisdiction and not borrowed.”

The Court thus upheld a common order passed by the Income Tax Appellate Tribunal (ITAT), which had quashed reassessment notices issued against NTPC.

The dispute arose after the AO had passed an assessment order under Section 143(3) read with Section 147 examining NTPC's claim for deduction under Section 80-IA, including issues relating to carry forward of losses and eligibility of its combined cycle gas power plant.

Though the AO disallowed the exemption, the Tribunal later allowed NTPC's appeal and that order attained finality

Subsequently, an audit party raised an objection alleging that NTPC had wrongly added back proportionate corporate expenses while computing eligible profits. Acting on this audit objection, the AO issued reassessment notices and passed fresh assessment orders.

After the ITAT set aside the reassessment, holding that it was based on a mere change of opinion, Revenue approached the High Court arguing that an audit objection constituted fresh information and justified reopening of the assessment.

NTPC on the other hand, contended that the issue had already been examined threadbare during the original assessment and that the audit objection reflected only a differing opinion on the same set of facts.

Agreeing with the assessee, the High Court held that an audit objection on a point of law does not amount to “information” enabling reassessment. The Bench reiterated that the expression “reason to believe” under Section 147 requires the AO to form an independent belief based on his own evaluation and cannot be borrowed from the opinion of the audit party.

It further held that if the Revenue believed the original assessment order to be erroneous, the proper statutory remedy lay under Section 263 of the Act, subject to its conditions, and not by invoking reassessment under Sections 147 and 148.

Rejecting the Revenue's plea that the magnitude of tax involved warranted a liberal approach, the Court held that "however big may be the amount but nothing is bigger than the letter of law"

As such, the Court dismissed the appeals.

For Appellant: Advocates Shlok Chandra, SSC, Naincy Jain and Madhavi Shukla, JSCs

For Respondent: Advocates Nischay Kantoor, Soniya Dodeja and Sparsh Kapoor