Income Tax Reassessment Reasons amounts to be Mere Change of Opinion without Nexus with Original Materials: Gujarat HC [Read Order]

Reasons for reopening of income tax assessment amounts to be mere change of opinion without any link or nexus with the material relied upon as during the regular assessment proceedings, the Gujarat High Court observed in this case.

The assessee, Facets Gems Polishing Works Private Limited, operates in the manufacturing and cutting of polished diamonds on a job work basis. Additionally, the company engages in diamond trading and generates power through windmills. It filed a writ petition challenging the notice issued under Section 148 of Income Tax Act, 1961 for A.Y. 2014-15.

During the Financial Year 2013-14, relevant to Assessment Year 2014-15, the assessee-petitioner disclosed income tax deductions under section 35DD for amortisation of expenditure due to amalgamation or demerger, and claimed a deduction of Rs. 76,27,934/- under section 80IA(4)(iv) of the Income Tax Act.

The company filed its income tax return for A.Y. 2014-15 on 25.09.2014, declaring a total income of Rs. 2,76,59,430/- after including these deductions. The assessee’s case was selected for scrutiny assessment, and after providing requested details, the Assessing Officer issued notices under section 142(1) of the Act, seeking further clarifications.

Despite submissions by the assessee, the Income Tax Assessing Officer made a disallowance of Rs. 2,28,898/- in expenses through an assessment order under section 143(3) on 30.11.2016.

Subsequently, the respondent-income tax department issued a notice under section 148 of the Act on 19.03.2020 to reopen the assessee’s assessment for the year in question.

In response, the petitioner filed its income tax return on 05.05.2020 and raised objections upon receiving the reasons for reopening. Despite objections raised by the assessee in a detailed submission dated 16.09.2020, the respondent disposed of these objections on 23.02.2021.

The assessee, having been amalgamated with M/s. Tirupati Organizers Private Limited and renamed as FACETS GEMS POLISHING WORKS PRIVATE LIMITED, decided to challenge these proceedings before this Court.

Senior Advocate Mr. Tushar Hemani argued on behalf of the assessee that a notice for reopening can only be issued if the Assessing Officer has a valid “reason to believe” that income chargeable to tax has escaped assessment. He emphasized that this belief must be that of an honest and reasonable person, grounded on solid reasons rather than mere suspicion or opinion.

Mr. Hemani contended that there must be a clear connection between the material available to the Assessing Officer and the belief formed regarding the escapement of income. In this case, he pointed out that the Assessing Officer thoroughly examined the deduction claim under section 80IA during the original assessment, rendering the reopening notice under section 148 unjustified and beyond jurisdiction.

It was further argued that the respondent has not acquired any new information subsequent to the issuance of the assessment order under section 143(3) of the Act. It was pointed out that the fact of amalgamation was disclosed in various documents such as the Tax Audit Report, Audited Annual Accounts, and the computation of income.

On the contrary, the respondent’s counsel argued that during the regular assessment, the Income Tax AO did not form any opinion on the matter now considered for reopening, thus negating the allegation of a change of opinion.

The counsel emphasised that the mere submission of financials and requested details does not automatically qualify as disclosure under the provisions of section 147 of the Act.

The bench of Justices Bhargav D. Karia and Niral R. Mehta observed that “ In view of such undisputed facts, the reasons recorded for reopening would amount to mere change of opinion of the respondent without there being any live link or nexus with the material relied upon as during the regular assessment proceedings.”

The court stated that the notice for income tax reopening issued beyond the period of four years cannot be sustained. Thus, the High Court quashed and set aside the impugned income tax notice dated 19.03.2020 under section 148 of the Act. The consequential order rejecting the objections was also set aside.

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