Delhi High Court Quashes Income Tax Reassessment Notices, Emphasizing Reassessment Must Be Based on “Reason to Believe” and Not “Reason to Suspect”

Court’s Decision:
The Delhi High Court allowed the writ petitions filed by Divine Infracon Pvt. Ltd., quashing the reassessment notices issued under Section 148 of the Income Tax Act for Assessment Years 2010-11 and 2011-12. The Court found that the Assessing Officer (AO) had relied solely on the District Valuation Officer’s (DVO) report without applying his mind to the facts, rendering the reassessment unsustainable.

Facts of the Case:
Divine Infracon Pvt. Ltd., a company engaged in real estate development and hotel management, was subjected to a search and seizure operation under Section 132 of the Income Tax Act. For AY 2010-11 and AY 2011-12, the company had initially declared nil and minimal income, respectively, but was later assessed by the AO at ₹35 crores for AY 2010-11 and ₹14.76 lakhs for AY 2011-12.

On 30th March 2015, the AO issued reassessment notices under Section 148 of the Income Tax Act, citing that the company had underreported investments in the renovation of a property. The AO based his belief on a DVO report, which estimated the property’s renovation costs at ₹211.99 crores, while the petitioner had declared a much higher amount of ₹592.13 crores under “Fixed Assets and Capital Work in Progress (WIP).”

Issues:
The key issue was whether the DVO report alone, without any application of mind by the AO, could form the basis for reopening the assessment under Section 147/148 of the Income Tax Act.

Petitioner’s Arguments:
The petitioner argued that there was no tangible material to justify the reassessment, as the AO had relied solely on the DVO report without considering the company’s books of account, which clearly showed the value of the property.

Respondent’s Arguments:
The Revenue argued that the DVO’s report constituted valid information for reopening the assessment and that the sufficiency of the material should not be scrutinized by the Court at this stage.

Court’s Analysis:
The Court emphasized that reassessment could only be initiated based on “reason to believe” and not “reason to suspect.” It held that the AO must apply his mind to the information and form a belief about income escapement.

The Court referred to the Supreme Court’s ruling in Dhariya Construction Co., which held that a DVO’s opinion alone cannot form the basis for reopening assessments without further corroborative material.

Conclusion:
The Delhi High Court quashed the reassessment notices dated 30th March 2015, issued for AY 2010-11 and 2011-12, along with the subsequent proceedings. The Court held that the AO’s reliance on the DVO report without any independent application of mind was insufficient to justify reopening the assessments.