The Assessing Officer asked about my share gains during scrutiny, I answered, and the assessment order says nothing about it. Can he now reopen and call the gains business income?
No. The Bombay High Court quashed the section 148 notice. Once a query is raised in scrutiny and the assessee answers it, the issue was considered by the Assessing Officer, even if the assessment order is silent on it. Reopening on the same issue is therefore a change of opinion and outside sections 147 and 148. The Court also held that an internal audit report which only draws a different inference from accounts already on record is not tangible material. The reassessment order passed while the writ was pending was set aside as well.
Decided by the High Court (High Court of Judicature at Bombay - Mohit S. Shah, C.J. and M.S. Sanklecha, J. (judgment per M.S. Sanklecha, J.)) on 2014-02-11, reported as Writ Petition No.137 of 2014 (Bombay High Court). It bears on section 147, section 148, section 143(3) of the Income Tax Act 1961, in Reassessment & Reopening and Assessment & Scrutiny matters.
This is the case that closes the Revenue's favourite argument on change of opinion: that no opinion was formed because the assessment order does not discuss the point. The Court answers that an Assessing Officer cannot be required to record his satisfaction on every query he raises, so the query plus the reply is itself proof of consideration. It also draws the line on tangible material: an internal audit note that reinterprets accounts already examined is opinion, not fact, and cannot found a reopening. Finally it enforces Asian Paints, holding that passing a reassessment order within four weeks of rejecting objections is an attempt to overreach the Court.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, a company financing, trading and investing in shares and securities, filed its return for assessment year 2008-09 showing business income of Rs.28.71 lakh, short term capital gains of Rs.3.68 crore and long term capital gains of Rs.3.71 crore. In scrutiny the Assessing Officer asked for a note on its activities and specifically queried why the profit on sale of investments was offered as capital gain. The assessee replied on 8 September 2010 explaining the distinction and relying on CBDT Circular No.4/2007, and on 13 September 2010 furnished sample contract notes, demat statements and shareholding patterns. The assessment under section 143(3) was completed on 12 October 2010 without any addition on that head. On 28 March 2013 the Assessing Officer issued a section 148 notice saying the assessee was only a share trader and had manipulated its accounts to claim short term capital gain at the lower section 111A rate. Objections were rejected on 20 November 2013 and a reassessment order was passed on 19 December 2013 while the writ was being prepared.
The petition was allowed. The Court set aside the reassessment order dated 19 December 2013 because it was passed in undue haste, in defiance of Asian Paints, within four weeks of the order rejecting objections and after the Assessing Officer had been told a writ was coming. On the merits it held there was no reason to believe income had escaped assessment: the very issue in the reasons had been raised as a query and answered in the original proceedings, so the notice was founded on change of opinion. The internal audit report was not part of the recorded reasons and could not be relied on, and in any event was only an inference on material already considered, not tangible material. The ground that contract notes and demat statements had not been filed was factually wrong. The section 148 notice dated 28 March 2013 and the order dated 20 November 2013 rejecting objections were both quashed.
The Court took the settled position from Kelvinator: reason to believe excludes change of opinion, the power to reassess is not a power to review, and reopening must rest on tangible material. It then addressed the Revenue's point that the assessment order is silent on the share-income issue, so no opinion was formed. It rejected that. Once a query is raised in assessment proceedings and the assessee replies, the query was a subject of consideration; the order need not record the satisfaction. If an Assessing Officer had to write down his conclusion on every issue he had raised and accepted, scrutiny assessments could never be completed, and how the order is drafted is his own domain. Here the query, the reply of 8 September 2010 and the reliance on Circular No.4/2007 - the same Circular cited in the reasons - showed the point had been examined. On the audit report, the Court applied Hindustan Lever v. Wadkar: reopening stands or falls on the reasons recorded, which cannot be supplemented by affidavit or oral argument, and the audit report figured in neither the reasons nor the order rejecting objections. Even taken on its own terms, the report drew inferences from accounts already before the Assessing Officer; tangible material means factual material, not a fresh opinion on existing material. The Court added that the Revenue had itself treated the same activity as investment in assessment years 2005-06, 2006-07 and 2009-10, and on Gopal Purohit consistency required the same treatment absent different facts.
Once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court quashed the section 148 notice. Once a query is raised in scrutiny and the assessee answers it, the issue was considered by the Assessing Officer, even if the assessment order is silent on it. Reopening on the same issue is therefore a change of opinion and outside sections 147 and 148. The Court also held that an internal audit report which only draws a different inference from accounts already on record is not tangible material. The reassessment order passed while the writ was pending was set aside as well. This was decided by the High Court (High Court of Judicature at Bombay - Mohit S. Shah, C.J. and M.S. Sanklecha, J. (judgment per M.S. Sanklecha, J.)) and bears on section 147, section 148, section 143(3) of the Income Tax Act 1961. It is reported as Writ Petition No.137 of 2014 (Bombay High Court). This is the case that closes the Revenue's favourite argument on change of opinion: that no opinion was formed because the assessment order does not discuss the point. The Court answers that an Assessing Officer cannot be required to record his satisfaction on every query he raises, so the query plus the reply is itself proof of consideration. It also draws the line on tangible material: an internal audit note that reinterprets accounts already examined is opinion, not fact, and cannot found a reopening. Finally it enforces Asian Paints, holding that passing a reassessment order within four weeks of rejecting objections is an attempt to overreach the Court. If it applies to you, the first step is this: Put every scrutiny questionnaire, your reply and the covering letters on record when you object to reopening - the correspondence, not the assessment order, proves the issue was considered.
The assessee, a company financing, trading and investing in shares and securities, filed its return for assessment year 2008-09 showing business income of Rs.28.71 lakh, short term capital gains of Rs.3.68 crore and long term capital gains of Rs.3.71 crore. In scrutiny the Assessing Officer asked for a note on its activities and specifically queried why the profit on sale of investments was offered as capital gain. The assessee replied on 8 September 2010 explaining the distinction and relying on CBDT Circular No.4/2007, and on 13 September 2010 furnished sample contract notes, demat statements and shareholding patterns. The assessment under section 143(3) was completed on 12 October 2010 without any addition on that head. On 28 March 2013 the Assessing Officer issued a section 148 notice saying the assessee was only a share trader and had manipulated its accounts to claim short term capital gain at the lower section 111A rate. Objections were rejected on 20 November 2013 and a reassessment order was passed on 19 December 2013 while the writ was being prepared. The matter was decided on 2014-02-11 by the High Court (High Court of Judicature at Bombay - Mohit S. Shah, C.J. and M.S. Sanklecha, J. (judgment per M.S. Sanklecha, J.)). On those facts the High Court held as follows. The petition was allowed. The Court set aside the reassessment order dated 19 December 2013 because it was passed in undue haste, in defiance of Asian Paints, within four weeks of the order rejecting objections and after the Assessing Officer had been told a writ was coming. On the merits it held there was no reason to believe income had escaped assessment: the very issue in the reasons had been raised as a query and answered in the original proceedings, so the notice was founded on change of opinion. The internal audit report was not part of the recorded reasons and could not be relied on, and in any event was only an inference on material already considered, not tangible material. The ground that contract notes and demat statements had not been filed was factually wrong. The section 148 notice dated 28 March 2013 and the order dated 20 November 2013 rejecting objections were both quashed.
The Court took the settled position from Kelvinator: reason to believe excludes change of opinion, the power to reassess is not a power to review, and reopening must rest on tangible material. It then addressed the Revenue's point that the assessment order is silent on the share-income issue, so no opinion was formed. It rejected that. Once a query is raised in assessment proceedings and the assessee replies, the query was a subject of consideration; the order need not record the satisfaction. If an Assessing Officer had to write down his conclusion on every issue he had raised and accepted, scrutiny assessments could never be completed, and how the order is drafted is his own domain. Here the query, the reply of 8 September 2010 and the reliance on Circular No.4/2007 - the same Circular cited in the reasons - showed the point had been examined. On the audit report, the Court applied Hindustan Lever v. Wadkar: reopening stands or falls on the reasons recorded, which cannot be supplemented by affidavit or oral argument, and the audit report figured in neither the reasons nor the order rejecting objections. Even taken on its own terms, the report drew inferences from accounts already before the Assessing Officer; tangible material means factual material, not a fresh opinion on existing material. The Court added that the Revenue had itself treated the same activity as investment in assessment years 2005-06, 2006-07 and 2009-10, and on Gopal Purohit consistency required the same treatment absent different facts. In the words reproduced by the source cited on this page: "Once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment."
It was decided by the High Court on 2014-02-11 and is reported as Writ Petition No.137 of 2014 (Bombay High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 147, section 148, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The petition was allowed. The Court set aside the reassessment order dated 19 December 2013 because it was passed in undue haste, in defiance of Asian Paints, within four weeks of the order rejecting objections and after the Assessing Officer had been told a writ was coming. On the merits it held there was no reason to believe income had escaped assessment: the very issue in the reasons had been raised as a query and answered in the original proceedings, so the notice was founded on change of opinion. The internal audit report was not part of the recorded reasons and could not be relied on, and in any event was only an inference on material already considered, not tangible material. The ground that contract notes and demat statements had not been filed was factually wrong. The section 148 notice dated 28 March 2013 and the order dated 20 November 2013 rejecting objections were both quashed. It arises in Reassessment & Reopening and Assessment & Scrutiny matters, on section 147, section 148, section 143(3) of the Income Tax Act 1961, and was decided by High Court of Judicature at Bombay - Mohit S. Shah, C.J. and M.S. Sanklecha, J. (judgment per M.S. Sanklecha, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask for the recorded reasons and test the notice only against them; the Revenue cannot add a fresh justification by affidavit or at the hearing. If the reasons rest on an audit objection, argue it is an inference on existing material and not tangible material. If objections are rejected, tell the Assessing Officer in writing that he must wait four weeks before proceeding, and move the High Court within that window.
Still good law. Read from the full text of the judgment, which is complete to the operative order. It follows Kelvinator (SC) and the Bombay decisions in Asian Paints, Hindustan Lever v. Wadkar and Gopal Purohit. I did not search for any later appeal to the Supreme Court against this order, so the position is stated as it stands on the judgment itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line carried no reporter citations, so the case number from the judgment is used instead. Whether the Revenue took this order further in appeal has not been checked. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The petition was allowed. The Court set aside the reassessment order dated 19 December 2013 because it was passed in undue haste, in defiance of Asian Paints, within four weeks of the order rejecting objections and after the Assessing Officer had been told a writ was coming. On the merits it held there was no reason to believe income had escaped assessment: the very issue in the reasons had been raised as a query and answered in the original proceedings, so the notice was founded on change of opinion. The internal audit report was not part of the recorded reasons and could not be relied on, and in any event was only an inference on material already considered, not tangible material. The ground that contract notes and demat statements had not been filed was factually wrong. The section 148 notice dated 28 March 2013 and the order dated 20 November 2013 rejecting objections were both quashed.
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