Assessing Officer’s ‘Change of Mind’ Not Valid Ground for Reopening Assessment : Madras HC [Read Order]

The Madras High Court has held that a mere ‘change of mind’ by the Assessing Officer (AO) cannot justify the reopening of a completed income tax assessment under Section 147 of the Income Tax Act, 1961.

The Bench comprising Chief Justice K.R. Shriram and Justice Sunder Mohan allowed the appeal filed by P. Sundararajan, an individual director in S.P. Apparels Ltd., who challenged the reassessment proceedings for Assessment Year 2006-07.

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The assessee, P. Sundararajan had originally filed his return in 2007, declaring an income of over ₹1 crore, which was scrutinized and assessed under Section 143(3). However, in 2010, the AO sought to reopen the case claiming that interest expenditure claimed by the assessee was not related to business activities or income-generating assets.

The AO alleged that the assessee had claimed excessive relief by showing substantial interest paid while failing to earn corresponding income or dividends on certain investments.

However, the assessee, during the original assessment had already disclosed the full details of the interest paid, sundry debtors, and investments. The High Court observed that the AO had raised queries at that stage and the assessee had submitted clarifications by letter and supporting statements. It was on these facts that the original assessment was completed, with a minor disallowance unrelated to the present issue.

The Court stated that reassessment cannot be permitted merely because the AO has a different view later on the same set of facts. It noted that once all primary facts are disclosed, it is the AO’s duty to draw inferences.

The bench observed that “Having considered the reasons, we would opine that the reopening of the assessment was merely on the basis of change of opinion of the Assessing Officer from that, as held earlier during the course of assessment proceedings, leading to the assessment order dated 22.04.2008. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.”

Accordingly, the Court held that the reassessment notice and subsequent order were unsustainable as they were founded merely on a “change of opinion”. Since the reopening itself failed the legal test, the Court did not find it necessary to examine the merits of the disallowance under Section 36(1)(iii).

The appeal was thus allowed in favour of the assessee.

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