Reopening scrutiny assessment after four years without fresh

Reopening scrutiny assessment after four years without fresh material or failure to disclose is impermissible.

Issue

Whether the Assessing Officer can legally reopen a completed scrutiny assessment under section 147 after the expiry of four years solely to reclassify software expenses as capital assets, in the absence of any new tangible material or any allegation that the assessee failed to fully and truly disclose all material facts.

Facts

The assessee-company filed its return of income for the assessment year 2014-15, which was selected for scrutiny, and the assessment was completed under section 143(3).
During the original assessment proceedings, the Assessing Officer (AO) explicitly directed the assessee to furnish details of software expenses, and the assessee complied by submitting the requested information, which was examined by the AO.
After the expiry of four years from the end of the relevant assessment year, the AO issued a notice under section 148 to reopen the assessment.
In the recorded reasons for reopening, the AO stated that the software expenses claimed by the assessee were intangible assets that should have been capitalized, proposing to allow only 25% depreciation and disallow the remaining balance.
The AO possessed no new tangible material to justify reopening the scrutiny assessment and did not allege any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

Decision

Held, yes: The issue was decided in favor of the assessee, and the impugned notice issued under section 148 was quashed.
Impermissible Change of Opinion: Since the AO had already called for, received, and examined the details of the software expenses during the original scrutiny proceedings, the subsequent reopening amounted to a mere “change of opinion,” which is legally impermissible.
Absence of Tangible Material: Reopening a completed scrutiny assessment requires fresh, tangible material; the AO cannot validly initiate reassessment by simply re-evaluating the existing record.
Failure to Meet Statutory Threshold: Because the reopening occurred after four years, the statutory proviso required an explicit allegation and proof of the assessee’s failure to truly and fully disclose material facts, which the AO failed to state in the recorded reasons.

Key Takeaways

Protection Against Change of Opinion: Once an issue is raised, examined, and concluded during a section 143(3) scrutiny assessment, the tax authority cannot revisit the same issue under the guise of reassessment based on a new interpretation of the same facts.
Strict Proviso Past Four Years: For assessments reopened after four years from the end of the relevant assessment year, the Revenue faces a higher legal burden; it must explicitly demonstrate that income escaped assessment due to the assessee’s failure to disclose material facts.
Requirement of Fresh Material: Reopening cannot be triggered by a subjective re-review of the original assessment folder; it fundamentally requires the discovery of new, external, and tangible information that was not available during the initial proceedings.

IN THE ITAT CHENNAI BENCH ‘C’

Deputy Commissioner of Income-tax

Paypal India (P.) Ltd

ABY T. VARKEY, Judicial Member
and Inturi Rama Rao, Accountant Member

IT Appeal No. 2857 (Chny) of 2025
CO No. 3 (Chny) of 2026
[Assessment year 2014-15]

JUNE 22, 2026

Nikhil Tiwari, CA for the Appellant. Ms. R. Anitha, Addl.CIT for the Respondent.

ORDER

Aby T. Varkey, Judicial Member. – This is an appeal preferred by the Revenue, and Cross-Objection [CO] preferred by the assessee, against the order of the Learned Commissioner of Income Tax(Appeals),(hereinafter referred to as ‘the Ld.CIT(A)’) dated 12.03.2025 for the Assessment Year (hereinafter referred to as the ‘AY’) 2014-15.

2. The main grievance of the Revenue is against the action of the Ld CIT(A) allowing the legal ground raised by the assessee by holding that the reopening of the assessment for AY 2014-15 was invalid. And the CO of the assessee supports the action of the Ld.CIT(A).

3. Briefly stated, the facts of the case are that for AY 2014-15, the assessee company had filed its return of income (ROI/ITR) on 28.11.2014 declaring total income of Rs. 95,31,33,970/- and the ITR of the assessee was selected for scrutiny assessment through CASS. In response to notices under Section 143(2) and 142(1) of the Income Tax Act, (hereinafter referred to as “the Act”), the assessee furnished its books of accounts, balance sheet, income & expenditure statement, and other details as requestioned by the AO. The AO had inter alia issued notice under Section 142(1) on 06.09.2016 and called for details regarding software expenses, including the ledger of such expenses, pursuant to which assessee filed reply dated 28.10.2016 along with details of it. The AO after verification of the material submitted and gathered by him, passed the original scrutiny assessment order under Section 143(3) on 19.01.2018, computed the total income at Rs. 121,02,76,062/- in place of returned income of Rs. 95,31,33,970/-. Thereafter, the AO reopened the assessment for the relevant AY, after expiry of four years, by issuing impugned notice u/s 148 on 31.03.2021. In response, the assessee filed the return on 20.04.2021 and requested for a copy of the reasons recorded, which was given belatedly only on 06.01.2022 along with the copy of approval by the PCIT dated 31.03.2021 u/s 151 of the Act. The reasons recorded by the AO to reopen the assessment reads as under: –

“The assessee company M/s.Paypal India Private Limited filed its return of in come on 28.11.2014 by declaring a total income of Rs.95,31,33,970/-. The case was selected for scrutiny under CASS and the assessment was completed u/s.143(3) on 19.01.2018 by assessing total income at Rs.121,02,76,062/-.

On perusal of the Profit and Loss account, it is seen that the software expenses to the tune of Rs.4,24,07,026/- has been claimed by the assessee. The assessee is in the business of software development and the above expense has to be capitalized as the same is in the nature of intangible asset. Hence, the above expenditure to be disallowed after allowing depreciation @ 25%. Hence, the amount of Rs.3,18,05,269/- being capital in nature needs to be disallowed and brought to tax.

Hence, I have reason to believe that income has escaped assessment and proposal is submitted for kind perusal of Pr.CIT-4, Chennai for necessary approval for initiation of remedial action u/s 147 of IT Act.”

4. The AO, after disposing of the objection preferred by the assessee, has framed the reassessment order, disallowing the expense claimed on account of software amounting to Rs 4,24,07,026/- and treated it as capital expenditure and allowed depreciation at the rate of 25%, by the passing the reassessment order dated 30.06.2023 u/s.147 of the Act by making addition of Rs.3,18,05,269/-.

5. Aggrieved by the order passed by the AO, the assessee preferred an appeal before the Ld.CIT(A), wherein the assessee is noted to have raised legal issue as well as on merits of addition, and the Ld CIT(A), inter alia was pleased to allow the legal issue against reopening of the assessment holding it to be invalid.

6. Aggrieved by the action of Ld CIT(A), the Revenue has preferred an appeal and CO by assessee supporting the action of Ld CIT(A). The grounds raised by Revenue reads as under;-

The order of the learned Commissioner of Income Tax (Appeals) in ITA No. ITBA/NFAC/S/250/2024-25/1074413015(1) dated 12.03.2025 for the Assessment year 2014-15 is erroneous in law, facts and circumstances of the case.

The learned Commissioner of Income Tax (Appeals) erred in holding that the reopening of assessment made under section 147 is bad in law on the ground that the Assessing Officer is not valid in the absence of any new tangible material that had come to the knowledge of the assessing officer after the completion of scrutiny assessment u/s 143(3) of the Act.

The learned Commissioner of Income Tax (Appeals) erred in holding that the reopening u/s 147 of the Income tax Act, 1961 is invalid and failed to adjudicate the merits of the case.

The Ld. CIT(A) erred in holding that the reopening of the assessment made u/s 147 is bad in law without appreciating that the AO recorded reasons for failure on the part of the assessee to disclose fully and truly all material facts which are necessary for passing assessment.

For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) may be set aside and that of the Assessing Officer be restored.

The appellant craves leave to add or amend any ground of appeal before it is finally disposed off.

7. In the CO of assessee, even though assessee has raised many grounds, Ld.AR supports the impugned action of Ld.CIT(A).

8. Assailing the impugned action of Ld CIT(A), the Ld.DR submitted that there indeed was failure on the part of the assessee to submit full and true information at the time of original assessment and hence the AO rightly initiated reopening of assessment and passed reassessment order, which action was in order and correct in law. According to the Ld. DR, the AO had not asked any specific question regarding the software expenses to the tune of Rs. 4,24,07,026/-hence, it cannot be said that the AO had inquired about the said issue. Moreover, the Ld. DR submitted that based on audit objection, the AO reopened the assessment, and hence the action of the AO in reopening the case of the assessee is valid. Therefore, the Ld. CIT(A) erred in allowing the legal issue, and the same needs to be overturned. Hence, the Ld.DR does not want us to disturb the action of the AO reopening the assessment and wants us to reverse the action of Ld CIT(A).

9. Supporting the impugned action of Ld CIT(A) and assailing the action of AO, the Ld. AR submitted that the AO didn’t appreciate the contentions raised by assessee objecting to reopening of the regular/original assessment under Section 147 of the Act. He submitted that in the present case the original assessment was passed after scrutiny u/s.143(3) of the Act, and the proceedings u/s.147 of the Act were initiated after the expiry of four years from the end of the relevant assessment year. The Ld.AR therefore argued that for valid initiation of proceedings u/s.147 it was necessary for the AO to show that while recording the reasons u/s 148, he was prima facie satisfied that the escapement of the income chargeable to tax for the relevant assessment year was as a result of the failure on the part of the assessee to disclose truly and fully, all material facts necessary for assessment. He submitted that from the recorded reasons itself such satisfaction should have been discernible. Drawing attention to the reasons recorded, [a copy of which is found placed at Page Nos.174 & 175 of Paper Book], the Ld.AR submitted that nowhere it was even prima facie apparent that in AO’s opinion escapement of income had resulted because of assessee’s failure to disclose truly & fully all material facts for his assessment. The Ld.AR therefore submitted that the twin conditions embedded in section 147 and proviso to it were not fulfilled. The Ld.AR submitted that initiation of reassessment would have been permissible only if the AO was having in his possession fresh and tangible material which came in his possession subsequent to passing of the order u/s 143(3) and its relation with formation of belief should have been spelt out in the reasons recorded to justify reopening. According to Ld. AR the AO had miserably failed to demonstrate the foregoing in the recorded reasons which vitiated the assumption of reopening-jurisdiction by the AO. The Ld.AR further pointed out that in the course of original proceedings u/s 143(3), the assessee was directed to furnish various details arising from the ITR filed by the assessee as well as the expense relating to software to the tune of Rs.4,24,07,026/- (refer page number 53 to 54 PB). And in compliance the particulars as requisitioned were furnished along with its beak-up, (refer page number 56 to 64 PB) which thereafter were examined by the AO not only with reference to the assessee’s books of account, balance-sheet, income & expenditure, computation of income but also by enquiry from the assessee by issuing notice u/s.142(1) of the Act. The Ld.AR therefore submitted that there was no failure on the part of the assessee to disclose true and full material facts necessary for assessment. In the circumstances therefore the reopening of assessment after four years was claimed to be impermissible.

10. The Ld. AR further submitted that from the reasons recorded, it can be seen that the AO was not having in his possession fresh and tangible material which came into his possession subsequent to passing of the original assessment order under Section 143(3), for formulation of belief, that there was escapement of income, which fact should have been spelt out in the reasons recorded to justify reopening. According to the Ld.AR, the AO has miserably failed to demonstrate the same in the recorded reasons because a perusal of the reasons would show that the AO himself has admitted to have reopened the assessment based on mere perusal of the profit and loss account, which is already in the assessment record during the first round. Thus, according to the Ld. AR, there was no tangible material to reopen the completed assessment and hence the assumption of jurisdiction by the AO after four years is vitiated.

11. The Ld. AR, therefore, submitted that there was no failure on the part of the assessee to disclose true and full material facts prior to completion of the order under Section 143(3). In the circumstances, the reopening of the assessment after four years is impermissible. Hence, according to the Ld. AR, besides there being no tangible material available to the AO, the reopening of the assessment was merely a change of opinion and does not satisfy the twin conditions precedent as given in the proviso to Section 147. The proceedings under Section 147 of the Act, therefore, suffer from incurable infirmities. In light of the aforesaid submissions, the Ld. AR submitted that the reopening was legally impermissible and, therefore, urged for upholding the action of the Learned CIT(A)-Appeals on the legal ground.

12. Further, drawing our attention to pages 57 to 64, which give the break-up of the software-expenses, he showed that the same was incurred for “software license”. Hence, according to the Ld. AR, since payment was made for using software, in any case it cannot be termed as capital in nature, and it is revenue in nature and relied on the decision of Hon’ble Madras High Court in CIT v. Danfos Industries (P.) Ltd. (Madras), CIT v. Karur Vysya Bank Ltd. (Madras).

13. Countering the submission of the Ld. DR that the reopening was based on audit objection, he drew our attention again to the reasons recorded (supra), and showed that the AO has not mentioned that upon receiving audit objection he came to know about the fact regarding the assessee’s claim of software expenses. Hence, according to Ld.AR the Ld.DR cannot be allowed to add something, which is not mentioned in the reasons recorded by AO to reopen the assessment and relied for such proposition on the decision of Hon’ble Bombay High Court in Hindustan Lever Ltd and Hon’ble Supreme Court in New Delhi Television Ltd. v. Dy. CIT [2020] 424 ITR 607 (SC). Thus, according to Ld.AR, the allegation made by the Ld.DR is neither emanating from the “reasons recorded” by the AO to re-open the assessment nor emanating from the impugned re-assessment order. Further according to the Ld.AR, even though it is an undisputed fact that original assessment u/s.143(3) of the Act has been re-opened after four years from the relevant assessment year but the reasons recorded by him does not have a whisper about the failure on the part of the assessee to fully and truly disclosed all material facts necessary for the assessment. Therefore, according to the Ld.AR the essential condition precedent for re-opening of assessment is not satisfied and therefore, the impugned action of the AO to re-open the assessment is bad in law and need to be quashed.

14. We have heard both parties and perused the records. Before we advert to the legal issue [challenging the jurisdiction of AO to reopen the assessment already completed u/s.143(3) of the Act after 4 years from the end of the relevant AY], first let us understand the settled position of law on the issue at hand. To begin with, it should be kept in mind that the concept of assessment is governed by the time-barring Rule, and the assessee acquires a right as to the finality of proceedings. Quietus of the completed assessment is the Fundamental Rule and exception to this rule is Re-opening of assessment by AO under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Therefore, the Parliament in its wisdom has provided safeguards for exercise of the reopening of assessment jurisdiction to AO; and revisional jurisdiction of CIT by providing condition precedent which is sine qua non for assumption/usurpation of jurisdiction. In the case of reopening of assessment, section 147 provides that where the Assessing Officer has reason to believe escapement of income [is the jurisdictional fact & law] he shall record his reasons for doing so and assess or reassess the income which has escaped assessment; and for exercising revisional jurisdiction u/s. 263 the CIT has to find the assessment order of the AO to be erroneous as well as prejudicial to the revenue. Unless the condition precedent is satisfied, the AO or the CIT can’t exercise their reopening jurisdiction or revisional jurisdiction respectively. The legislative history is that in respect to the reopening u/s. 147 of the Act, the Parliament by Direct Tax Laws (Amendment) Act 1987 w.e.f. 01.04.1989 had substituted “for reason to believe escapement of income” to ‘for reasons to be recorded by him in writing, is of the opinion” which gave unbridled subjective satisfaction to the AO was later substituted back to ‘reason to believe escapement of income”, by the Direct Tax Laws (Amendment) Act, 1989. The Hon’ble Apex Court as well as the Hon’ble jurisdictional High Court as well as other Hon’ble High Courts have already held in plethora of cases the test of a prudent person instructed in law in understanding jurisdictional fact & law (mixed question of fact and law) the reason to believe escapement of income (supra).

15. As noted, the AO, who is a quasi-judicial authority is empowered to reopen the assessment only in a given case wherein there is reason to believe escapement of chargeable income to tax, which he has to record before issuing notice u/s 148 of the Act. In this regard, it must be borne in mind that reasons to believe postulates foundation based on information, and belief based on reason. After a foundation based on information, is made, there still must be some reason, which should warrant the holding of a belief that income chargeable to tax has escaped assessment. It has to be kept in mind that the Hon’ble Supreme Court in Ganga Saran & Sons (P.) Ltd. v. ITO 130 ITR 1 (SC) held that the expression “reason to believe” occurring in sec. 147 “is stronger” than the expression “if satisfied” and such requirement has to be met by the AO in the reasons recorded before usurping the jurisdiction u/s. 147 of the Act. At this stage, authorities must understand the fine distinction between “reason to suspect” & ‘reason to believe”. Adverse information against an assessee may trigger “reason to suspect,” then the AO is duty bound to make reasonable enquiry to collect material which would make him form a belief that there is an escapement of income. And on satisfaction of such an event, then proceed to reopen the assessment and not before that event, because reason to believe is the jurisdiction requirement u/s 147 of the Act, and not the reason to suspect escapement of income. This subtle distinction should be borne in mind while adjudicating the legal issue raised by assessee.

16. And, if the AO intends to re-open the assessment [scrutinized u/s 143(3)] after four years from the relevant assessment year, then as per first proviso to section 147 of the Act, an additional safeguard or condition that escapement of income was due to fault of the assessee, in not fully and truly disclosing the material facts at the time of original assessment needs to be satisfied. In this context, it is gainful to refer to the Hon’ble Supreme Court decision endorsing the Full Bench decision of the Hon’ble Delhi High Court in CIT v. Kelvinator of India Ltd. 320 ITR 561 (SC) wherein inter alia, it was held that Assessing Officer has no power to review; and emphasized that AO in absence of “tangible material” should not resort to reopening. The Hon’ble Supreme Court held that merely on “change of opinion” the AO should not re-open the assessment because he doesn’t enjoy the power to review his own order.

17. Thus, as noted before the AO assumes jurisdiction to re-open it is necessary that the conditions laid down in the said section 147 has to be satisfied viz., AO should record “reason to believe” that the income chargeable to tax for that assessment year has escaped assessment. And, if the AO intends to re-open an assessment [scrutinized u/s 143(3)] after four years from the relevant assessment year, then an additional condition needs to be satisfied viz escapement of income was due to fault of the assessee, in not fully and truly disclosing all the material facts necessary at the time of original assessment. If the conditions stipulated by statute are not satisfied at the first place, then it cannot be said that AO has validly assumed jurisdiction u/s.147 of the Act. Therefore, the question for consideration is whether on the basis of the reasons recorded by the AO, he could have validly reopened the assessment. For that it has to be seen as to whether the AO on the basis of whatever material before him, [which he had indicated in his “reasons recorded”] had reasons warrant holding a belief that income chargeable to tax has escaped assessment. At this stage, it is also important to bear in mind that the reasons recorded by AO to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed, while adjudicating the legal issue of AO’s usurpation of jurisdiction u/s. 147 of the Act. The Hon’ble Bombay High Court, in the case of Hindustan Lever Ltd. v. R.B. Wadkar 268 ITR 332 (Bombay), has, inter alia, observed that “……….. It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons………………..” Their Lordships added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence……………….”. Therefore, the reasons are to be examined only as they were recorded by the AO before the issue of the notice.

18. From the aforesaid understanding of law governing the issue at hand, we have to examine the reasons recorded by AO to reopen which has been already set out above, and test whether the condition precedent necessary to usurp the re-opening jurisdiction as required u/s. 147 of the Act is satisfied or not ? And in the present case, since four years have elapsed from the end of the relevant AY and original assessment has been completed u/s. 143(3) of the Act, it needs to be examined as to whether the addition condition precedent as laid down in first proviso to section 147 of the Act is also satisfied or not ? For doing that we have to examine on a standalone basis the reasons recorded by the AO to reopen the assessment (refer Page No 3, para 3 supra). The AO, in the reasons recorded, first notes that the assessee company had filed its return admitting Rs.95,31,33,970/-, which was selected for scrutiny, and the assessment was completed under section 143(3) on 19.11.2018 by assessing total income of Rs.121,02,76,062/-. In the second paragraph, while perusing the profit and loss account of the assessee, he saw that the assessee has claimed software expenses to the tune of Rs.4,24,07,026/- and that the assessee is in the business of software development, and hence the said expenses need to be capitalized as it is in the nature of intangible assets. Hence, such expenditure needs to be disallowed after allowing depreciation at the rate of 25%. Therefore, Rs.3,18,05,269/- (Rs.4,24,07,026/- minus Rs.1,06,01,757/-, which is close to Rs.3,18,05,269/-) needs to be disallowed and brought to tax. On the basis of the aforesaid facts, the AO framed his opinion that income chargeable to tax has escaped assessment.

19. On analysis of the reasons recorded by the AO to justify reopening of the assessment, we find for various reasons stated herein, that the AO erred in reopening the assessment. From a reading of the reasons recorded by the AO, it is discerned that the AO, while perusing the profit and loss account (i.e. without any tangible material from any other source), has noted that the assessee has claimed software expenses, which expenses need to be capitalized after allowing 25% depreciation thereon. The balance 75% needs to be capitalized and hence needs to be disallowed. Thus, we find that there was no tangible material in the possession of the AO to reopen the scrutiny assessment under section 143(3) of the Act, which action is impermissible as held the Hon’ble Supreme Court in Kelvinator of India Ltd (supra).

20. Further, in the reasons recorded, the AO has not alleged any failure on the part of the assessee to disclose fully and truly any material facts necessary for the original assessment. It is an admitted fact that the notice under section 148 of the Act has been issued on 31.03.2021, which is an event after four years from the end of the relevant assessment year. Since the AO sought to reopen the scrutinized assessment under section 143(3) after four years from the relevant assessment year, it was incumbent upon the AO to prove that he satisfies the additional condition precedent provided in the first proviso to section 147 of the Act, namely that escapement of income was due to failure on the part of the assessee in not fully and truly disclosing the material facts at the time of the original assessment. As noted the AO in the reasons recorded has not made any allegation/averment about the failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. Thus in the facts and circumstance of the case, in the absence of satisfying the essential condition precedent as envisaged in the first proviso to section 147 of the Act, the AO’s action to reopen the assessment is bad in law. In this regard, it would be gainful to refer to the decision of the Hon’ble Supreme Court in the case of CIT v. Avadh Transformers (P.) Ltd. (SC) wherein, the Apex Court upheld the judgment of the Allahabad High Court, holding that in absence of failure on the part of the assessee in disclosure of material facts, the reassessment proceedings could not be initiated after expiry of four years.

21. Further it is noted that in the original assessment proceedings under Section 143(3) of the Act, the AO had directed the assessee, inter alia, to furnish the details of the software expenses, and to file the ledger copies of expenses claimed vide notice dated 06.09.2016, copy of notice is found placed at pages 53 to 54 of the paper book, wherein at item No. 14, the AO directed the assessee to produce the ledger copy of the same. The assessee is noted to have filed the reply vide letter dated 28.10.2016, wherein the assessee had enclosed the break-up in relation to the software expenses amounting to Rs.4,24,07,026/-under Schedule 19 of the financial statements (refer pages 56 to 64 of the paper book). Thus, we find that during the assessment proceedings, the AO had directed the assessee to file details of the software expenses, and the assessee, in compliance, filed the same, which were examined by the AO not only with reference to the books of accounts, balance sheets, income and expenditure computation, but also by inquiry from the assessee by issuing notice under Section 142(1) of the Act. Hence, the impugned action of AO to reopen the assessment is an exercise undertaken merely on “change of opinion”, which is impermissible, since the AO doesn’t enjoy the power to review his own order as held the Hon’ble Supreme Court in Kelvinator of India Ltd (supra).

22. For the reasons discussed in the foregoing, therefore, we find that the essential condition precedents to invoke the jurisdiction to reopen the assessment for AY 2014-15 is absent; and consequently the action of AO to reopen the assessment without complying with the requirement of law is held to be wholly without jurisdiction and therefore the issuance of notice u/s. 148 of the Act is ab-initio void and consequent actions of AO are quashed.

23. In the result, the appeal filed by the Revenue and CO of the assessee is dismissed.