Chetan Sabharwal vs Assistant Commissioner Of Income Tax Circle 28(1) New Delhi
- Court
- Supreme Court
REPORTABLE
2026 INSC 1163
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 13953 OF 2026
(Arising out of Special Leave Petition (C) No. 20045 of 2019)
CHETAN SABHARWAL …APPELLANT
VERSUS
ASSISTANT COMMISSIONER OF
…RESPONDENT
INCOME TAX CIRCLE 28(1)
NEW DELHI
WITH
CIVIL APPEAL NO. 13954 OF 2026
(@SLP(C) No. 20535/2019)
CIVIL APPEAL NO. 13955 OF 2026
(@SLP(C) No. 21295/2019)
CIVIL APPEAL NO. 13956 OF 2026
(@SLP(C) No. 21242/2019)
J U D G M E N T
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2026.10.28
15:24:42 IST
Reason:
J.B. PARDIWALA, J.:
For the convenience of exposition, this judgment is divided into the
following parts:-
INDEX
A. FACTUAL MATRIX ................................................................................................. 2
B. SUBMISSIONS ON BEHALF OF THE APPELLANTS ............................ 6
C. SUBMISSIONS ON BEHALF OF THE RESPONDENT .......................... 9
D. ISSUES FOR DETERMINATION ................................................................... 11
E. ANALYSIS ................................................................................................................. 12
(I). W HETHER THE IMPUGNED NOTICE DATED 31.03.2015 REOPENING OF
ASSESSMENTS OF THE APPELLANTS FOR THE AY 2008-09 AND AY 2009-
10 SATISFIES THE ANVIL OF “ REASON TO BELIEVE ” UNDER S ECTIONS 147-
148 OF THE A CT AND , THUS , IS VALID ? ....................................... 12
(a) Contours of the expression “reason to believe” under Sections 147 and
148 of the Act. ................................................................................... 17
(b) In-built test of “change of opinion” and its applicability to the facts of
the present case. ............................................................................... 34
F. CONCLUSION ......................................................................................................... 52
SLP(C) No. 20045 of 2019 & Connected Matters Page 1 of 53
1. Leave granted.
2. These connected appeals arise from the self same judgment and
order dated 06.08.2019 passed by the High Court of Delhi in Writ
Petition (C) No. 10898 of 2015 preferred by the appellant herein, by
which the High Court dismissed the said writ petition and thereby
upheld the reassessment proceedings initiated by the respondent-
revenue under Sections 147 and 148 of the Income Tax Act, 1961
respectively (hereinafter referred to as “ the Act ”) in the case of the
appellants for AY 2008-09 and AY 2009-10, respectively.
A. FACTUAL MATRIX
3. Mr. Chetan Sabharwal, the appellant-assessee herein, along with
his brother – Mr. Nitin Sabharwal, the appellant-assessee in the
connected matters, and two other shareholders, entered into two
Share Purchase Agreements dated 19.10.2007 (“ SPA ”) with GYS
Real Estate Pvt. Ltd/ (“ Buyer Company ”) for sale of 7.5 Lakh equity
shares of one Pawan Impex (P.) Ltd. (“ Company No. 1 ”) and of 2.5
Lakh equity shares of another SVIIT Software (P.) Ltd. (“ Company
No. 2 ”) held by each of the parties for a total sale consideration of
Rs. 195 Crore and Rs. 60 Crore, respectively. The appellant and
th
other selling shareholders were each entitled to 1/4 share of this
total consideration. With respect to the company nos. 1 and 2, an
amount of Rs. 110 Crore and Rs. 22.5 Crore, respectively, was
received as advance during FY 2007-08/AY 2008-09 out of the sale
consideration of Rs. 195 Crore and Rs. 60 Crore, respectively. The
th
appellant’s 1/4 share in this advance consideration amounted to
Rs. 27.5 Crore and 5.62 Crore, respectively. Further, the buyer
company made an additional payment of Rs. 18 Crore with respect
th
to the sale of the company no. 2’s share. The appellant’s 1/4 share
SLP(C) No. 20045 of 2019 & Connected Matters Page 2 of 53
in this additional payment amounted to Rs. 4.5 Crore. Therefore,
th
the total of the 1/4 share of the appellant in advance
consideration and additional payment aggregated to an amount of
Rs. 37.64 Crore.
4. On 25.09.2008, the appellant filed his ITR for AY 2008-09,
declaring a loss of Rs. 90.37 Lakh, which was accompanied by the
computation of total income along with the tax audit report. In the
return in Form ITR 4, particulars of the tax audit report obtained
had been filed, and therein a sum of Rs. 37.64 Crore has been
shown under the head sundry credit, which included the amount
of liability in the name of the buyer company aggregating to a tune
of Rs. 37.62 Crore.
5. As per the terms embodied in Article 1 read with Article 4 of the
SPA, the ‘Closing’ of sale of equity shares of company nos. 1 and 2
respectively in favour of the buyer company had to take place
subject to fulfilment of the conditions as stated in Article 4. At the
time of Closing, the total consideration of Rs. 195 Crore payable for
the shares of company no. 1 was reduced by Rs. 63.79 Crore, being
the amount of unsecured loan standing in the books of the
company, and by Rs. 3 Crore, being the estimated cost of
construction of building as per the SPA, and the buyer company
accordingly paid a net sale consideration of Rs. 128,20,66,501, of
th
which the appellant’s 1/4 share was Rs. 32,05,16,625. Similarly,
with respect to company no. 2, the total consideration of Rs. 60
Crore was reduced by Rs. 18.99 Crore, being the amount of
unsecured loan standing in the books of the company, and by Rs.
60 Lakh, being the estimated cost of construction of building as per
the SPA, and the buyer company accordingly paid a net sale
SLP(C) No. 20045 of 2019 & Connected Matters Page 3 of 53
th
consideration of Rs. 40,40,84,770, of which the appellant’s 1/4
share was Rs. 10,10,21,192.
6. On 17.11.2008, the shares of company no. 1 were dematerialised
upon the request of the buyer company dated 19.11.2008, and
were transferred to Religare Securities Ltd. (Depositary under
NSDL), an associate company/concern of the Religare Group. On
25.09.2009, the appellant deposited amounts of Rs. 28 Crore and
Rs. 3.915 Crore, respectively, in the Capital Gain Savings Bank
Account No. 307802090000006 with the Union Bank of India, in
accordance with Section 54F(4) of the Act.
7. On 21.04.2010, the two appellants jointly purchased an undivided
and undefined 1/2 share in a residential property located in Delhi
for an aggregate consideration of Rs. 61 Crore. The said property
was purchased out of the capital gains arising in the hands of the
appellant and his brother from the sale of shares of company no. 1
and company no. 2, respectively, within a period of 2 years, thereby
entitling the appellant to the benefit of Section 54F of the Act.
8. On 06.08.2010, the respondent issued a notice under Section
142(1) of the Act, seeking an explanation on the nature of the
transaction with the buyer company amounting to Rs. 37.62 Crore,
and the production of the return documents of the buyer company
for the last 5 years, among other details. In response to the queries
raised by the respondent, the appellant submitted the requisite
details along with supporting documents on 05.10.2010.
9. Thereafter, on 13.12.2010, the respondent issued notices under
Section 133(6) of the Act to company no. 1, company no. 2 and the
buyer company, calling for information in relation to the
aforementioned transaction of sale of shares by the appellant. On
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16.12.2010, the company no. 1 and company no. 2 filed their reply
to the said notice, submitting the documents sought thereunder.
Similarly, on 16.12.2010, the buyer company filed its reply to the
said notice, submitting the documents sought.
10. On 22.12.2010, the assessment under Section 143(3) of the Act was
framed for AY 2008-09, whereby the returned income of the
appellant was accepted.
11. Subsequent to the completion of the assessment, the Investigation
Unit, Noida, under the DGIT (Inv.), Lucknow, conducted enquiries
into the value of the shares of company no. 1 and company no. 2
and prepared a report (“ Investigation Report ”). The report
concluded, prima facie , that the shares were overvalued when
compared with the cost of their land and building, which was much
lower than the transaction amounts of Rs. 195 Crore and Rs. 60
Crore, respectively. The enquiries also revealed that the appellants
purchased one-half share of property at Sikandara Road, New Delhi
in April 2010 through a court auction, and that the major source
of this investment was the sale proceeds of the shares of company
no. 1 and company no. 2.
12. Thereafter, on perusal of the investigation report and after a gap of
4 years, the respondent issued a notice dated 31.03.2015 under
Section 148 of the Act (“ Impugned Notice ”) for reassessment in the
case of the appellant for AY 2008-09, calling upon the appellant to
file his return of income. By letter dated 24.04.2015, the
respondent communicated the recorded reasons under Section 148
of the Act for reopening the case of the appellant. On 20.05.2015,
the appellant filed legal objections to the initiation of the impugned
reassessment proceedings for AY 2008-09.
SLP(C) No. 20045 of 2019 & Connected Matters Page 5 of 53
13. On 24.09.2015, the respondent passed an order rejecting the legal
objections of the appellant for AY 2008-09. Aggrieved by the said
rejection of the legal objections against the initiation of
reassessment proceedings for AY 2008-09, the appellant filed a writ
petition bearing W.P.(C) No. 10898 of 2015 before the High Court.
The High Court, by the impugned judgment and order, dismissed
the writ petition filed by the appellant, thereby upholding the
initiation of reassessment proceedings by the respondent under
Section 147 of the Act in the case of the appellant for AY 2008-09.
14. In such circumstances referred to above, the appellant is here
before us with the present appeal.
B. SUBMISSIONS ON BEHALF OF THE APPELLANTS
15. Mr. Mukul Rohatgi, the learned senior counsel appearing for the
appellant, submitted that, after the expiry of 4 years from the end
of the relevant AYs, the respondent issued impugned notice dated
31.03.2015 under Section 148 of the Act, initiating reassessment
proceedings in the case of the appellant and his brother for AY
2008-09 and AY 2009-10, and that identical reasons to believe were
recorded by the respondent under Section 148(2) of the Act in the
case of both of them for both the years. He further submitted that
it is trite law that the initiation of reassessment proceedings under
Sections 147 and 148 of the Act, respectively, is required to be
tested on the reasons to believe as they stand recorded by the
respondent.
16. The learned senior counsel argued that there is an absence of valid
“reasons to believe” demonstrating escapement of income in the
present case. He submitted that, on a bare perusal of the reasons
SLP(C) No. 20045 of 2019 & Connected Matters Page 6 of 53
recorded for the said notice, the reasons recorded by the
respondent for alleging escapement of income in the hands of the
appellant and his brother are legally unsustainable inasmuch as:
(a) The sole basis for reopening is the alleged overvaluation of
shares sold by the appellant, which cannot result in
escapement of income in the hands of the seller, and no doubt
ever came to be raised on the genuineness of the sale, thereby
showing non-application of mind to the jurisdictional condition
of escapement of income;
(b) For AY 2008-09, there can be no escapement of income on the
sale of shares of company no. 1 and company no. 2, as the
transfer was complete only in AY 2009-10, upon fulfilment of
the conditions under Article 4 of the SPAs and delivery of share
certificates with transfer deed and/or transfer through Demat
Account;
(c) For AY 2009-10, the Long Term Capital Gains (“ LTCG ”) on the
transfer was duly disclosed and offered to tax in the ITRs filed
by the appellant and his brother;
(d) The transaction was independently enquired into by the
respondent and confirmed by the said companies and the
buyer company in the scrutiny assessment under Section
143(3) of the Act for both AYs. The reassessment of the buyer
company on the same transaction also ended in acceptance of
its returned income;
(e) The alleged colourable deferment of LTCG and the resultant
claim under Section 54F, raised in the order disposing of the
objections, formed no part of the reasons recorded, and
amount to an improvement upon the same.
SLP(C) No. 20045 of 2019 & Connected Matters Page 7 of 53
17. The learned senior counsel further submitted that, in terms of the
Proviso 1 to Section 147 of the Act, reassessment beyond 4 years
from the end of the relevant AY, where an assessment has been
completed under Section 143(3), is permissible only if income has
escaped assessment by reason of the failure of the assessee to
disclose fully and truly all material facts necessary for assessment,
and that in the absence of such failure during the earlier scrutiny
proceedings, reassessment initiated after the said period is illegal.
Reliance was placed on various decisions to fortify the submission
that the respondent must come into possession of some fresh
tangible information relating to a concluded assessment which
exposes the falsity of the statement made by the assessee at the
time of the original assessment.
18. It was submitted that, in the case of the appellant, the transaction
of sale of shares of company no. 1 and company no. 2, respectively,
to the buyer company was fully disclosed in the accounts and the
ITRs, and was thoroughly examined, and that all information and
evidence was duly furnished for AY 2008-09 and AY 2009-10
respectively. He pointed out that at no stage has any failure on the
part of the appellant to disclose the primary facts been alleged or
made out. In this background, it was argued that since such failure
to disclose is a jurisdictional precondition under the Proviso 1 to
Section 147 of the Act, its absence renders the reassessment
initiated beyond 4 years from the end of the relevant AY without
jurisdiction.
19. The learned senior counsel further submitted that the
reassessment could be said to have been initiated on a mere change
of opinion, without any allegation, let alone evidence, of a failure on
the part of the appellant to disclose the primary facts. It was
SLP(C) No. 20045 of 2019 & Connected Matters Page 8 of 53
submitted that, in the case of the appellant, the record clearly
demonstrates that the transaction of sale of shares of company no.
1 and company no. 2 to the buyer company was specifically and
thoroughly examined, and that it was only thereafter that the
respondent found merit in the explanation offered by the appellant
and accepted the returned income without drawing any adverse
inference. He submitted that the mere fact that such opinion
formed by the respondent in favour of the appellant did not find
specific mention in the body of the assessment order does not, in
any way, dilute the formation of the opinion itself.
C. SUBMISSIONS ON BEHALF OF THE RESPONDENT
20. Ms. Nisha Bagchi, the learned senior counsel, along with Mr. K.M.
Nataraj, the learned ASG, appearing for the respondent-revenue,
submitted that the investigation report, which was made available
to the respondent by the Investigation Unit, Noida, subsequent to
the completion of the assessments, pointed out the overvaluation
of the shares and constituted specific, reliable and tangible
information sufficient to form a reason to believe that income had
escaped assessment. The said investigation report concludes as
follows:
“It can be prima facie concluded that the value of shares are
overvalued to the extent of ₹ 109,80,00,000/– (In the case of
M/S Pawan Impex Limited) and ₹ 40,40,28,000/– (in the
case of SVIIT Software Private Limited) going by the cost of
land and Building, which is much lower than the
₹
transaction amount of 195,00,00,000/– in the case of M/S
Pawan Impex Private Limited plus ₹ 60,00,00,000/– in the
case of SVIIT Software Private Limited”
21. It was further submitted on behalf of the respondent-revenue that
as per the settled law, whether the facts stated in the letter are true
SLP(C) No. 20045 of 2019 & Connected Matters Page 9 of 53
or not is not the concern at this stage, as the truth of the allegations
may be established after making the necessary enquiries, and that,
at the stage of issuance of the notice, the only question is whether
there was credible material on which a reasonable person could
have formed the requisite belief. On these parameters, it was
contended that the notices have been validly issued on a reason to
believe formed on the basis of tangible material, and that the
respondent has duly recorded reasons which have a live nexus to
the notice. After perusing the letter dated 15.10.2015, the other
correspondence in this regard and the report of the Investigation
Unit, the respondent believed that the shares had been overvalued,
that the capital gains were adjusted in future years and that
deductions were also claimed under Section 54F of the Act. The AO
had recorded that “with respect to the share transactions, the capital
gain earned, and deduction on the same claimed. I have the reasons
to believe that substantial amount has escaped assessment during
the assessment years 2008–09 and 2009–10 ”.
22. In respect of the assessee - Mr. Chetan Sabharwal, the respondent-
revenue submitted that the original assessment orders for both AYs
passed under Section 143(3) of the Act do not indicate that the
respondent formed any opinion on the issue on which reopening
has been ordered, and that the record indicates that the issue of
overvaluation of shares was not considered during the scrutiny
assessment. It was contended that, the order under Section 143(3)
of the Act being a non-speaking order, no opinion can be attributed
to the respondent on the issues sought to be raised in the proposed
reassessment proceedings. As regards the requirement under the
proviso to Section 147 of the Act that the under-assessment must
have occurred by reason of, inter alia , the failure of the assessee to
disclose fully and truly all material facts necessary for his
SLP(C) No. 20045 of 2019 & Connected Matters Page 10 of 53
assessment, it was submitted that the same essentially involves
questions of fact, which stand relegated to the adjudicating
authority. The Act postulates a duty on every assessee to disclose
fully and truly all material facts necessary for his assessment. It
was further submitted that the Assistant Commissioner of Income
Tax, while disposing of the objections against reassessment by his
order dated 24.09.2011, specifically recorded that the DDIT
(Investigation), Noida, had clearly mentioned that the mechanism
through which the net worth of the shares was calculated, and the
due diligence report of the shares, were not provided despite the
assessee being repeatedly asked to do so.
23. In respect of the assessee - Mr. Nitin Sabharwal, it was further
submitted on behalf of the respondent-revenue that only an
intimation under Section 143(1) of the Act was issued accepting his
returns, and that the notice was issued within the time prescribed
under Section 149(1)(b) of the Act on the basis of a valid reason to
believe. It was contended that the contentions relating to change of
opinion or failure to make full disclosure are not relevant to the
reassessment proceedings in his case. It was further submitted that
the only criteria for assessing income under Section 147 of the Act
are the existence of a valid reason recorded by the respondent and
the satisfaction of the jurisdictional Principal Commissioner, both
of which stand satisfied on the facts of the present assessment.
D. ISSUES FOR DETERMINATION
24. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the sole question that
falls for our consideration is whether the impugned notice dated
31.03.2015 seeking to reopen the assessments of the appellants for
SLP(C) No. 20045 of 2019 & Connected Matters Page 11 of 53
the AY 2008-09 and AY 2009-10, respectively, satisfies the anvil of
“reason to believe” under Section 147-148 of the Act and, thus, is
valid?
E. ANALYSIS
(I). Whether the impugned notice dated 31.03.2015 reopening of
assessments of the appellants for the AY 2008-09 and AY 2009-
10 satisfies the anvil of “reason to believe” under Section 147-
148 of the Act and, thus, is valid?
25. Before dealing with the rival submissions canvassed on either side,
a bare reading of Sections 147-148 of the Act, respectively, that
deal with reopening of the assessment must be undertaken.
26. Section 147 of the Act, as it stood on 31.03.2015, reads as follows:
“ Section 147. Income escaping assessment.— If
the Assessing Officer, has reason to believe that any
income chargeable to tax has escaped assessment for any
assessment year, he may, subject to the provisions of
sections 148 to 153, assess or reassess such income and
also any other income chargeable to tax which has
escaped assessment and which comes to his notice
subsequently in the course of the proceedings under this
section, or recompute the loss or the depreciation allowance
or any other allowance, as the case may be, for the
assessment year concerned (hereafter in this section and in
sections 148 to 153 referred to as the relevant assessment
year):
Provided that where an assessment under sub-section
(3) of section 143 or this section has been made for the
relevant assessment year, no action shall be taken under
this section after the expiry of four years from the end of the
relevant assessment year, unless any income chargeable to
tax has escaped assessment for such assessment year by
reason of the failure on the part of the assessee to make a
return under section 139 or in response to a notice issued
under sub-section (1) of section 142 or section 148 or to
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disclose fully and truly all material facts necessary for his
assessment, for that assessment year:
Provided further that the Assessing Officer may
assess or reassess such income, other than the income
involving matters which are the subject matters of any
appeal, reference or revision, which is chargeable to tax and
has escaped assessment.
Explanation 1.—Production before the Assessing
Officer of account books or other evidence from which
material evidence could with due diligence have been
discovered by the Assessing Officer will not necessarily
amount to disclosure within the meaning of the foregoing
proviso.
Explanation 2.—For the purposes of this section, the
following shall also be deemed to be cases where income
chargeable to tax has escaped assessment, namely:
(a) where return of income has been furnished by the
assessee although his total income or the total income of
any other person in respect of which he is assessable under
this Act during the previous year exceeded the maximum
amount which is not chargeable to income-tax;
(b) where a return of income has been furnished by
the assessee but no assessment has been made and it is
noticed by the Assessing Officer that the assessee has
understated the income or has claimed excessive loss,
deduction, allowance or relief in the return;
(c) where an assessment has been made, but—
(i) income chargeable to tax has been
underassessed; or
(ii) such income has been assessed at too low a rate;
or
(iii) such income has been made the subject of
excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any
other allowance under this Act has been computed.
Explanation 3.—For the purpose of assessment or
reassessment under this section, the Assessing Officer may
assess or reassess the income in respect of any issue,
which has escaped assessment, and such issue comes to
his notice subsequently in the course of the proceedings
under this section, notwithstanding that the reasons for
such issue have not been included in the reasons recorded
under sub -section (2) of section 148.”
(Emphasis Supplied)
SLP(C) No. 20045 of 2019 & Connected Matters Page 13 of 53
27. Section 148 of the Act, as it stood on 31.03.2015, reads as follows:
“ Section 148. Issue of notice where income has
escaped assessment.— (1) Before making the assessment,
reassessment or recomputation under section 147, the
Assessing Officer shall serve on the assessee a notice
requiring him to furnish within such period , as may be
specified in the notice, a return of his income or the
income of any other person in respect of which he is
assessable under this Act during the previous year
corresponding to the relevant assessment year , in the
prescribed form and verified in the prescribed manner and
setting forth such other particulars as may be prescribed;
and the provisions of this Act shall, so far as may be, apply
accordingly as if such return were a return required to be
furnished under section 139:
Provided that in a case—
(a) where a return has been furnished during the
st
period commencing on the 1 day of October, 1991 and
th
ending on the 30 day of September, 2005 in response to a
notice served under this section, and
(b) subsequently a notice has been served under sub-
section (2) of section 143 after the expiry of twelve months
specified in the proviso to sub-section (2) of section 143, as
it stood immediately before the amendment of said sub-
section by the Finance Act, 2002 (20 of 2002) but before the
expiry of the time limit for making the assessment,
reassessment or recomputation as specified in sub-section
(2) of section 153, every such notice referred to in this clause
shall be deemed to be a valid notice:
Provided further that in a case—
(a) where a return has been furnished during the
st
period commencing on the 1 day of October, 1991 and
th
ending on the 30 day of September, 2005, in response to
a notice served under this section, and
(b) subsequently a notice has been served under
clause (ii) of sub-section (2) of section 143 after the expiry of
twelve months specified in the proviso to clause (ii) of sub-
section (2) of section 143, but before the expiry of the time
limit for making the assessment, reassessment or
recomputation as specified in sub- section (2) of section 153,
every such notice referred to in this clause shall be deemed
to be a valid notice.
SLP(C) No. 20045 of 2019 & Connected Matters Page 14 of 53
Explanation.—For the removal of doubts, it is hereby
declared that nothing contained in the first proviso or the
second proviso shall apply to any return which has been
st
furnished on or after the 1 day of October, 2005 in
response to a notice served under this section.
(2) The Assessing Officer shall, before issuing any
notice under this section, record his reasons for doing so.”
(Emphasis Supplied)
28. A conjoint reading of Sections 147 and 148 of the Act respectively
makes it clear that the power to reopen an assessment is not
unfettered and is hedged with conditions, the first being that the
AO must have reason to believe that income chargeable to tax has
escaped assessment, which is the jurisdictional foundation for
assuming the power to reassess. Once this threshold is met, the
AO is also empowered to bring to tax any other escaped income that
comes to his notice in the course of the reassessment proceedings,
provided the reason or at least one of the reasons, projected for
reopening is eventually found to be escaped income. However,
where the original assessment has been completed under Section
143(3) of the Act, a further safeguard is introduced by the proviso
to Section 147, whereby a notice beyond 4 years from the end of
the relevant AY can be sustained only if the escapement of income
is attributable to the failure of the assessee to disclose fully and
truly all material facts necessary for his assessment, and the
existence of such failure thus becomes a condition precedent to the
exercise of jurisdiction. Further, the power to reopen an
assessment is not confined to cases where the assessee has
concealed his income, and extends also to cases where, though
there has been no concealment, the respondent has reason to
believe, in consequence of tangible material in his possession, that
income has escaped assessment. Section 148 then operates as the
procedural safeguard, as it requires service of a notice on the
SLP(C) No. 20045 of 2019 & Connected Matters Page 15 of 53
assessee before the reassessment is undertaken, and, more
importantly, mandates that the AO record his reasons before
issuing the notice.
29. In the present case, the revenue’s stand is that it issued the
impugned notice under Section 148 of the Act on the strength of
the investigation report submitted by the DGIT Investigation Unit,
Noida, which constituted specific and tangible material on the
overvaluation of shares. Thus, at the stage of issuing the notice, the
only question that would be relevant is whether there was any
credible material on which a reasonable person could form the
requisite belief, the truth of the allegations being a matter for
enquiry in the reassessment proceedings. The assessees’ stand is
that the reasons recorded for the impugned notice proceed solely
on the alleged overvaluation of shares, which cannot result in
escapement of income in the hands of the sellers and raises no
doubt on the genuineness of the sale, and that the grounds of
colourable deferment of LTCG and the claim under Section 54F of
the Act, raised later in the order disposing of the objections, are an
improvement on the reasons recorded. Further, the transaction
having been examined in the scrutiny assessment under Section
143(3) of the Act, the reassessment amounts to a mere change of
opinion.
30. In order to determine whether the impugned notice satisfied the
test of “reason to believe” as required under section 147 of the Act,
we have to understand the meaning and scope of the said
expression.
SLP(C) No. 20045 of 2019 & Connected Matters Page 16 of 53
(a) Contours of the expression “reason to believe” under Sections
147 and 148 of the Act.
31. In the case of Calcutta Discount Co. Ltd. v. ITO , reported in
(1961) 41 ITR 191 (SC) , the Constitution Bench of this Court
observed that the duty of the assessee is to disclose fully and truly
all primary relevant facts, and that it does not extend beyond this.
It was further observed that, if there were in fact some reasonable
grounds for thinking that there had been non-disclosure of any
primary fact having a material bearing on the question of under-
assessment, that would be sufficient to give the AO jurisdiction to
issue the notice, and that the adequacy of such grounds is not open
to the court’s investigation. It was held that all that is necessary is
that the AO had, when he assumed jurisdiction, some prima facie
grounds or reasons for thinking that there had been some non-
disclosure of material facts, and that it is the duty of the assessee
who contends that jurisdiction was lacking to establish that the AO
had no material at all before him for believing that there had been
such non-disclosure. The relevant observations made by this Court
are as under:
“13. We have therefore come to the conclusion that while the
duty of the assessee is to disclose fully and truly all primary
relevant facts, it does not extend beyond this.
14. The position therefore is that if there were in fact some
reasonable grounds for thinking that there had been any
non-disclosure as regards any primary fact, which could
have a material bearing on the question of
“underassessment” that would be sufficient to give
jurisdiction to the Income Tax Officer to issue the notices
under Section 34. Whether these grounds were adequate or
not for arriving at the conclusion that there was a non
disclosure of material facts would not be open for the court's
investigation. In other words, all that is necessary to give
SLP(C) No. 20045 of 2019 & Connected Matters Page 17 of 53
this special jurisdiction is that the Income Tax Officer had
when he assumed jurisdiction some prima facie grounds for
thinking that there had been some non-disclosure of
material facts.
15. Clearly it is the duty of the assessee who wants the
court to hold that jurisdiction was lacking, to establish that
the Income Tax Officer had no material at all before him for
believing that there had been such non-disclosure. To
establish this the company has relied on the statements in
the assessment orders for the three years in question and
on the statement of Kanakendra Narayan Banerjee in the
report made by him to the Commissioner of Income Tax for
the purpose of obtaining sanction to initiate proceedings
under Section 34 and also on his statement in the affidavit
on oath in reply to the writ petition.”
(Emphasis Supplied)
32. The decision in Calcutta Discount (supra) was later also followed
in the case of S. Narayannappa v. CIT , reported in (1967) 63 ITR
219 (SC) .
33. In the case of Chhugamal Rajpal v. S.P. Chaliha , reported in
(1971) 1 SCC 453 , the AO had issued a notice under Section 148
of the Act on a report which set out neither the reasons nor the
material for his conclusion, and which showed only a vague feeling
that the transactions were bogus. This Court held that, before
issuing a notice under Section 148 of the Act, the AO must either
have reason to believe that income chargeable to tax has escaped
assessment by reason of the failure of the assessee to make a
return or to disclose fully and truly all material facts necessary for
his assessment, or, notwithstanding the absence of such failure,
have reason to believe, in consequence of information in his
possession, that income chargeable to tax has escaped assessment,
and that, unless the requirements of Section 147 are satisfied, the
AO has no jurisdiction to issue the notice. It was held that the AO
SLP(C) No. 20045 of 2019 & Connected Matters Page 18 of 53
had no material satisfying either clause, that a conclusion that a
matter requires investigation is not the same as having reasons to
issue a notice under Section 148, and that the Commissioner had
mechanically accorded permission without recording his own
satisfaction. The relevant observations are as under:
“5. In his report the Income Tax Officer does not set out any
reason for coming to the conclusion that this is a fit case to
issue notice under Section 148. The material that he had
before him for issuing notice under Section 148 is not
mentioned in the report. In his report he vaguely refers to
certain communications received by him from the CIT, Bihar
and Orissa. He does not mention the facts contained in
those communications. All that he says is that from those
communications “it appears that these persons (alleged
creditors) are name lenders and the transactions are
bogus”. He has not even come to a prima facie conclusion
that the transactions to which he referred are not genuine
transactions. He appears to have had only a vague feeling
that they may be bogus transactions. Such a conclusion
does not fulfil the requirements of Section 151(2). What that
provision requires is that he must give reasons for issuing a
notice under Section 148. In other words he must have some
prima facie grounds before him for taking action under
Section 148. further his report mentions: “Hence proper
investigation regarding these loans is necessary”. In other
words his conclusion is that there is a case for investigating
as to the truth of the alleged transactions. That is not the
same thing as saying that there are reasons to issue notice
under Section 148. Before issuing a notice under Section
148, the Income Tax Officer must have either reasons to
believe that by reason of the omission or failure on the part
of the assessee to make a return under Section 139 for any
assessment year to the Income Tax Officer or to disclose
fully and truly all material facts necessary for his
assessment for that year, income chargeable to tax has
escaped assessment for that year or alternatively
notwithstanding that there has been no omission or failure
as mentioned above on the part of the assessee, the Income
Tax Officer has in consequence of information in his
possession reason to believe that income chargeable to tax
has escaped assessment for any assessment year. Unless
SLP(C) No. 20045 of 2019 & Connected Matters Page 19 of 53
the requirements of clause (a) or (b) of Section 147 are
satisfied, the Income Tax Officer has no jurisdiction to issue
a notice under Section 148. From the report submitted by
the Income Tax Officer to the Commissioner, it is clear that
he could not have had reasons to believe that by reason of
the assessee’s omission to disclose fully and truly all
material facts necessary for his assessment for the
accounting year in question, income chargeable to tax has
escaped assessment for that year; nor could it be said that
he as a consequence of information in his possession, had
reasons to believe that the income chargeable to tax has
escaped assessment for that year. We are not satisfied that
the Income Tax Officer had any material before him which
could satisfy the requirements of either clause (a) or (b) of
Section 147. Therefore he could not have issued a notice
under Section 148. Further the report submitted by him
under Section 151(2) does not mention any reason for
coming to the conclusion that it is a fit case for the issue of
a notice under Section 148. We are also of the opinion that
the Commissioner has mechanically accorded permission.
He did not himself record that he was satisfied that this was
a fit case for the issue of a notice under Section 148. To
Question 8 in the report which reads “whether the
Commissioner is satisfied that it is a fit case for the issue of
notice under Section 148”, he just noted the word “yes” and
affixed his signatures thereunder. We are of the opinion that
if only he had read the report carefully, he could never have
come to the conclusion on the material before him that this
is a fit case to issue notice under Section 148. The important
safeguards provided in Sections 147 and 151 were lightly
treated by the Income Tax Officer as well as by the
Commissioner. Both of them appear to have taken the duty
imposed on them under those provisions as of little
importance. They have substituted the form for the
substance.”
(Emphasis Supplied)
34. In the same year, this Court, in the case of Sheo Nath Singh v.
Appellate Assistant Commissioner of Income Tax, Calcutta ,
reported in 1972 (3) SCC 234 , observed that the expression
“reason to believe” requires a belief of an honest and reasonable
person based upon reasonable grounds, and that the AO may act
SLP(C) No. 20045 of 2019 & Connected Matters Page 20 of 53
on direct or circumstantial evidence but not on mere suspicion,
gossip or rumour. It was further observed that the AO would act
without jurisdiction if the reason for his belief does not exist or is
not material or relevant to the belief required by the section, and
that, while the Court can always examine this aspect, it cannot
investigate the sufficiency of the reasons for the belief. The relevant
observations are as under:
“10. In our judgment, the law laid down by this Court in the
above case is fully applicable to the facts of the present
case. There can be no manner of doubt that the words
“reason to believe” suggest that the belief must be that of
an honest and reasonable person based upon reasonable
grounds and that the Income Tax Officer may act on direct
or circumstantial evidence but not on mere suspicion, gossip
or rumour. The Income Tax Officer would be acting without
jurisdiction if the reason for his belief that the conditions are
satisfied does not exist or is not material or relevant to the
belief required by the section. The Court can always
examine this aspect though the declaration or sufficiency of
the reasons for the belief cannot be investigated by the
Court.”
(Emphasis Supplied)
35. Thereafter, in the case of ITO vs. Lakhmani Mewal Das , reported
in [1976] 103 ITR 437 (SC) , this Court observed that the adequacy
of the grounds or reasons is not a matter for the Court to
investigate, and that the sufficiency of the grounds which induce
the AO to act is not a justiciable issue. It was further observed that,
while it is open to the assessee to challenge the existence of the
belief, the sufficiency of the reasons for the belief cannot be
challenged, and that the expression “reason to believe” does not
mean a purely subjective satisfaction on the part of the AO, as the
reason must be held in good faith and cannot be merely a pretence.
This Court held that the reasons for the formation of the belief must
have a rational connection with or a relevant bearing on the
SLP(C) No. 20045 of 2019 & Connected Matters Page 21 of 53
formation of the belief, and that rational connection postulates a
direct nexus or live link between the material coming to the notice
of the AO and the formation of his belief that income has escaped
assessment by reason of the failure of the assessee to disclose fully
and truly all material facts. It was held that, though the courts
cannot go into the sufficiency or adequacy of the material and
substitute their own opinion for that of the AO on whether action
should be initiated, yet it is not any and every material, however
vague, indefinite, distant, remote or far-fetched, which would
warrant the formation of the belief relating to escapement of
income. Nevertheless, the courts can still examine whether the
reasons for the formation of the belief have a rational connection
with or a relevant bearing on the formation of the belief, and are
not extraneous or irrelevant for the purpose of the section. The
relevant observations are as under:
“8. […] Whether the grounds are adequate or not is not a
matter for the court to investigate. The sufficiency of the
grounds which induce the Income-tax Officer to act is,
therefore, not a justiciable issue. It is, of course, open to the
assessee to contend that, the Income-tax Officer did not hold
the belief that there had been such non-disclosure. The
existence of the belief can be challenged by the assessee
but not the sufficiency of the reasons for the belief. The
expression “reason to believe” does not mean a purely
subjective satisfaction on the part of the Income-tax Officer.
The reason must be held in good faith. It cannot be merely
a pretence. It is open to the court to examine whether the
reasons for the formation of the belief have a rational
connection with or a relevant bearing on the formation of the
belief and are not extraneous or irrelevant for the purpose
of the section […]
xxx xxx xxx
11. As stated earlier, the reasons for the formation of the
belief must have a rational connection with or relevant
bearing on the formation of the belief. Rational connection
postulates that there must be a direct nexus or live link
SLP(C) No. 20045 of 2019 & Connected Matters Page 22 of 53
between the material coming to the notice of the Income Tax
Officer and the formation of his belief that there has been
escapement of the income of the assessee from assessment
in the particular year because of his failure to disclose fully
and truly all material facts. It is no doubt true that the court
cannot go into the sufficiency or adequacy of the material
and substitute its own opinion for that of the Income Tax
Officer on the point as to whether action should be initiated
for reopening assessment. At the same time we have to bear
in mind that it is not any and every material, howsoever
vague and indefinite or distant, remote and farfetched,
which would warrant the formation of the belief relating to
escapement of the income of the assessee from assessment
[…]”
(Emphasis Supplied)
36. Similarly, in Ganga Saran & Sons (P). Ltd. v. ITO , reported in
(1981) 130 ITR 1 (SC) , this Court observed that the words “has
reason to believe” in Section 147(a) are stronger than the words “is
satisfied” , and that the belief entertained by the AO must not be
arbitrary or irrational, but must be reasonable, that is, based on
reasons which are relevant and material. It was held that, while the
Court cannot investigate the adequacy or sufficiency of the reasons
which weighed with the AO, it can examine whether the reasons
are relevant and have a bearing on the matters in regard to which
he is required to entertain the belief. It was further held that, if
there is no rational and intelligible nexus between the reasons and
the belief, so that no one properly instructed on facts and law could
reasonably entertain the belief, the AO could not have reason to
believe that income had escaped assessment, and the notice would
be liable to be struck down as invalid. The relevant observations
are as under:
“6. […] The important words under Section 147(a) are “has
reason to believe” and these words are stronger than the
words “is satisfied”. The belief entertained by the Income
Tax Officer must not be arbitrary or irrational. It must be
SLP(C) No. 20045 of 2019 & Connected Matters Page 23 of 53
reasonable or in other words it must be based on reasons
which are relevant and material. The court, of course,
cannot investigate into the adequacy or sufficiency of the
reasons which have weighed with the Income Tax Officer in
coming to the belief, but the court can certainly examine
whether the reasons are relevant and have a bearing on the
matters in regard to which he is required to entertain the
belief before he can issue notice under Section 147(a). If
there is no rational and intelligible nexus between the
reasons and the belief, so that, on such reasons, no one
properly instructed on facts and law could reasonably
entertain the belief, the conclusion would be inescapable
that the Income Tax Officer could not have reason to believe
that any part of the income of the assessee had escaped
assessment and such escapement was by reason of the
omission or failure on the part of the assessee to disclose
fully and truly all material facts and the notice issued by
him would be liable to be struck down as invalid.”
(Emphasis Supplied)
37. Moreover, in the case of Phool Chand Bajrang Lal v. ITO , reported
in (1993) 4 SCC 77 , this Court held that the AO acquires
jurisdiction to reopen an assessment under Section 147(a) read
with Section 148 of the Act only if, on the basis of specific, reliable
and relevant information coming to his possession subsequently,
he has reasons, which he must record, to believe that income has
escaped assessment by reason of the failure of the assessee to make
a true and full disclosure of all material facts during the concluded
assessment proceedings. It was held that the AO may start
reassessment either because fresh facts come to light or because
information comes into his possession which tends to expose the
untruthfulness of the facts previously disclosed, and that, in such
situations, it is not a case of mere change of opinion but of acting
on fresh information. It was further held that, while the sufficiency
of the reasons is not for the Court to judge, the Court may examine
whether there was material on record from which the requisite
SLP(C) No. 20045 of 2019 & Connected Matters Page 24 of 53
belief could be formed, and whether that material had a rational
connection or a live link with the formation of the belief. The
relevant observations are as under:
“25. From a combined review of the judgments of this Court,
it follows that an Income Tax Officer acquires jurisdiction to
reopen assessment under Section 147(a) read with Section
148 of the Income Tax Act, 1961 only if on the basis of
specific, reliable and relevant information coming to his
possession subsequently, he has reasons which he must
record, to believe that by reason of omission or failure on the
part of the assessee to make a true and full disclosure of all
material facts necessary for his assessment during the
concluded assessment proceedings, any part of his income,
profit or gains chargeable to income tax has escaped
assessment. He may start reassessment proceedings either
because some fresh facts come to light which were not
previously disclosed or some information with regard to the
facts previously disclosed comes into his possession which
tends to expose the untruthfulness of those facts. In such
situations, it is not a case of mere change of opinion or the
drawing of a different inference from the same facts as were
earlier available but acting on fresh information. Since, the
belief is that of the Income Tax Officer, the sufficiency of
reasons for forming the belief, is not for the Court to judge
but it is open to an assessee to establish that there in fact
existed no belief or that the belief was not at all a bona fide
one or was based on vague, irrelevant and non-specific
information. To that limited extent, the Court may look into
the conclusion arrived at by the Income Tax Officer and
examine whether there was any material available on the
record from which the requisite belief could be formed by the
Income Tax Officer and further whether that material had
any rational connection or a live link for the formation of the
requisite belief. It would be immaterial whether the Income
Tax Officer at the time of making the original assessment
could or, could not have found by further enquiry or
investigation, whether the transaction was genuine or not,
if on the basis of subsequent information, the Income Tax
Officer arrives at a conclusion, after satisfying the twin
conditions prescribed in Section 147(a) of the Act, that the
assessee had not made a full and true disclosure of the
material facts at the time of original assessment and
SLP(C) No. 20045 of 2019 & Connected Matters Page 25 of 53
therefore income chargeable to tax had escaped
assessment […]”
(Emphasis Supplied)
38. In the case of CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. ,
reported in (2008) 14 SCC 208 , this Court held that the word
“reason” in the phrase “reason to believe” means cause or
justification, and that the AO need only have cause or justification
to know or suppose that income has escaped assessment, without
having finally ascertained the fact by legal evidence or conclusion.
It was further held that, at the stage of initiation, what is required
is a reason to believe and not the established fact of escapement of
income, and that, at the stage of issuing the notice, the only
question is whether there was relevant material on which a
reasonable person could have formed the requisite belief, whether
the material would conclusively prove the escapement being no
concern at that stage. The relevant observations made by this Court
are as under:
“19. Section 147 authorises and permits the assessing
officer to assess or reassess income chargeable to tax if he
has reason to believe that income for any assessment year
has escaped assessment. The word “reason” in the phrase
“reason to believe” would mean cause or justification. If the
assessing officer has cause or justification to know or
suppose that income had escaped assessment, it can be
said to have reason to believe that an income had escaped
assessment. The expression cannot be read to mean that
the assessing officer should have finally ascertained the
fact by legal evidence or conclusion. The function of the
assessing officer is to administer the statute with solicitude
for the public exchequer with an inbuilt idea of fairness to
taxpayers.
20. As observed by the Delhi High Court (sic the Supreme
Court) in Central Provinces Manganese Ore Co. Ltd. v. ITO3
for initiation of action under Section 147(a) (as the provision
SLP(C) No. 20045 of 2019 & Connected Matters Page 26 of 53
stood at the relevant time) fulfilment of the two requisite
conditions in that regard is essential. At that stage, the final
outcome of the proceeding is not relevant. In other words, at
the initiation stage, what is required is "reason to believe",
but not the established fact of escapement of income. At the
stage of issue of notice, the only question is whether there
was relevant material on which a reasonable person could
have formed a requisite belief. Whether the materials would
conclusively prove the escapement is not the concern at that
stage. This is so because the formation of belief by the
assessing officer is within the realm of subjective
satisfaction”
(Emphasis Supplied)
39. Further, in Income Tax Officer, Ward No. 16(2) v. Techspan
India Private Limited and Another , reported in 2018 (6) SCC
685 , this Court, by placing strong reliance upon the decision in CIT
v. Kelvinator of India Ltd. , reported in (2010) 2 SCC 723 , held
that the words “reason to believe” in Section 147 of the Act have to
be interpreted schematically, as a liberal interpretation would
confer arbitrary power on the AO to initiate reassessment
proceedings merely on a change of opinion on the same facts and
circumstances already considered by him in the original
assessment, which could never have been the intention of the
legislature. It was held that the provision was incorporated to
empower the assessing authorities to reassess income on a ground
which was not brought on record in the original proceedings and
escaped the knowledge of the AO, and which has a material bearing
on the outcome of the assessment order. It was further held that
Section 147 of the Act does not permit reassessment merely
because the AO takes a different view of the law on facts that were
well within his knowledge at the time of the assessment, as doing
so would amount to a power of review, whereas Section 147 confers
only the power to reassess. The relevant observations made by this
Court are as under:
SLP(C) No. 20045 of 2019 & Connected Matters Page 27 of 53
“14. The language of Section 147 makes it clear that the
assessing officer certainly has the power to reassess 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 reassess 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.
15. 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
reassess and not the power to review.
(Emphasis Supplied)
40. The issue at hand recently fell for consideration before this Court
in Sanand Properties (P) Ltd. v. CIT , reported in (2026) 488 ITR
337 , wherein one of us, J.B. Pardiwala, J., speaking for the Bench
observed that the expression “reason to believe” in Section 147 of
the Act means cause or justification, and that the AO need not have
finally ascertained the facts to prove the escapement of income. It
was held that the validity of the reopening has to be ascertained by
SLP(C) No. 20045 of 2019 & Connected Matters Page 28 of 53
limiting the enquiry to the reasons recorded under Section 148 of
the Act, and that the merits of the reopening cannot be looked into
to justify or discredit it. It was further observed that, to decide
whether the AO had reason to believe, only the materials which
were before him at the time of initiating the proceedings are to be
taken into account, and not any further materials which
subsequently came to light, and that the AO must have some
tangible material in his possession to conclude that income has
escaped assessment before assuming jurisdiction under Section
147 of the Act. It was thus held to be settled law that a document
not referred to in the reasons recorded cannot be used to justify the
validity of the reopening, as the assessee must not be deprived of a
fair opportunity to dispute such grounds. The relevant observations
made by this Court are as under:
“63. The expression “reason to believe” in section 147 of the
Income- tax Act means cause or justification and there need
not be an established fact of assessment at this stage. The
Assessing Officer need not have finally ascertained the
facts to prove escapement of income […] The validity of the
reopening has to be ascertained by limiting the enquiry to
the “reasons recorded” under section 148 only, and the
merits of the reopening cannot be looked into to justify or
discredit the reopening […] In such a scenario, the reopening
would remain valid, irrespective of the outcome arrived at.
On the other hand, there can be a scenario where even
though the merits indicate that income had escaped
assessment, if the Revenue failed to record those reasons
under section 148, then the reopening in such a scenario
would be invalid since the reopening cannot be justified by
other reasons gathered subsequently at the merits stage […]
64. To decide whether the Assessing Officer has a “reason
to believe” that income chargeable to tax has escaped
assessment, it is only those materials which were before the
Assessing Officer at the time of initiating proceedings that
have to be taken into account, and not any further materials
which subsequently came to light in the course of the
SLP(C) No. 20045 of 2019 & Connected Matters Page 29 of 53
proceedings under this section. The expression “reason to
believe” has been interpreted by this court to mean that the
Assessing Officer must have some “tangible material” in his
possession to come to the conclusion that there is
escapement of income from assessment, before assuming
jurisdiction under section 147. In other words, this tangible
material must provide him with the reason to believe that
the income has escaped assessment […]
xxx xxx xxx
87. Thus, it is settled law that the validity of a reopening
must be tested solely on the basis of the reasons recorded
at the time of issuing the notice under section 148. A
document not referred to in those reasons recorded under
section 148 cannot be used to justify the validity of the
reopening, as the assessee must not be deprived of a fair
opportunity to dispute such grounds. In the present matter,
while we exclude the extraneous documents relied upon by
the High Court, our inquiry into the reassessment’s validity,
when tested strictly against the reasons recorded, reveals
existence of “tangible material” to form a bona fide belief
that income has escaped assessment. Accordingly, Civil
Appeal No. 9107 of 2012 stands dismissed.”
(Emphasis Supplied)
41. On a conspectus of the decisions discussed above, broadly the
following principles emerge for the purpose of construing the
meaning and scope of the expression “reason to believe” :
(i) The word “reason” in the phrase “reason to believe” means
cause or justification. If the AO has cause or justification to
know or suppose that income had escaped assessment, it can
be said that he has reason to believe that income had escaped
assessment. The expression cannot be read to mean that the
AO should have finally ascertained the fact by legal evidence
or conclusion;
(ii) The AO may start reassessment proceedings either because
some fresh facts come to light which were not previously
SLP(C) No. 20045 of 2019 & Connected Matters Page 30 of 53
disclosed, or because some information with regard to the
facts previously disclosed comes into his possession which
tends to expose the untruthfulness of those facts. In such
situations, it is not a case of mere change of opinion or the
drawing of a different inference from the same facts as were
earlier available, but acting on fresh information. It would be
immaterial whether the AO, at the time of making the original
assessment, could or could not have found by further enquiry
or investigation whether the transaction was genuine or not;
(iii) At the initiation stage, the final outcome of the proceeding is
not relevant, and what is required is “reason to believe” but
not the established fact of escapement of income. At the stage
of issue of notice, the only question is whether there was
relevant material on which a reasonable person could have
formed the requisite belief. Whether the materials would
conclusively prove the escapement is not the concern at that
stage;
(iv) The words “reason to believe” are stronger than the words “is
satisfied” . Accordingly, the belief entertained by the AO must
not be arbitrary or irrational. It must be reasonable, or in
other words, based on reasons which are relevant and
material, and must be that of an honest and reasonable
person based upon reasonable grounds. The expression does
not mean a purely subjective satisfaction on the part of the
AO. The reason must be held in good faith and cannot be
merely a pretence;
(v) The AO may act on direct or circumstantial evidence but not
on mere suspicion, gossip or rumour. A vague feeling that the
transactions may be bogus does not fulfil the requirement,
and the AO must give reasons for issuing a notice under
SLP(C) No. 20045 of 2019 & Connected Matters Page 31 of 53
Section 148 of the Act and must have some prima facie
grounds before him for taking action. A conclusion that there
is a case for investigating as to the truth of the alleged
transactions is not the same thing as saying that there are
reasons to issue the notice;
(vi) The reasons for the formation of the belief must have a
rational connection with or a relevant bearing on the
formation of the belief, and must not be extraneous or
irrelevant for the purpose of the section. Rational connection
here means that there must be a direct nexus or live link
between the material coming to the notice of the AO and the
formation of his belief that there has been escapement of the
income of the assessee from assessment. It is not any and
every material, however vague and indefinite or distant,
remote and far-fetched, which would warrant the formation
of the belief relating to escapement of income. If there is no
rational and intelligible nexus between the reasons and the
belief, so that, on such reasons, no one properly instructed
on facts and law could reasonably entertain the belief, the AO
could not have reason to believe that income had escaped
assessment;
(vii) Whether the grounds or reasons are adequate or not is not a
matter for the court to investigate, and the sufficiency of the
grounds which induces the AO to act is not a justiciable issue.
The court cannot go into the sufficiency or adequacy of the
material and substitute its own opinion for that of the AO on
the point as to whether action should be initiated for
reopening the assessment;
(viii) However, it is open to the assessee to contend that the AO did
not hold the belief, as the existence of the belief can be
SLP(C) No. 20045 of 2019 & Connected Matters Page 32 of 53
challenged but not the sufficiency of the reasons for the belief.
It is open to the assessee to establish that there in fact existed
no belief, or that the belief was not at all a bona fide one, or
was based on vague, irrelevant and non-specific information.
To that limited extent, the court can examine whether there
was any material available on the record from which the
requisite belief could be formed by the AO, and whether that
material had any rational connection or a live link for the
formation of the requisite belief. It is the duty of the assessee
who wants the court to hold that jurisdiction was lacking to
establish that the AO had no material at all before him for
believing that there had been such non-disclosure;
(ix) To decide whether the AO has a reason to believe that income
chargeable to tax has escaped assessment, only those
materials which were before the AO at the time of initiating
the proceedings are to be taken into account, and not any
further materials which subsequently came to light in the
course of the proceedings under Section 147 of the Act. A
document not referred to in the reasons recorded under
Section 148 of the Act cannot be used to justify the validity of
the reopening, as the assessee must not be deprived of a fair
opportunity to dispute such grounds;
(x) The words “reason to believe” have to be interpreted
schematically, as a liberal interpretation would confer
arbitrary powers on the AO, who may initiate reassessment
proceedings merely on his change of opinion on the basis of
the same facts and circumstances already considered by him
during the original assessment proceedings, which could not
be the intention of the legislature. Section 147 of the Act does
not allow reassessment merely because the AO has a change
SLP(C) No. 20045 of 2019 & Connected Matters Page 33 of 53
of opinion with regard to the interpretation of law differently
on facts that were well within his knowledge even at the time
of assessment, as doing so would give the AO the power of
review, whereas Section 147 confers the power to reassess
and not the power to review.
(xi) The concept of “change of opinion” (which we shall discuss
below) is an in-built test to check abuse of power by the AO.
There has to be some “tangible material” to come to the
conclusion that there is escapement of income from
assessment, and the reasons must have a live link with the
formation of the belief.
(b) In-built test of “change of opinion” and its applicability to the
facts of the present case.
42. The revenue’s stand on this aspect is that the investigation report,
which reached the respondent after the completion of the
assessments, constituted fresh and tangible material, and that the
order under Section 143(3) of the Act being a non-speaking order,
no opinion can be attributed to the respondent on the issues sought
to be raised in the reassessment proceedings. It was further
contended that, in the case of Mr. Nitin Sabharwal, only an
intimation under Section 143(1) of the Act was issued, so that the
contentions of change of opinion are not relevant to the proceedings
in his case. The appellants-assessees’ stand, on the other hand, is
that the reassessment has been initiated on a mere change of
opinion, as the transaction of sale of shares was fully disclosed in
the accounts and the ITRs, and was specifically and thoroughly
examined in the scrutiny assessment, including through
independent enquiries from company no. 1, company no. 2 and the
SLP(C) No. 20045 of 2019 & Connected Matters Page 34 of 53
buyer company, before the returned income was accepted without
any adverse inference. In view of the rival submissions, we must
first understand what is meant by the expression “change of
opinion” and its scope, before examining its applicability to the facts
of the present case.
43. The meaning and scope of the expression “change of opinion” were
explained by this Court in Kelvinator of India Ltd. (supra) ,
wherein it was held that a mere change of opinion cannot, per se,
be a reason to reopen an assessment. This Court observed that,
although the power to reopen became wider with effect from
01.04.1989, when only one condition, namely reason to believe that
income has escaped assessment, was retained, the widened power
cannot be exercised on the basis of a mere change of opinion. The
reason was explained by drawing a conceptual difference between
the power to review and the power to reassess, the AO having only
the latter, and it was held that, if the concept of change of opinion
is removed from consideration, a review would take place in the
garb of reopening. The concept was thus held to be a built-in check
against misuse of the power, so that an AO who has already formed
a view on a matter cannot reopen merely because he now takes a
different view, and may do so only where there is tangible material
having a live link with the formation of the belief. The relevant
observations made by this Court are as under:
“5. On going through the changes, quoted above, made to
Section 147 of the Act, we find that, prior to the Direct Tax
Laws (Amendment) Act, 1987, reopening could be done
under the above two conditions and fulfilment of the said
conditions alone conferred jurisdiction on the assessing
officer to make a back assessment, but in Section 147 of the
Act (with effect from 1-4-1989), they are given a go-by and
only one condition has remained viz. that where the
SLP(C) No. 20045 of 2019 & Connected Matters Page 35 of 53
assessing officer has reason to believe that income has
escaped assessment, confers jurisdiction to reopen the
assessment. Therefore, post-1-4-1989, power to reopen is
much wider. However, one needs to give a schematic
interpretation to the words “reason to believe” failing which,
we are afraid, Section 147 would give arbitrary powers to
the assessing officer to reopen assessments on the basis of
“mere change of opinion”, which cannot be per se reason to
reopen.
6. We must also keep in mind the conceptual difference
between power to review and power to reassess. The
assessing officer has no power to review; he has the power
to reassess. But reassessment has to be based on fulfilment
of certain precondition and if the concept of “change of
opinion” is removed, as contended on behalf of the
Department, then, in the garb of reopening 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 1-4- 1989, the assessing officer has
power to reopen, 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 […]”
(Emphasis Supplied)
44. Thereafter, in Techspan India (supra) , this Court held that, in
order to determine whether a case is one of change of opinion or
not, one has to look at its meaning in literal as well as legal terms.
This Court observed that the words “change of opinion” imply the
formulation of an opinion and then a change thereof, and that, in
terms of assessment proceedings, it means the formulation of a
belief by the AO resulting from what he thinks on a particular
question, being a result of understanding, experience and
reflection. This Court, relying on Kelvinator of India Ltd. (supra) ,
further observed that the concept of change of opinion is an in-built
test to check abuse of power by the AO, and that the AO has the
SLP(C) No. 20045 of 2019 & Connected Matters Page 36 of 53
power to reopen an assessment only if there is tangible material to
conclude that income has escaped assessment, the reasons having
a live link with the formation of the belief. It was further held that,
before interfering with the proposed reopening on the ground that
it is based only on a change of 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. It was observed that,
if the assessment order is non-speaking, cryptic or perfunctory in
nature, it may be difficult to attribute to the AO any opinion on the
questions raised in the proposed reassessment proceedings, and
that every attempt to bring to tax income that has escaped
assessment cannot be absorbed by judicial intervention on an
assumed change of opinion, even where the order of assessment
does not address itself to the aspect sought to be examined. The
relevant observations made by this Court are as under:
“16. 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 words “change of opinion” imply 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.
17. It is well settled and held by this Court in a catena of
judgments and it would be sufficient to refer to CIT v.
Kelvinator of India Ltd.? wherein this Court has held as
under: (SCC p. 725, para 5-7) […]
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 1-4-1989, assessing officer has
power to reopen, provided there is "tangible material" to
come to the conclusion that there is escapement of income
SLP(C) No. 20045 of 2019 & Connected Matters Page 37 of 53
from assessment. Reasons must have a live link with the
formation of the belief.
18. Before interfering with the proposed reopening 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 reassessment
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.
19. […] a bare perusal of notice dated 9-3-2004 which was
issued in the original assessment proceedings under
Section 143 makes it clear that the point on which the
reassessment proceedings were initiated, was well
considered in the original proceedings […] Hence, initiation
of the reassessment proceedings under Section 147 by
issuing a notice under Section 148 merely because of the
fact that now the assessing officer is of the view that the
deduction under Section 10-A was allowed in excess, was
based on nothing but a change of opinion on the same facts
and circumstances which were already in his knowledge
even during the original assessment proceedings.”
(Emphasis Supplied)
45. Further, in Sanand Properties (supra) , this Court supported the
decision of Kelvinator of India Ltd. (supra) and Techspan India
(supra) on the aspect of “change of opinion” . This Court observed
that, to constitute a change of opinion, there must first be a
conscious application of mind and a formation of an opinion during
the original assessment proceedings. It was held that a mere
reference in the assessment order to an arrangement, derived from
SLP(C) No. 20045 of 2019 & Connected Matters Page 38 of 53
agreements involving different parties and separate subject
matters, cannot be construed as a finding on the income in
question. It was further observed that, where the AO’s discussion
in the original assessment was confined to one agreement, and
there was a perceptible lack of any inquiry or adjudication on the
specific terms of the other, the plea of change of opinion is legally
untenable, as a change of opinion presupposes the existence of a
previously formed opinion. This Court thus held that, where no
such opinion was formed in the first instance, the revenue is not
precluded from reopening the assessment upon the discovery of
facts suggesting that income has escaped assessment. The relevant
observations made by this Court are as under:
“79. […] These are two legally distinct agreements involving
different contracting parties and separate subject matters.
The mere fact that the assessment order contains a reference
to a 35 : 65 sale-proceeds sharing arrangement, derived from
two wholly different agreements involving different parties, it
cannot be construed as a finding on the income derived from
the association of persons. To constitute a “change of
opinion”, there must first be a conscious application of mind
and a formation of an opinion during the original assessment
proceedings.
80. In the present case, the Assessing Officer's discussion in
the assessment order for the assessment year 2007-2008
was confined to the joint venture agreement. There is
perceptible lack of any inquiry or adjudication regarding the
specific terms of the association of persons agreement,
particularly the nature of income under clause 7. In the
absence of such an initial inquiry, the plea of “change of
opinion” is legally untenable. A change of opinion
presupposes the existence of a previously formed opinion.
Where no such opinion was formed in the first instance, the
Revenue is not precluded from reopening the assessment
upon the discovery of facts suggesting that income has
escaped assessment. Thus, it can be concluded that since the
Revenue had not formed any opinion on the fundamental
nature of the income accrued to the SPPL from the association
SLP(C) No. 20045 of 2019 & Connected Matters Page 39 of 53
of persons as to whether it is a share of profit or revenue, the
Revenue retains the authority to reassess the income upon
coming across information which prima facie indicates that
the income is tax-liable revenue and not tax-exempt profit.”
(Emphasis Supplied)
46. On a conjoint reading of the aforesaid decisions, the following
principles emerge on the expression “change of opinion” in the
context of Section 147 of the Act:
(i) A mere change of opinion cannot, per se , be a reason to
reopen an assessment, as the AO has the power to reassess
and not the power to review. The concept is an in-built test to
check abuse of power, and after 01.04.1989 the AO may
reopen only if there is tangible material, with the reasons
having a live link with the formation of the belief;
(ii) A change of opinion implies the formulation of an opinion and
then a change thereof. It presupposes a conscious application
of mind and the formation of an opinion during the original
assessment proceedings;
(iii) The court must verify whether the earlier assessment has,
either expressly or by necessary implication, expressed an
opinion on the matter which is the basis of the alleged
escapement of income;
(iv) If the assessment order is non-speaking, cryptic or
perfunctory, it may be difficult to attribute any opinion to the
AO, and every attempt to tax escaped income cannot be
absorbed by judicial intervention on an assumed change of
opinion. Where there is a perceptible lack of any inquiry on
the specific aspect, the plea of change of opinion is legally
untenable;
SLP(C) No. 20045 of 2019 & Connected Matters Page 40 of 53
(v) Where no opinion was formed in the first instance, the
revenue may reopen upon the discovery of facts suggesting
that income has escaped assessment. But where the point
was well considered in the original proceedings, reassessment
merely because the AO now takes a different view on the same
facts is a change of opinion.
(c) Applying the principles of law enunciated above to the facts
of the present case.
47. Now, adverting to the facts of the present case, it has emerged that
the appellant, along with his brother and two other shareholders,
entered into SPAs dated 19.10.2007 with the buyer company for
the sale of shares of company no. 1 and company no. 2 for a total
consideration of Rs. 195 Crore and Rs. 60 Crore, respectively, the
th
appellant being entitled to a 1/4 share. On 25.09.2008, the
appellant filed his ITR for AY 2008-09, declaring a loss of Rs. 90.37
Lakh, accompanied by the computation of total income and the tax
audit report, wherein the sum of Rs. 37.64 Crore received as
advance and additional payment was shown under the head
sundry credit. At the time of Closing, the consideration was reduced
by the unsecured loans standing in the books of the two companies
and the estimated cost of construction of building, and the buyer
company paid a net sale consideration of Rs. 128,20,66,501 and
th
Rs. 40,40,84,770, of which the appellant's 1/4 share was Rs.
32,05,16,625 and Rs. 10,10,21,192, respectively. On 25.09.2009,
the appellant deposited Rs. 28 Crore and Rs. 3.915 Crore
respectively in the Capital Gain Savings Bank Account with the
Union Bank of India under Section 54F(4) of the Act, and on
21.04.2010, the appellant and his brother jointly purchased an
SLP(C) No. 20045 of 2019 & Connected Matters Page 41 of 53
undivided 1/2 share in a residential property in Delhi, claiming the
benefit of Section 54F of the Act. In the original assessment
proceedings, the revenue had issued a notice dated 06.08.2010
under Section 142(1) of the Act, seeking an explanation on the
nature of the transaction with the buyer company amounting to Rs.
37.62 Crore and the production of the return documents of the
buyer company for the last 5 years, among other details, to which
the appellant replied with supporting documents on 05.10.2010.
48. Thereafter, on 13.12.2010, the respondent issued notices under
Section 133(6) of the Act to the company no. 1, company no. 2 and
the buyer company, respectively who filed their replies on
16.12.2010, and on 22.12.2010 respectively. The assessment
under Section 143(3) of the Act was framed, accepting the returned
income of the appellant. Subsequent to the completion of the
assessment, the Investigation Unit, Noida, under the DGIT (Inv.),
Lucknow, conducted enquiries and prepared a report, which
concluded, prima facie , that the value of the shares of company no.
1 and company no. 2, respectively, was overvalued, going by the
cost of land and building, which was much lower than the
transaction amounts of Rs. 195 Crore and Rs. 60 Crore
respectively. On 30.03.2015, the respondent sent the impugned
notice with recorded reasons for reopening assessment. The
relevant extract from the recorded reasons are as under:
“The letter DG/LKO/D/44/Vol.204/2011-12 dated 15-10-
2015 (sic) from the O/o DGIT (Inv.), Lucknow to The Deputy
Secretary (Inv. IV) and other correspondence in this regard
mentions that the enquiries conducted by the Investigation
Unit, Naida revealed that Shri Chetan Sabharwal (PAN-
AATPS3048P) and his brother, Shri Nitin Sabharwal (PAN-
ABKPS7284D) jointly purchased one half share of property
No. 7, Sikandara Road, New Delhi in April 2010. The total
SLP(C) No. 20045 of 2019 & Connected Matters Page 42 of 53
consideration for purchase of this property incurred by
these two persons was Rs. 64,69,25,000/-. The property
was purchased through auction made at the directions of
the Delhi High Court. Enquiries revealed that the major
source of investment has come from sale proceeds of
shares of M/s Pawan Impex Pvt. Ltd. and M/s SVIIT
Software Pvt. Ltd. Shares of M/s Pawan Impex Pvt. Ltd. and
M/s SVIIT Software Pvt. Ltd. were sold by Shri Chetan
Sabharwal and Shri Nitin Sabharwal to M/s GYS Real
Estate Pvt. Ltd. [a Fortis Group Company]. The shares were
sold through Share Purchase Agreement dated 19-10-2007.
Enquiries conducted revealed that a total consideration of
Rs. 195 crores was to be paid by M/s GYS Real Estate Pvt.
Ltd. to the shareholders of M/s Paawan Impex Pvt. Ltd.
Similarly, share purchase agreement was signed in the case
of SVIIT Software Pvt. Ltd. Total sale consideration of Rs.
60 crores was determined. The total long term capital gain
derived by Shri Chetan Sabharwal was worked out to Rs.
40,38,40, 170/- out of which a sum of Rs. 31,91,50,000/-
was deposited in the Capital Gains Saving Bank Ale before
th
30 September 2009 and the deduction u/s 54F of the
Income-Tax Act, 1961 was claimed. Similarly, Shri Nitin
Sabharwal has shown capital gains of Rs. 40,40,84,770/-
out of which Rs. 35,80,97,629/- was deposited in the
Capital Gains Saving Bank Ale before 30th September 2009
and the deduction u/s 54F of the Income Tax Act, 1961 was
claimed. Shri Chetan Sabharwal and Shri Nitin Sabharwal
th
have also purchased 1/4 share each in the Property No.
7, Sikandara Road, New Delhi vide sale deed dated
21.04.2010 for Rs. 9,33,69,928/- each.
xxx xxx xxx
After enquiries by the Investigation Unit, Naida about the
value of shares of M/s Pawan Impex Pvt. Ltd. and M/s
SVIIT Software Pvt. Ltd. It has been reported that:
“It can be prima facie concluded that the value of shares are
overvalued to the extent of Rs. 109,80,000/- (in the case of
M/s Pawan Impex Pvt. Ltd.) and of Rs. 40,40,28,000/- (in
the case of M/s SVIIT Software Pvt. Ltd.) going by the cost
of land and building which is much lower than the
transaction amount of Rs. 195,00,00,000/- in the case of
M/s Pawan Impex Pvt. Ltd. plus Rs. 60,00,00,000/-in the
case of M/s SVIIT Software Pvt. Ltd.”
SLP(C) No. 20045 of 2019 & Connected Matters Page 43 of 53
On further perusal of the information and mentioned above
the shares' have been overvalued and the capital gains
were adjusted in future years and the deductions were also
claimed u/s 54.
The implication is as follows:
Share purchase agreement entered in FY 07-08 relevant to
AY 08-09. The consideration for the sale of shares has been
received majorly in FY 08-09 relevant to A Y 09-10 and
deduction u/s 54F was claimed on the same.
With respect to the share transactions, the capital gain
earned & deduction on the same claimed. I have the
reasons to believe that a substantial amount has escaped
assessment during the Assessment Years 2008-09 and
2009-10. In order to assess the above income or any other
income which comes to the notice, subsequently in the
course of proceedings u/s 147, issue of notice u/s 148 of
the Income-tax Act, 1961 is necessary in the case.”
(Emphasis Supplied)
49. From the above, it is evident that the reasons recorded in the
impugned notice refer to the said investigation report, and state
that the enquiries revealed that the appellant and his brother
jointly purchased one half share of Property in Delhi, in April 2010,
through a court auction, and that the major source of this
investment was the sale proceeds of the shares of company no. 1
and company no. 2, respectively. The reasons further record that
the total long term capital gain derived by the appellant was Rs.
40,38,40,170, out of which Rs. 31,91,50,000 was deposited in the
Capital Gains Savings Bank Account before 30.09.2009 and the
deduction under Section 54F of the Act was claimed, that the same
was done by his brother, and that each of them had purchased a
th
1/4 share in the said property for Rs. 9,33,69,928. On the
strength of the information, the respondent recorded that the
shares had been overvalued, that the capital gains were adjusted
in future years and that deductions were also claimed. The
SLP(C) No. 20045 of 2019 & Connected Matters Page 44 of 53
implication recorded was that the SPAs were entered into in FY
2007-08 relevant to AY 2008-09, the consideration was received
majorly in FY 2008-09 relevant to AY 2009-10, and the deduction
under Section 54F of the Act was claimed on the same, on which
the respondent recorded that he had reason to believe that a
substantial amount had escaped assessment for AY 2008-09 and
AY 2009-10 respectively.
50. Adverting to the first aspect, the duty of the assessee, as discussed
above, is to disclose fully and truly all primary relevant facts, and
all that is required at the stage of reopening is that the AO had
some prima facie grounds for believing that there had been some
non-disclosure of material facts. The reasons recorded indicate that
the enquiries conducted by the Investigation Unit, Noida revealed
that the appellant and his brother jointly purchased one half share
of a property at Sikandara Road, Delhi in April 2010, and that the
major source of this investment was the sale proceeds of the shares
of company no. 1 and company no. 2, respectively. They also record
that the LTCG derived by the appellant was Rs. 40,38,40,170, out
of which Rs. 31,91,50,000 was deposited in the Capital Gains
Savings Bank Account before 30.09.2009 and the deduction under
Section 54F of the Act was claimed. The report further concluded
that the value of shares was overvalued, going by the cost of land
and building, which was much lower than the transaction
amounts. These facts came to the respondent through the enquiries
of the Investigation Unit, after the assessment had been completed
on 22.12.2010. On this material, the respondent had prima facie
reasons to believe that all material facts relating to the transaction
had not been fully and truly disclosed in the original assessment,
which is all that is required at this stage.
SLP(C) No. 20045 of 2019 & Connected Matters Page 45 of 53
51. Further, it cannot be denied that the AO has the jurisdiction to
initiate reassessment proceedings relying on some fresh facts
having surfaced which were not previously disclosed, or because
information with regard to the facts previously disclosed comes into
his possession which tends to expose the untruthfulness of those
facts. In the present case, the fresh facts that came to light through
the Investigation Unit, Noida, after 22.12.2010 are one relating to
the value of shares of company no. 1 and company no. 2
respectively as against the cost of land and building, and the
investment of the sale proceeds in the property at Sikandara Road.
In our view, what came to light afresh, through the investigation
report, was the conclusion that the shares of company no. 1 and
company no. 2 respectively were overvalued when compared with
the cost of their land and building, which was much lower than the
transaction amounts in the SPA, and that the major source of the
investment in the property at Sikandara Road was the sale
proceeds of those shares. That specific information was not
available with the AO at the time of the original assessment, nor
was such information disclosed by the appellant in those
proceedings. In our opinion, the only question at the stage of
issuing notice is whether there was relevant and credible material
on which a reasonable person could have formed the requisite
belief, and whether the material would conclusively prove the
escapement is not the concern at that stage. At the time of issuing
the impugned notice, the respondent had before him the
investigation report stating that the shares were overvalued as
against the cost of land and building, and the finding that the major
source of the investment in the property was the sale proceeds of
those shares. On this material, a reasonable person could form the
belief that income had escaped assessment.
SLP(C) No. 20045 of 2019 & Connected Matters Page 46 of 53
52. Further, we need not go into the adequacy or sufficiency of the
grounds which induced the AO to issue the impugned notice under
Section 148 of the Act as the same is not a justiciable issue. The
courts have only to see whether there is a rational connection or a
live link between the material and the formation of the belief. The
reasons recorded indicate this link at each step. The bare perusal
of the information would indicate that the respondent recorded that
the shares had been overvalued, that the capital gains were
adjusted in future years and that deductions were also claimed.
The implication recorded is that the SPAs were entered into in FY
2007-08 relevant to AY 2008-09, while the consideration was
received mainly in FY 2008-09 relevant to AY 2009-10, and the
deduction under Section 54F of the Act was claimed on the same.
It is from this material that the respondent recorded that he had
reason to believe that a substantial amount had escaped
assessment for both the AYs. The contention of the appellants that
overvaluation of shares cannot result in escapement of income in
the hands of the seller, if accepted, would amount to overlooking
the fact that the reasons do not end with the finding on valuation
but also record the adjustment of the gains to future years and the
claim under Section 54F of the Act. The escapement of income at
the hands of the seller of the shares, the proceeds of which were
later utilised to acquire capital assets to thus claim deduction,
could as well be a diversion of income, assessable to tax under the
guise of sale proceeds which, in the present case, assumes
relevance for reason of the sale proceeds being far above the actual
value of the shares. It is settled law that the AO must have some
tangible material to conclude that there is escapement of income,
and that the reasons must have a live link with the formation of the
belief. The tangible material in the present case is the report of the
SLP(C) No. 20045 of 2019 & Connected Matters Page 47 of 53
Investigation Unit, Noida, which concluded, prima facie , that the
shares of company no. 1 and company no. 2 respectively were
overvalued. The expression “reason to believe” cannot be read to
mean that the AO should have finally ascertained the fact by legal
evidence or conclusion. The present case is not one wherein it could
be said that the AO had only a vague feeling on the basis of which
he recorded that proper investigation was necessary. We are of the
view that a conclusion that the truth of the alleged transactions
needs to be investigated is not the same thing as having reasons,
post investigation, to issue a notice. Where an officer records only
that a proper investigation is necessary, the investigation is yet to
be done, and the notice is issued in order to carry it out. The
present case stands on a different footing. The investigation had
already been carried out by the Investigation Unit, Noida, before
the reasons were recorded, and its conclusion on the value of the
shares is set out in the reasons, along with the other material and
the belief formed by the respondent on that basis.
53. With respect to the argument of the appellants that the issuance of
the impugned notice under Section 148 of the Act amounted to a
change of opinion, we shall first look into the case of Mr. Nitin
Sabharwal. In his case, the returns for the two AYs in question were
accepted as such, and an intimation was sent to him under Section
143(1) of the Act. In CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. ,
reported in (2008) 14 SCC 208 , this Court held that an intimation
under Section 143(1) of the Act cannot be treated as an order of
assessment. This Court observed that, under Section 143(1), the
AO has to pass an assessment order if he decides to accept the
return, whereas, under the amended provision, an intimation is
sent instead. It was further observed that the acknowledgement of
a return, which is deemed to be an intimation, is done mostly by
SLP(C) No. 20045 of 2019 & Connected Matters Page 48 of 53
ministerial staff and not by the AO, and that no assessment can be
said to be done by them. It was thus held that, there being no
assessment under Section 143(1), the question of change of opinion
does not arise. Applying this to the case of Mr. Nitin Sabharwal, the
returns for the two AYs in question were accepted by an intimation
under Section 143(1) of the Act, and no assessment was framed.
Consequently, there was no occasion for the AO to form any opinion
in the first place. Therefore, there is no question of change of
opinion in his case as far as the notice under Sections 147 and 148
of the Act is concerned. The relevant observations made by this
Court in Rajesh Jhaveri (supra) are as under:
“15. In the scheme of things, as noted above, the intimation
under Section 143(1)(a) cannot be treated to be an order of
assessment. The distinction is also well brought out by the
statutory provisions as they stood at different points of time.
Under Section 143(1)(a) as it stood prior to 1-4-1989, the
assessing officer had to pass an assessment order if he
decided to accept the return, but under the amended
provision, the requirement of passing of an assessment
order has been dispensed with and instead an intimation is
required to be sent. Various circulars sent by the Central
Board of Direct Taxes spell out the intent of the legislature
i.e. to minimise the departmental work to scrutinise each
and every return and to concentrate on selective scrutiny of
returns […]
16. It may be noted above that under the first proviso to the
newly substituted Section 143(1), with effect from 1-6-1999,
except as provided in the provision itself, the
acknowledgment of the return shall be deemed to be an
intimation under Section 143(1) where (a) either no sum is
payable by the assessee, or (b) no refund is due to him. It is
significant that the acknowledgment is not done by any
assessing officer, but mostly by ministerial staff. Can it be
said that any “assessment” is done by them? The reply is
an emphatic “no”. The intimation under Section 143(1)(a)
was deemed to be a notice of demand under Section 156,
for the apparent purpose of making machinery provisions
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relating to recovery of tax applicable. By such application
only recovery indicated to be payable in the intimation
became permissible. And nothing more can be inferred from
the deeming provision. Therefore, there being no
assessment under Section 143(1)(a), the question of change
of opinion, as contended, does not arise.”
(Emphasis Supplied)
54. As far as the case of Mr. Chetan Sabharwal is concerned, he filed
his ITR for AY 2008-09 on 25.09.2008 declaring a total loss of Rs.
90,37,369/-. A sum of Rs. 37,64,40,000/- was shown under the
head ‘sundry creditors’, which included Rs. 37,62,50,000/- being
the liability in the name of the buyer company. A notice under
Section 143(2) of the Act was issued on 09.08.2009. The AO also
issued notices under Section 133(6) of the Act to company no. 1,
company no. 2 and the buyer company, all of whom filed their
replies and documents. Thereafter, on 20.12.2010, the AO framed
the assessment order under Section 143(3) of the Act, which stated
that “after examination of the submissions of the assessee and
discussion with the Authorised Representative of the assessee,
assessed at loss of Rs. 90,37,369/- under Section 143(3) of the Act” .
The ITR was thus accepted without any change. For AY 2009-10,
the appellant filed his ITR declaring a net income of Rs.
1,17,21,750/-, in which inter alia , the LTCG on the sale of the
shares of company no. 1 and company no. 2 was declared, and the
capital gain was deposited under the Capital Gains Account
Scheme. On 19.12.2011, the AO framed the assessment order,
discussing various issues, but there was no discussion in it on the
LTCG. Additionally, in the inquiry carried out by the AO, the factum
of the undervaluation was suppressed, and it came to light only on
the investigation carried out, which further negates the case of
“change of opinion” .
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55. Having said so, we are of the view that the original assessment
orders for both AY 2008-09 and 2009-10 respectively under Section
143(3) of the Act do not indicate that the AO formed any opinion on
the matters which form the basis of the present reopening. In view
of the principles discussed above, a “change of opinion”
presupposes a conscious application of mind and the formation of
an opinion during the original assessment proceedings, and the
court must verify whether the earlier assessment has, either
expressly or by necessary implication, expressed an opinion on the
matter which is the basis of the alleged escapement of income. The
reasons recorded in the present case rest on the value of the shares
as against the cost of land and building, the investment of the sale
proceeds in the property at Sikandara Road, the adjustment of the
gains to future years and the claim under Section 54F of the Act.
The assessment order for AY 2008-09 in the present case is a bare
acceptance of the returned income as it is. As held in Sanand
Properties (supra) , in the absence of any inquiry or adjudication
on the specific aspect, the plea of change of opinion is legally
untenable. Where no opinion was formed in the first instance, the
revenue is not precluded from reopening upon the discovery of facts
suggesting that income has escaped assessment, and the notice
here rests on the report of the Investigation Unit, Noida, which
came after the assessment. Consequently, even in the case of Mr.
Chetan Sabharwal, in view of the above, it cannot be said that the
reason to believe constitutes a change of opinion.
56. In view of the above discussion, we are of the firm view that the
impugned notice dated 31.03.2015 issued by the AO under Section
148 of the Act, for initiating reassessment for AY 2008-09 and AY
2009-10, was issued on reasons duly recorded and is valid. The
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reasons rest on tangible material, namely the report of the DGIT
Investigation Unit, Noida, which inter alia concluded that the
shares of company no. 1 and company no. 2 were overvalued when
compared with the cost of their land and building, and they have a
rational nexus and a live link with the belief formed by the AO. No
case of change of opinion is made out either. In the case of Mr. Nitin
Sabharwal, the returns were accepted by an intimation under
Section 143(1) of the Act, so no opinion was formed. In the case of
Mr. Chetan Sabharwal, the assessment orders under Section
143(3) of the Act reflect no opinion, expressly or by necessary
implication, on the matters on which the notice rests, which came
to light afresh through the investigation report after the
assessment.
F. CONCLUSION
57. In view of the foregoing and considering the totality of the
circumstances, the question formulated by us for our
determination is answered as follows:
(i) The expression “reason to believe” in Section 147 of the Act
means cause or justification. The AO must have tangible
material having a rational connection or a live link with the
formation of the belief that income has escaped assessment,
and need not have finally ascertained the fact by legal evidence
or conclusion. At the stage of the notice, the only question is
whether there was relevant material on which a reasonable
person could have formed the requisite belief, and the
sufficiency of the reasons is not a justiciable issue. Further, a
mere “change of opinion” cannot be a reason to reopen, as the
AO has the power to reassess and not the power to review. A
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change of opinion presupposes a conscious application of mind
and the formation of an opinion in the original assessment,
which the court must verify, either expressly or by necessary
implication, before interfering with the reopening. The non-
exhaustive principles governing “reason to believe” and “change
of opinion” are at paragraph nos. 41 and 46 of this judgment,
respectively.
(ii) In the facts of the present case, the impugned notice dated
31.03.2015 was issued on reasons duly recorded, based on the
tangible material of the report of the Investigation Unit, Noida,
prepared after the assessment, and which have a rational
nexus and a live link with the belief formed by the AO. The
notice is therefore valid. No case of change of opinion is made
out either.
58. In view of the above, the appeals fail and are hereby dismissed.
59. Pending applications, if any, shall stand disposed of.
....................................... J.
(J.B. Pardiwala)
....................................... J.
(K. Vinod Chandran)
New Delhi;
th
28 October, 2026.
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