Karnataka HC Quashed Reassessment as It Was Based on Mere Change of Opinion

ITO Vs Narayan Ravi Prakash (Karnataka High Court)

The Karnataka High Court considered an intra-court appeal filed by the Revenue against the order of the learned Single Judge in a writ petition concerning reassessment proceedings under the Income-tax Act, 1961. The assessee had sold an immovable property on 29 August 2016, purchased a residential site on 1 June 2017, completed construction of a residential house on 26 August 2019, and claimed exemption under Section 54F. The return of income was selected for scrutiny on the issues of deduction/exemption from capital gains and investment in immovable property. After considering the assessee’s explanation, the Assessing Officer completed the assessment under Section 143(3) by accepting the claim. Subsequently, a notice under Section 148 was issued proposing to deny the Section 54F exemption on the ground that the unutilised sale consideration had not been deposited in the Capital Gains Account Scheme as required under Section 54F(4). The reassessment resulted in denial of the exemption, which was challenged by the assessee.

The Revenue contended that compliance with Section 54F(4) was mandatory and that the assessee was not entitled to deduction because the unutilised sale consideration had not been deposited in the Capital Gains Account Scheme. The assessee argued that the original assessment had already examined the claim for exemption and investment in immovable property, and that reopening the assessment on the very same issue without any fresh or additional material amounted to an impermissible review based on a mere change of opinion.

The High Court examined the reasons recorded for reopening the assessment and found that both the original scrutiny assessment and the reassessment concerned the identical issues of deduction/exemption from capital gains and investment in immovable property. Relying on the Supreme Court decisions in TechSpan India Pvt. Ltd. and Kelvinator of India Ltd., the Court reiterated that reassessment under Sections 147 and 148 requires tangible material indicating escapement of income and cannot be initiated merely because the Assessing Officer has changed his opinion on matters already examined during the original assessment. The Court observed that once the Assessing Officer had scrutinised the claim, considered the assessee’s explanation, and accepted the return, an opinion had been formed by necessary implication. In the absence of any fresh tangible material, reopening the assessment amounted to a mere change of opinion and was therefore not permissible in law.

The High Court held that the reassessment proceedings initiated under Section 148 were invalid and quashed the reassessment order. In view of this conclusion, the Court declined to examine the substantive issue relating to the requirement of deposit under Section 54F(4). It also clarified that the interpretation of Section 54F recorded by the learned Single Judge would not operate as a binding precedent in any other case. Accordingly, the Revenue’s appeal was dismissed.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

Heard Sri E.I. Sanmathi, learned Senior Standing Counsel for the appellants-Revenue and Sri G.S. Naveen, learned counsel for the respondent-Assessee.

2. This intra-court appeal under Section 4 of the Karnataka High Court Act is preferred by the Revenue, calling in question the order dated 06.08.2024 passed in W.P. No.8936 of 2022 (T-IT).

3. The brief facts of the case are that the assessee sold an immovable property on 29.08.2016. The assessee purchased a residential site on 01.06.2017 and thereafter commenced construction of a residential house, which was completed on 26.08.2019. The assessee claimed the benefit of exemption under Section 54F of the Income-tax Act, 1961 (for short, “the I.T. Act”). The return of income filed by the assessee was selected for scrutiny to examine the claim of deduction/exemption and investment in immovable property. The assessment was completed on 12.12.2019, accepting the submissions made by the assessee.

3.1 Thereafter, a notice under Section 148 of the I.T. Act was issued on 29.03.2021 proposing to disallow the benefit under Section 54F of the I.T. Act on the ground that the unutilised consideration from the sale of the original capital asset was not deposited in the Capital Gains Account Scheme as contemplated under Section 54F of the I.T. Act. Pursuant thereto, the reassessment was completed denying the benefit under Section 54F of the I.T. Act. The said order was assailed by the assessee in the writ petition.

3.2 The learned Single Judge, placing reliance on the judgment of the Division Bench of this Court in The Commissioner of Income Tax and Others v. Smt. B.S. Shanthakumari [ITA No. 165 of 2014], disposed of on 13.07.2015, held that mere non-deposit of the sale consideration, or a portion thereof, in the designated Capital Gains Account would not, by itself, disentitle the petitioner from claiming exemption from payment of capital gains tax.

4. Sri E. I. Sanmathi, learned Senior Standing Counsel appearing for the Revenue, submits that the assessee sold the original capital asset on 29.08.2016 and purchased a residential site on 01.06.2017. It is contended that the balance sale consideration ought to have been deposited in the Capital Gains Account Scheme in terms of sub-section (4) of Section 54F of the I.T. Act, and that such deposit alone could have been utilised for construction of the residential house. In the absence of compliance with the mandate under sub-section (4) of Section 54F of the I.T. Act, the assessee, to that extent, is not entitled to claim deduction under Section 54F of the I.T. Act.

4.1 The learned Senior Standing Counsel further submits that compliance with sub-section (4) of Section 54F of the I.T. Act, is mandatory. It is contended that the factual matrix involved in the case of Smt. B.S. Shanthakumari (supra) is not applicable to the facts of the present case. According to the learned Senior Standing Counsel, the learned Single Judge committed an error in allowing the deduction under Section 54F of the I.T. Act by placing reliance on the said judgment.

5. Per contra, Sri G. S. Naveen, learned counsel appearing for the assessee, submits that the assessee had filed the return of income claiming deduction under Section 54F of the I.T. Act. The return was subjected to scrutiny to examine the issue of capital gains and investment in immovable property. The explanation offered by the assessee was accepted, and the assessment was concluded accordingly. It is contended that the reopening of the assessment on the very same issue, in the absence of any fresh or additional material, is impermissible in law.

5.1 Additionally, learned counsel submits that the order of the learned Single Judge granting relief under Section 54F of the I.T. Act is founded on the judgment of the Division Bench of this Court, which, according to him, is squarely applicable to the facts of the present case.

6. Having considered the submissions of the learned counsel for the parties and upon perusal of the appeal papers, we notice that the assessee sold the original capital asset on 29.08.2016, purchased a residential site on 01.06.2017, and completed construction of the residential house on 26.08.2019. The case of the assessee is that the entire sale consideration received from the transfer of the original asset was utilised for construction of the new asset, thereby entitling the assessee to deduction under Section 54F of the I.T. Act.

7. Annexure-A is the assessment order passed under Section 143 of the I.T. Act. The assessee was subjected to scrutiny to examine two issues, namely:

i. deduction/exemption from capital gains; and

ii. investment in immovable property.

The assessee filed the requisite reply and furnished the necessary details. The Assessing Officer accepted the submissions made and concluded the assessment by accepting the return of income. At a later stage, a notice under Section 148 of the I.T. Act was issued reopening the assessment.

8. The reasons recorded for issuance of notice under Section 148 of the I.T. Act indicate that the assessee was not entitled to deduction under Section 54F of the I.T. Act on the ground that the unutilised consideration was not deposited in the Capital Gains Account Scheme as required under sub-section (4) of Section 54F of the I.T. Act. When a scrutiny notice had already been issued and the regular assessment completed, it cannot be said that the aspect of non-deposit in the Capital Gains Account Scheme was not examined. The issue considered in the regular assessment and the reassessment is one and the same, namely:

9. The Hon’ble Supreme Court in Income Tax Officer Ward No.16(2) vs. M/s. TechSpan India Private Limited and another in Civil Appeal No.2732/2007 (R), dated 24.04.2018 while examining the scope of change of opinion while re-opening assessment under Sections 147 and 148 of the Act held as under;

“The language of Section 147 makes it clear that the assessing officer certainly has the power to re-assess any income which escaped assessment for any assessment year subject to the provisions of Sections 148 to 153. However, the use of this power is conditional upon the fact that the assessing officer has some reason to believe that the income has escaped assessment. The use of the words ‘reason to believe’ in Section 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the assessing officer who may even initiate such re­assessment proceedings merely on his change of opinion on the basis of same facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the legislature. The said provision was incorporated in the scheme of the IT Act so as to empower the Assessing Authorities to re-assess any income on the ground which was not brought on record during the original proceedings and escaped his knowledge; and the said fact would have material bearing on the outcome of the relevant assessment order.

9. Section 147 of the IT Act does not allow the re­assessment of an income merely because of the fact that the assessing officer has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the assessing officer the power of review and Section 147 confers the power to re-assess and not the power to review.

10. To check whether it is a case of change of opinion or not one has to see its meaning in literal as well as legal terms. The word change of opinion implies formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an assessing officer resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection.

11. It is well settled and held by this court in a catena of judgments and it would be sufficient to refer Commissioner of Income Tax, Delhi vs. Kelvinator of India Ltd. (2010) 320 ITR 561(SC) wherein this Court has held as under:-

“5….where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe”…..

Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open.

6. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re­assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place.

7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”

12) Before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed re-assessment proceedings.

Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re­assessment proceedings.”

If the case in hand is considered in the light of the above judgment, notice under Section 143(2) was issued during regular assessment to consider the claim for deduction/exemption for capital gains and investment in immovable property. The reasons recorded for re-opening of assessment is for the same purpose and on the same issue. In view of the acceptance of the claim in the regular return, it is to be held that the Assessing Officer has by necessary implication expressed opinion on the matter and the present proceeding to re-open the assessment is a change of opinion by the Assessing Officer. Once an issue is raised, examined, and the assessment is concluded after considering the reply of the assessee, it amounts to formation of an opinion in favour of acceptance of the return of income.

10. It is an undisputed and well-settled position of law that a completed scrutiny assessment cannot be reopened in the absence of any new or tangible material indicating escapement of income. In the present case, we find no such material that would enable reopening of the regular completed assessment. On that ground alone, we hold that the reopening of the assessment amounts to a mere change of opinion and is, therefore, impermissible in law. Accordingly, the order of assessment under Section 148 of the Act stands quashed.

11. In light of the above finding, we are not inclined to examine the other issues relating to the requirement of deposit under sub-section (4) of Section 54F of the I.T. Act. The finding recorded by learned Single Judge interpreting Section 54F of the Act shall not operate as a binding precedent in any other case.

12. For the above observations, the appeal stands dismissed.