The assessment proceedings, completed under Section 143(3) of the Income-tax Act, 1961 ("Act"), have to be conferred sanctity and any reopening of the same has to be on a sound legal basis and not on a mere conjecture or surmise on for frivolous reasons. Existence of "reason to believe" is a sine-qua-non for initiating proceedings under Section 147 of the Act and should not be a reason to suspect.

Re-opening of assessment is a power granted to the Assessing Officer ("AO") to revive an assessment of an assessee vis-a-vis any income escaping assessment. The provisions regarding re-opening of an assessment are enshrined under section 147 and 148 of the Act. The power to reassess under section 148 of the Act can be exercised by the AO only when he has a "reason to believe" that any income chargeable to tax has escaped assessment for a particular Assessment Year ("AY"). This power is not unbridled and is subject to the limitation and other safeguards provided in the statute.

The conditions which need to be satisfied mandatorily by the AO before re-opening any assessment are as under:

The provisions regarding re-opening/re-assessment have historically been the subject matter of lis across forums in India. Recently, the Hon'ble High Court of Punjab and Haryana ("High Court") examined the provisions regarding re-opening of assessment in the case of Greater Mohali Area Developmental Authority [TS-5298-HC-2018(Punjab & Haryana)-O] ("Petitioner"), a developmental authority in the State of Punjab.

Brief facts of the case:

The Petitioner received External Development Charges ("EDC") from developers / colonizers in consideration for granting approvals to develop a residential/ commercial zone in Mohali and to carry out external development work. These charges were shown under the head "other liabilities" by the Petitioner in the balance sheet.

The Petitioner had filed the return of income for AY 2010-11, along with the audited balance sheet, pursuant to which, the AO issued a questionnaire to the Petitioner and sought details of current liabilities and provisions. Accordingly, the Petitioner submitted the necessary details which included details about EDC under the head "other liabilities". Subsequently, an assessment was framed under section 143(3) of the Act ("regular assessment"). However, no dispute vis-à-vis nature of EDC receipts was raised by the AO in the assessment order. From the facts available, it seems that after the submission of the details of "current liabilities" no further questions were asked by the AO in course of the scrutiny assessment.

Thereafter, the AO re-opened the assessment for AY 2010-11, after a period of 4 years from the end of relevant assessment year by issuing a notice under section 148 of the Act. The AO, while recording his "reason to believe", recorded that the Petitioner had wrongly claimed the EDC charges under the schedule for current liabilities as the same were attributable to Petitioner's regular business and were thus revenue in nature and had not been offered to tax. Consequently, the AO concluded that the EDC receipts were income chargeable to tax and had escaped assessment due to non-disclosure of the true and material facts.

The Petitioner raised objections against the reasons recorded by the AO, which were dismissed by the AO. It is against this order passed by the AO dismissing Petitioner's objection, that the Petitioner filed a Writ Petition before the Hon'ble High Court.

Question before the Hon'ble High Court:

The only plea that was raised before the Hon'ble High Court by the Petitioner was whether the proceedings for reassessment were barred in law being a mere "change of opinion".

Decision of the Hon'ble High Court:

The Hon'ble High Court dismissed the Writ Petition filed by the Petitioner and held the reopening of assessment as valid. While doing so, the Hon'ble High Court made the following observations:

-  That the AO had "reason to believe" that income of the Petitioner on account of EDC receipts had escaped assessment.

-  "That the mere absence in the assessment order of a reference to EDC receipts was not conclusive. What is important is the reason for its absence. In our view it was on account of the assesses failure to disclose fully and truly all material facts. The words "all material facts are significant". Moreover, section 147 requires the assessee to declare the material not merely fully but also "truly". In our view these requirements were not met either in the return or in the answer to the query relating to EDC." (Para 15 of the Judgement delivered by the Hon'ble High Court)

-  That the AO could not have applied his mind vis-à-vis details of "other liabilities" produced before him, especially when his query during the course of regular assessment pertained only to "current liabilities".

-  That the method of indicating EDC under the head "other liabilities", which was may be permissible as per the relevant provisions of law as well as accounting principles but the same was not relevant for determining the validity of reopening of assessment.

-  That there was no further disclosure of any material regarding EDC receipts by the Petitioner during the regular assessment.

-  There was no requirement under section 147 of the Act that the material forming basis for the "reason to believe" should be from an outside source.

-  That merely because EDC was mentioned in the balance sheet and in the reply to the questionnaire during regular assessment it would not render the AO powerless to re-open the case.

-  That there was material even outside the record with the AO which required consideration such as detailed provisions regarding the EDC, provisions regarding the liability to pay EDC, nature of the charge, the statutory agreements to be entered into and declarations to be filed with the authorities. Thus, apart from the material on record, there was other tangible material which was not considered during the assessment.

-  That the issue of change of opinion could only arise if the issue had been dealt with or the material with regard to EDC was there before the AO during the course of regular assessment.

Our analysis:

This was a typical case involving reassessment proceedings, which were challenged before the Hon'ble High Court on the point of assumption of jurisdiction to re-open assessment beyond a period of four years. Admittedly, this was a case of re-opening beyond a period of 4 years and the scrutiny assessment having been completed earlier, the protection of the proviso to Section 147 of the Act was available to the Petitioner. Although the Hon'ble High Court has rendered its judgment basis the arguments and records produced before it, the same is a digression from the established jurisprudence so far. Perhaps the reason for this is that the Petitioner pleaded mostly on the issue of "change of opinion" and did not take the other well settled pleas involving the absence of "new material". The Petitioner also did not raise the plea invoking the safeguard in the proviso which required the AO to record as to which fact material to the assessment of income had not been disclosed by the Petitioner. Before discussing the possible arguments that could have been taken by the Petitioner to bring home its case, it is pertinent to mention that the Hon'ble ITAT, Chandigarh Bench, had adjudicated upon same issue and on identical facts in Petitioner's own case for A.Y. 2008-09. The ITAT, vide order dated 28.12.2017 [TS-7984-ITAT-2017(Chandigarh)-O], observed that the case of the Petitioner was one involving a mere "change of opinion" on the part of AO as the "reasons to believe" were solely based on the information furnished during regular assessment and in the absence of no new material, the reassessment proceedings were invalid. At this stage, we may hasten to point out that the ITAT had followed the well settled judicial norms relating to reassessment proceedings. Absence of any reference to this order of the ITAT in the Hon'ble High Court's decision, perhaps indicate that the same was not produced before the Hon'ble High Court by the Petitioner.

"Reason to believe" in absence of fresh information never argued:-

From the reasons recorded by the AO as contained in the Order of the Hon'ble High Court, it is a glaring fact that this was a case of re-appraisal of the same material which was available to the AO at the time of the regular assessment and no new material came into his possession for initiating the re-assessment proceedings. This fact is evident from the very first sentence of the reasons recorded which refers to "perusal of the records in this case". In our view, this in itself was fatal to the reassessment proceedings.

Failure to disclose material facts not established by the AO in his "reasons to believe":-

It is also a well settled position in law that, where an assessment has been originally completed under Section 143(3) of the Act, the proviso to Section 147 requires that re-opening can be initiated beyond a period of 4 years only if there is a failure on the part of the assessee to disclose material facts relating to his assessment. Thus, the onus lies heavily on the AO that in the reasons recorded, this failure and the material fact must be specifically recorded to justify the initiation of the reassessment proceedings. It is also a settled position that merely mentioning in the reasons recorded that the assessee has failed to disclose material facts does not discharge this onus of the AO. The available judicial precedents suggest that this failure to disclose material facts must come from the reasons recorded i.e., the reasons must speak for themselves in the context of failure to disclose facts. In the present case also, a perusal of the reasons would render that this onus had not been discharged by the AO. The reasons only record the AO's conclusions and that the Petitioner has failed to disclose EDC charges as taxable income. This was an inference to be drawn from facts.

The Hon'ble High Court in para 10 of its Order has observed that the AO has clearly indicated his 'reason to believe' that income on account of an EDC had escaped assessment. The High Court also notes that the assessment order did not deal with EDC or its effects upon the Petitioner's income. It was further held that the reasons recorded on the other hand deal with the issue in considerable detail with the concept of EDC and none of these aspects were ever recorded in the assessment order. Based on this, the High Court concluded that the AO had reason to believe that income chargeable to tax had escaped assessment. In para 15 of its order, the High Court also notes that the mere absence in the assessment order of a reference to EDC was not conclusive. However, what was important was the reason for its absence and in the High Court's opinion that the reason for the absence was the failure on the part of the assessee to disclose the material facts.

The constitutional bench judgment of the Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. vs. ITO [TS-2-SC-1960-O] lays down the principles of law relating to "disclosure" and "inferences". With all due respect to the High Court, this fine line of reasoning has been completely missed and the conclusion has become muddled. What the High Court has completely missed is the fact that once the AO had sought the details of current liabilities, the same were duly provided to him by the Petitioner. It was for the AO to draw the correct factual and legal inferences and it was not for the Petitioner to educate the AO on any point of law or inference to be drawn. Thus, the decision of the Hon'ble High Court is clearly contradictory to the constitution bench judgment of the Hon'ble Supreme Court in Calcutta Discount Co. Ltd. (Supra). This of course is regarding the obligation of the assessee for furnishing all material facts to invoke the protection of the proviso under Section 147 of the Act.

It is also surprising that the High Court has gone to the length of analyzing the information furnished by the Petitioner and concluding that the AO's intention was not focused on the entries under column B of other liabilities. With all due respect, it was not for the High Court to critically analyze the information submitted, as that was the job of the AO. One also fails to understand as to how the High Court has also able to determine where the AO's attention was "focused". This entire analysis by the Hon'ble High Court of the information submitted to AO is contrary to the principles laid down in by the Hon'ble Supreme Court of India in Calcutta Discount Co. Ltd.

Change of Opinion:-

Regarding the issue of change of opinion, although the law is fairly well settled, however, there are some key aspects which need to be highlighted. The Hon'ble Court has referred the decision of the full bench of the Delhi High Court in the case of CIT vs. Usha International Ltd [TS-758-ITAT-2012(DEL)-O]. It is evident that critical portion of the decision have gone unnoticed. Some relevant observations made by the Delhi High Court which will have the bearing of the case at hand are referred to as under:

"39. In view of the above observations we must add one caveat. There may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer in the first round/ original proceedings may have examined the subject matter, claim etc, because the aspect or question may be too apparent and obvious. To hold that the assessing officer in the first round did not examine the question or subject matter and form an opinion, would be contrary and opposed to normal human conduct. Such cases have to be examined individually. Some matters may require examination of the assessment order or queries raised by the Assessing Officer and answers given by the assessee but in others cases, a deeper scrutiny or examination may be necessary. The stand of the Revenue and the assessee would be relevant. Several aspects including papers filed and submitted with the return and during the original proceedings are relevant and material. Sometimes application of mind and formation of opinion can be ascertained and gathered even when no specific question or query in writing had been raised by the Assessing Officer. The aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction etc. It may be apparent and obvious to hold that the Assessing Officer would not have gone into the said question or applied his mind. However, this would depend upon the facts and circumstances of each case."

Given the above, the decision of the Hon'ble Punjab and Haryana High Court may not serve as a useful reference in setting down any principles of law, as it is contrary to the judgment of the Hon'ble Supreme Court as well as the full bench judgment of Hon'ble Delhi High Court.