Reassessment After 4 Years Quashed as No Failure to Disclose Material Facts: Bombay HC

GSTAAD Hotels Pvt. Ltd. Vs ACIT (Bombay High Court)

High Court quashes reassessment proceedings, holding that the first proviso to Section 147 is not satisfied as there was no failure on the assessee’s part to disclose material facts

Facts:

• The Petitioner, Gstaad Hotels Pvt. Ltd., constructed a hotel of over two-star category and handed it over to JW Marriott for operation. For the purpose of construction of the said hotel, the Petitioner incurred capital expenditure amounting to Rs. 639,73,36,790/-, which was claimed as a deduction under Section 35AD of the Income Tax Act, 1961 in its return of income.
• The case of the Petitioner was selected for scrutiny assessment. During the course of the assessment proceedings, the Assessing Officer issued notices and specifically called for details in respect of the expenditure, particularly the claim made under Section 35AD. In response, the Petitioner furnished detailed submissions, including letters dated 19.09.2016 and 27.12.2016, providing explanations and supporting material in respect of the said claim. Thereafter, the Assessing Officer passed an order under Section 143(3) dated 29.12.2016, wherein the claim of deduction under Section 35AD was specifically examined and allowed, and the returned income was accepted.
• Subsequently, after the expiry of four years but within six years from the end of Assessment Year 2014–15, the Assessing Officer issued a notice dated 30.03.2021 under Section 148 of the Act seeking to reopen the assessment. Upon request by the Petitioner, the reasons for reopening were furnished. As per the reasons recorded, it was stated that the Petitioner had capitalised certain pre-operative expenses amounting to Rs. 293,39,48,980/- and claimed the same under Section 35AD. According to the Assessing Officer, such expenditure was revenue in nature and ought to have been allowed under Section 72 of the Act, which provides for a limited period of carry forward of losses, instead of Section 35AD read with Section 73A, which allows indefinite carry forward. It was therefore alleged that income to the extent of Rs. 293,39,48,980/- had escaped assessment.
• The Petitioner filed objections to the reopening, contending inter alia that there was no escapement of income and that all material facts had been fully and truly disclosed during the original assessment proceedings. The said objections were rejected by the Assessing Officer vide orders dated 09.02.2022 and 18.02.2022. In the second order disposing of objections, it was stated for the first time that the reopening was based on an audit objection raised by the Revenue Audit Party, which had taken a view that the expenditure in question was revenue in nature.
• Aggrieved by the initiation of reassessment proceedings, the issuance of notice under Section 148, and the orders disposing of objections, the Petitioner approached this Court by way of the present writ petition challenging the validity of the reassessment proceedings.

Issues:

• Whether the reopening of assessment under Section 147 of the Act, initiated after the expiry of four years from the end of the relevant assessment year, is valid in law in the absence of any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, as mandated by the first proviso to Section 147 of the Act.
• Whether the reassessment proceedings, initiated on the basis of a re-appreciation of the same facts and materials that were available and considered during the original scrutiny assessment, are vitiated in law as being based on a mere change of opinion.
• Whether the initiation of reassessment proceedings solely on the basis of an objection raised by the Revenue Audit Party, without independent application of mind and formation of “reason to believe” by the Assessing Officer, is sustainable in law.
• Whether a re-characterization of expenditure, which merely alters the period of carry forward of loss from an indefinite period under Section 73A read with Section 35AD to a restricted period under Section 72, can be said to constitute “income escaping assessment” so as to justify reopening under Section 147 of the Act.
• Whether a bald assertion in the reasons recorded for reopening, alleging failure on the part of the assessee to disclose fully and truly all material facts, without specifying the particular material or fact not disclosed, satisfies the jurisdictional requirement of the first proviso to Section 147 of the Act.

Observations:

• The Court, at the very outset, on a perusal of the reasons for reopening, noted that the reopening is initiated based on the facts already on record of the Assessing Officer and that there is no new fact or any new tangible material, basis which the impugned notice under Section 148 is issued. The Court also noted that the original assessment had been concluded under Section 143(3) vide order dated 29.12.2016 wherein the claim of deduction under Section 35AD was also considered.
• The Court observed that the reassessment proceedings had been initiated beyond a period of four years from the end of the relevant assessment year, and therefore the first proviso to Section 147 was attracted. It was held that such reassessment could be initiated only if there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment.
• In the present case, the Court held that admittedly all the necessary facts were available with the Assessing Officer and certainly, it cannot be stated that there was any failure on the part of the assessee to disclose fully and truly all the primary facts. The Court further emphasized that the very reasons recorded for re-opening show that all the facts based on which the reasons were recorded were available with the Assessing Officer.
• The Court, after referring to settled legal position, held that though the reasons recorded state that there was a failure on the part of the assessee, it is not stated as to what was the said failure and the same is merely a bald assertion.
• In this regard, reliance was placed on Bombay Stock Exchange Ltd. vs DDIT (WP 2468 of 2011), wherein it was held that no reopening beyond four years can be made unless income has escaped assessment by reason of failure to disclose fully and truly all material facts.
• The Court further relied on Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxman 479 and reiterated that the reasons must be read as recorded, no substitution or addition is permissible, and the Assessing Officer must disclose which fact or material was not disclosed, establishing a link between the reasons and the evidence.
• Further reliance was placed on Bharat Petroleum Corporation Ltd. vs ACIT (2025) 478 ITR 358 (Bombay), wherein it was held that merely making a bald assertion is not sufficient and the Assessing Officer must clearly disclose the material not disclosed. The Court also noted that the Special Leave Petition against the said judgment has been rejected in ACIT vs Bharat Petroleum Corporation Ltd. (SLP (C) Diary No. 8091 of 2026).
• The Court relied on Transchem Ltd. vs ACIT (WP 1387 of 2010; Order dated 03.02.2022) and reiterated that to reopen the assessment based on the same material with a view to take another view is not permissible, and that an error discovered on reconsideration of the same material does not give power to the Assessing Officer to reopen the assessment.
• The Court concluded that in the absence of any failure on the part of the assessee to disclose necessary facts, the impugned reassessment proceedings are bad in law and void in terms of the first proviso to Section 147.
• Accordingly, the Court quashed and set aside the Notice issued under Section 148 dated 30.03.2021, the orders disposing of objections dated 09.02.2022 and 18.02.2022, and all consequential proceedings thereto.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT