Big Relief! High Court Sets Aside Reassessment Notice Due to Absence of ‘Reason to Believe’

In a recent ruling, the Delhi High Court set aside a reassessment notice issued under Section 148 of the Income Tax Act for the Assessment Year 2014-15. The case involved a salaried taxpayer who had filed their income tax return (ITR), disclosed capital gains, and paid over Rs. 2 crore in taxes. The return was selected for scrutiny, and assessment was completed under Section 143(3). The petitioner, while treating the initial and original return as filed in compliance with the notice, requested the reasons for reopening. The AO revealed that the basis of reopening was the Directorate of Investigation’s report, which contained admissions by stockbrokers that they had assisted accommodation entries

The petitioner challenged the said reassessment and reopening done purely on the basis of generalised information without specific material against him before the Delhi High Court, under Article 226 of the Constitution.

Issue Raised: Whether reassessment under Section 147 can be initiated purely based on general investigation reports and third-party statements, without any tangible or specific material linking the assessee to the alleged bogus transactions, is justified.

Hon’ble Delhi HC’s Decision: The Court observed that the Assessing Officer had not conducted any independent investigation, nor had he applied his own mind to the material in question. There seems to be no direct connection between the brokers listed in the investigation report and the assessee. The reassessment proceedings did not meet the statutory requirement of a “reason to believe” under the Income Tax Act and are founded solely on suspicion and borrowed satisfaction.

The court cited a multitude of significant court decisions in its ruling. The Supreme Court stressed the necessity of a live and logical connection between the material and the income that is said to have escaped assessment in ITO v. Lakhmani Mewal Das (1976) 3 SCC 757. Similar to this, it was decided in Union of India v. Usha International Ltd. that suspicion alone cannot be used in place of proof. Furthermore, the Delhi High Court held in PCIT v. SNG Developers Ltd. that reassessment cannot be upheld based only on reports from third parties without appropriate independent verification. Accordingly, the Hon’ble High Court quashed the reassessment proceedings and declared the notice under Section 148 as invalid.

To Read the Judgment, Download the PDF Given Below.