Reopening Tax Assessments: Court Ruling Reinforces the Ban on Changing Opinions.


13 February 2024 Income Tax >> Tax Laws  

In a significant judgment of Mira Bhavin Mehta v/s Income Tax Officer Ward 6 (3) (1) & Another, the Bombay High Court has reiterated that the reopening of an income tax assessment cannot be done on the grounds of a mere change of opinion. This ruling aligns with established legal principles, emphasizing that the Assessing Officer (AO) cannot revisit issues already considered during the original assessment unless there is new tangible evidence suggesting that income has escaped assessment.

The case centers on a petitioner, an individual taxpayer, who filed their return of income for the assessment year 2018-19, declaring an income of Rs. 26,26,220/-. The return was selected for limited scrutiny, with the main focus on investments in immovable property and the capital gains on the sale of a property. The taxpayer had sold a flat in Mumbai (Flat No. 802, Boulevard-III, Ghatkopar) during the assessment year, which led to the inquiry by the Income Tax Department regarding the capital gains derived from the sale.

 
 

Over the course of the assessment process, the petitioner submitted all requested documents and evidence, including the details of the sale of the property and the corresponding capital gains. The assessment order passed on April 28, 2021, stated that after reviewing the records, no additional tax was required to be assessed on the issues of capital gains or investments in immovable property, thus finalizing the petitioner’s income as originally declared.

However, nearly a year later, the Income Tax Department issued an inquiry under Section 148A of the Income Tax Act, questioning the classification of the capital gain from the sale of the flat as long-term rather than short-term. The Department proposed a recalculation of the capital gain, asserting that the asset sold was a short-term capital asset, thereby subject to taxation at a higher rate. The petitioner objected to this move, arguing that it was a clear case of a change of opinion by the Assessing Officer, which is impermissible under the law.

In response to the objections, the AO issued a final order and notice under Section 148 of the Income Tax Act, asserting that the sale of the flat resulted in short-term capital gains. The petitioner challenged these notices in the Bombay High Court, claiming that the issue had already been addressed during the initial scrutiny, where no such discrepancies were found.

The court’s decision rests on the principle that the Assessing Officer, in the process of assessment, cannot reopen an issue already scrutinized unless there is new material to support a conclusion that income has escaped assessment. It is well-settled that the Assessing Officer has the power to reassess, not to review or revisit past decisions based on a change in opinion. Citing a landmark judgment in Siemens Financial Services Private Limited Vs. Deputy Commissioner of Income Tax & Ors. (2023), the court reiterated that such reassessment based solely on a change of opinion is impermissible.

The court highlighted that during the original assessment, the query regarding the sale of the property had been raised and duly addressed. The Assessment Order of April 2021 made it clear that no additional tax was required in relation to the capital gains from the property sale. The reopening of the assessment was thus viewed as an improper review, driven by a change in the AO’s opinion rather than new tangible evidence.

This ruling is significant for taxpayers, as it reinforces the importance of safeguarding against arbitrary actions by the tax authorities. It underscores the necessity for the AO to act based on tangible material when reopening an assessment and not merely to review or revise earlier opinions.

Ultimately, the Bombay High Court quashed the order and notice dated March 31, 2022, under Section 148A(d) and Section 148 of the Income Tax Act, affirming that the reopening of the assessment in this case was illegal. The judgment aligns with established legal norms on the issue of reopening assessments and provides clarity on the limits of the AO’s powers, emphasizing that such powers should not be misused for arbitrary reviews.

This decision serves as an important reminder to both taxpayers and tax authorities regarding the limits of reassessment powers, reinforcing the legal protection against unjustified reopening of income tax assessments on the grounds of mere change of opinion.


Section 148, Income Tax Act - 1961  

Income Tax Act, 1961