Change of Opinion vs Fresh Material in Income Tax Reassessment

Abstract  

This paper discusses the changing reassessment provisions under Indian Income Tax Law, particularly post the Finance Act 2021. Traditionally, reassessment was possible only if the Assessing Officer had a “reason to believe” income had escaped assessment, based on new evidence that was tangible in nature. This doctrine, adhered to by the judicial precedents of CIT v. Kelvinator of India Ltd., has protected the taxpayers from sheer and arbitrary reassessment on the grounds of change of opinion of the AO alone. With the introduction of the Finance Act, 2021, “reason to believe” is substituted with the notion of “information”. Therefore, the scope of AO’s reassessment powers may have expanded. However, reassessment calls for new tangible material as well, which has been discussed in courts as well. The paper presses home its point with the analysis of recent case law that illustrates the precarious balance between the AO’s authority and protections for taxpayers against the misuse of reassessment powers.

INTRODUCTION

The reassessment provisions under the Indian Income Tax Law have seen significant evolution, especially with the introduction of the Finance Act, 2021. This Act brought in notable changes to how the reassessment process is governed. Earlier, the Assessing Officer (AO) had to demonstrate “reason to believe” that income had escaped assessment before reopening a case. However, the Finance Act, 2021, has shifted this focus to “information” that suggests income has escaped assessment. This shift has raised important questions about the relevance of the concepts of “Change of Opinion” and “Fresh Tangible Material” in reassessment proceedings under the current framework.

CHANGE OF OPINION AND LEGAL FRAMEWORK FOR REASSESSMENT

Sec. 147 of Income Tax Act, 1961 permits the reassessment of the assessment process. According to this section, the Assessing Officer may choose to restart the assessment process if he has “reason to believe” that the said income has “escaped assessment” for any assessment year. The term ‘escaped assessment was defined in the case of Hum Boldt Wedag India Ltd. v. ACIT¹ as “the income for a particular assessment year went unnoticed by the Assessing Officer and because of it not being noticed by him for any reason, it escaped assessment”.

Historically, the requirement of ‘reason to believe’ was more than just a procedural formality; it was a substantive check on the AO’s power to reassess. The Indian Courts have established this precedent in many cases that reassessment under sec.147 is only permissible if there is some fresh tangible material and not merely a change in the assessing officer’s opinion on the same facts. The Doctrine of Change of Opinion refers to the situation where the assessing officer tries to reassess the income based on a different interpretation of the same facts and documents the assessing officer has already assessed in the original assessment.

In the landmark cases such as Calcutta Discount Co. Ltd. v. ITO² and CIT v. Kelvinator of India Ltd.³, clarified that “reason to believe” was not a vague concept. It required the AO to base his belief on new, tangible material that has not been considered during the original assessment. The Court emphasized that the AO could not initiate reassessment simply because he had changed his mind about a particular issue; there had to be some new material that indicated income had escaped assessment.

In Kelvinator of India, the Supreme Court underscored that reassessment could not be used as a tool to review the AO’s previous opinion. Once an AO had formed a view on a particular piece of information during the original assessment, he could not reopen the assessment merely because of a change in opinion. There had to be new tangible material that indicated income had escaped assessment. This principle was a safeguard against the arbitrary use of power by the AO and ensured that reassessment proceedings were not initiated frivolously.

But the previous reassessment rules under the Income-tax Act of 1961 were superseded by the Finance Act of 2021. In the past, the Assessing Officer (AO) required a ‘reason to believe’ an independent belief based on fresh, physical evidence, not on records already in existence or the judgement of another authority that income had evaded assessment. The Finance Act 2021 introduced a paradigm shift by replacing the “reason to believe” criterion with the requirement of “information” that suggests income has escaped assessment. In Explanation 1 to Section 148 of the Act, this term “information” has now been broadly defined to include data flagged under the risk management strategy, audit objections, information from Double Taxation Avoidance Agreements, data from the e-Verification Scheme 2021, and directives from tribunals or courts. This expansion of the AO’s powers raised concerns about the potential erosion of the safeguards previously provided by the requirement for fresh tangible material.

If the information is of such nature which states that the income of the assesses has escaped the assessment and it’s important to assess this information then a valid notice will be issued under Sec.148 to the Assessee informing about the reopening of the assessment on the discovery of the new information. In simple terms, escaped assessment means the income that has not been assessed in the assessment.

FRESH TANGIBLE MATERIAL

Fresh Tangible material means new information which was not assessed during the original assessment. This information is crucial in the reassessment, without assessing such information the assessment is not proper. The Assessing officer has the power to reassess the income if there is information available which has not been assessed in the original assessment. The judiciary has also held that fresh tangible material is mandatory for initiating the reassessment

proceedings, without the availability of fresh tangible material reassessment is not allowed as it will be a mere change of opinion. In other words, the term Fresh tangible material can be understood in the case where an assessment is done but in such an assessment, certain income has not been disclosed then in such a scenario, the reassessment of the income will be done by the assessing officer by including the undisclosed income.

CURRENT JUDICIAL PERSPECTIVE

Seema Gupta v. ITO (2022)⁴ – The question of reconsidering an assessment under Section 148 of the Income-tax Act, 1961 was discussed by the Delhi High Court. The Assessing Officer (AO) had examined the case before issuing the initial assessment decision in favour of the petitioner, as the Court noted, and the AO had already reviewed, pondered, and confirmed the issue that was being reopened during the original assessment procedures. However, the AO mistakenly believed that the assessee had not declared the sale of real estate and long-term capital gains in the Income Tax Return (ITR) or during the initial assessment in the assailed decision under Section 148A(d). The Court set aside the contested ruling and the notification dated June 30, 2022, as a result of this mistaken determination. The matter was remanded to the AO for a new, legally-mandated review within four weeks.

M/s Mangalam Publication v. CIT (2024)⁵ – The Supreme Court in civil appeal nos. 8580­8582 of 2011 decided that the reopening of assessments cannot be justified by the Assessing Officer’s simple change of opinion. The Court made clear that incomplete returns are not void unless the Assessing Officer notifies the Assessee and provides an opportunity for correction, and that revaluation based on subjective interpretation in the absence of fresh information is not permitted. The Court concluded that the reassessments for the three assessment years were not warranted and confirmed the Tribunal’s findings.

BDR Builders and Developers Pvt. Ltd. v. ACIT (2024)⁶ – To reopen assessments under the Income Tax Act of 1961, the Delhi High Court elucidated the differences between a “change of opinion” and “fresh tangible material”. The Court stressed that a reassessment may only be regarded as a modification of view if the first assessment order stated an opinion on the subject matter, either directly or indirectly. The Assessing Officer’s decision cannot be easily attributed to a vague or non-speaking initial order, which permits revision in light of fresh information. The Court decided that if new information becomes available that was missed or disregarded in the first assessment, court involvement shouldn’t stop evaluations from being reopened. Significant advice on the legal standards for revisiting evaluations is given by this decision.

The reopening of the assessment is not permissible based on a change of opinion both as per the old provisions and as per the new provisions. The reassessment is only available for the escaped income. An income which has not been assessed. If fresh tangible material needs to be presented for reassessment, it is not allowed on the mere change of opinion on the original assessment. Taxpayers have the right to challenge the notice of reassessment if they have a reason to believe that the reopening is based on a mere change of opinion and not on any fresh tangible material. Finance Act, 2022 introduced Section 148A, which requires the assessing officer to conduct an inquiry and allow the taxpayer to explain their case before issuing a notice under Section 148. After considering the assessee’s explanation the officer will issue the notice if required. Generally, if the relevant evaluation year ended three years ago, no notice may be provided. However, a notice may be issued after three years but no later than ten years from the end of the relevant assessment year if there is proof of tax evasion amounting to at least Rs 50 lakh.

CONCLUSION

It is thus apparent that Finance Act, 2021 has really made a very significant change to the rules of reassessment under Indian Income Tax Law. The “reason to believe” rule has been replaced by a far more elaborate and deep concept of “information” that brings forth the suggestion that income has not been assessed. Again, however, courts lay stress upon new clear evidence for protection against unfair reassessment. Important judgments by courts including CIT v. Kelvinator of India Ltd. and BDR Builders and Developers Pvt. Ltd. v. ACIT, clearly established that a mere change of opinion is not sufficient to reopen the assessment. In fact, new information available has also emerged as a very important consideration for permitting reopening. Though the Finance Act, 2021 has given more detail to the Assessing Officer, the same has to be balanced with the rights of the taxpayer and the rule of the court that puts an end to the malafide use of reassessment powers. Reassessment actions should therefore come only when there is new evidence or which is clear and not because the AO has changed his opinion.

Notes:-

¹ [1999] 236 ITR 845 (Cal.) (App.)

² [1961] 41 ITR 191 (SC)

³ [2010] 187 Taxman 312 (SC)

⁴ [2022] 140 taxmann.com 463/288 Taxman 519/[2023] 457 ITR 642 (Delhi)

⁵ 2024 LiveLaw (SC) 55

⁶ MANU/DE/3246/2024

Authors Details:-

Author 1: Pukar Banga, BBA LLB (Hons.), NMIMS School of Law, Mumbai	Co-Author: Divyanshu Vats, BA LLB (Hons.), REVA University, Bengaluru, Karnataka