Income Tax | Reassessment Cannot Be Used as a Tool for Harassment: Delhi High Court Slams Revenue for Reopening Case Without Fresh Material

In a significant ruling, the Delhi High Court struck down reassessment proceedings initiated against Sarika Kansal for Assessment Year (AY) 2017-18, ruling that the Income Tax Department cannot reopen a concluded assessment on the same grounds without fresh material. A division bench comprising Justice Vibhu BakhrU and Justice Tushar Rao Gedela held that the Assessing Officer (AO) had no jurisdiction to issue a fresh notice under Section 148 of the Income Tax Act, 1961, when the same issue had already been examined and settled in an earlier reassessment.

The petitioner, Sarika Kansal, had initially filed her return for AY 2017-18 on August 2, 2017, declaring taxable income of ₹74,77,750, which included capital gains from the sale of 1,70,000 shares of Trustline Real Estate Private Limited (TREPL) at ₹42 per share. The AO had previously reopened the assessment in 2021, alleging undervaluation of shares. However, after considering the petitioner’s submissions, including valuation reports and financial documents, the AO accepted her declared income and made no additions in the reassessment order passed on March 29, 2022.

Despite this, the AO issued a fresh notice on March 28, 2024, once again claiming that the sale price of TREPL shares was below fair market value, suggesting an attempt to evade taxes. The basis for this claim was that TREPL owned the entire property at A-20, Friends Colony East, New Delhi, and the petitioner had undervalued her shareholding.

Rejecting the Revenue’s arguments, the High Court held that reopening a settled assessment on the same facts was impermissible under tax law:

"Once the matter has been examined and concluded in a reassessment order, the AO cannot initiate another round of proceedings on the same issue unless fresh tangible material comes to light. Reassessment cannot be used as a tool for harassment."

No Fresh Material – Reopening Invalid Under Supreme Court Precedents
The Court emphasized that mere suspicion or a change of opinion does not justify reassessment. Referring to Supreme Court precedents, including Calcutta Discount Co. Ltd. v. ITO, (1961) 41 ITR 191 (SC) and Commissioner of Income Tax v. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC), the Court reiterated that reassessment must be based on fresh tangible material and not on re-examination of the same facts.

"Reassessment under Section 147 of the Act requires 'reason to believe,' not just 'reason to suspect.' A reassessment cannot be based on a mere change of opinion, nor can the same issue be reopened without new material."

The Court further noted that the petitioner had already provided all relevant financial documents, including a valuation report, confirming that TREPL owned only two floors (first and third) of the Friends Colony property. The AO’s assumption that TREPL owned the entire property was not backed by any credible evidence.

"The AO has completely ignored the petitioner’s response and has proceeded with reassessment without any new material. This is a clear violation of Section 148A(d) of the Act, which mandates the AO to pass an order based on records and the assessee’s reply."

High Court Quashes Reassessment, Calls Revenue’s Action Arbitrary
Holding the reassessment proceedings to be legally unsustainable, the Delhi High Court set aside the reassessment order and notice dated April 22, 2024. The Court also declined to address the limitation issue since the entire reassessment was deemed invalid.

"The impugned order and notice under Section 148 are quashed. The AO has no jurisdiction to reassess the petitioner for the same issue that was already examined. The petition is allowed, and pending applications are disposed of."

Key Takeaways from the Judgment
•    Reassessment Cannot Be Used to Revisit the Same Issue – Once an issue has been examined and concluded, the AO cannot reopen it unless new, tangible material emerges.
•    Absence of Fresh Material Invalidates Reopening – The Revenue failed to provide any fresh evidence contradicting the petitioner’s position, making the reassessment legally unsustainable.
•    Failure to Consider Assessee’s Reply Violates Natural Justice – The AO ignored the petitioner’s submissions, which included clear proof that TREPL owned only two floors and not the entire Friends Colony property.
•    High Court Affirms Rule Against Fishing Inquiries – Tax authorities cannot conduct reassessment proceedings merely to revisit past transactions without valid reason.
•    This ruling reinforces taxpayer protection against arbitrary reassessments and upholds the principle that reopening of assessments must be based on genuine new information, not a mere change of opinion.
 

Date of Decision: 30 January 2025