Safiya Malik

The Bombay High Court, in a judgment delivered by the Division Bench of Justice G.S. Kulkarni and Justice Advait M. Sethna, quashed the reassessment proceedings initiated for the assessment year 2014-15 under Section 147 read with Section 144B of the Income Tax Act, 1961. The court found that the reassessment notice issued under Section 148 was beyond the statutory four-year limitation, lacked fresh tangible material, and was based on an internal audit review, amounting to a mere change of opinion. It also noted that the failure to dispose of objections separately before reassessment violated the mandatory procedure prescribed under Section 144B, rendering the reassessment without jurisdiction and void.

The petitioner, Crystal Pride Developers, is a partnership firm engaged in real estate development, operating under a registered partnership deed. For the assessment year 2014-15, the petitioner filed its income tax return on November 27, 2014, declaring a loss of Rs. 5,53,822. The return was duly acknowledged by the respondent, and a tax audit report was submitted as per the requirements of Section 144B of the Income Tax Act.

During the assessment proceedings, the assessing officer (AO) issued a notice under Section 142(1) of the Income Tax Act on May 10, 2016, seeking detailed financial documents. The petitioner responded on May 24, 2016, submitting all requested information, including audited financial statements, loan confirmations, and details of capital accounts. On December 13, 2016, the AO issued a final show cause notice under Section 142(1), questioning why interest on Rs. 75.64 crores—classified as a debit balance under the capital account of a partner—should not be treated as taxable income. The petitioner clarified in a reply dated December 19, 2016, that the sum was a capital withdrawal by a partner and sourced from interest-free funds, rendering interest computation inapplicable. After reviewing the submissions, the AO assessed the income as NIL and issued a demand notice on June 29, 2016.

Nearly five years later, on March 27, 2021, the respondent issued a notice under Section 148, reopening the assessment for AY 2014-15. The reopening was based on an internal audit, which suggested that certain interest amounts had escaped assessment. The notice under Section 148 was issued beyond the four-year statutory limitation from the end of the relevant assessment year.

The petitioner challenged the reassessment, arguing that:

1. The reopening was beyond the four-year limitation period, violating the first proviso to Section 147 of the Income Tax Act.

2. The reassessment constituted a change of opinion since all facts had been disclosed during the original assessment.

3. The reassessment was based solely on an internal audit report, without fresh tangible material.

4. The objections raised by the petitioner against the reassessment were not disposed of in accordance with GKN Driveshafts (India) Ltd v. Income Tax Officer.

The respondents, in their affidavit in reply, argued that the petitioner had not disclosed complete material facts during the original assessment, justifying the reopening beyond four years. They also contended that the petitioner had an alternative statutory remedy of appeal under the Income Tax Act and should not have approached the High Court.

The court examined the statutory framework governing income tax reassessments and evaluated whether the respondent’s actions conformed to legal provisions. The bench observed that:

“The reasons recorded by the assessing officer do not indicate any failure on the part of the petitioner to disclose material facts necessary for assessment. Rather, the reasons rely entirely on the same materials that were examined in the original assessment.”

The court referred to GKN Driveshafts (India) Ltd v. Income Tax Officer, stating that when an assessment is reopened, the assessee has the right to receive a copy of the reasons recorded and file objections. The objections must be considered and disposed of through a separate speaking order before proceeding with reassessment. The court noted:

“The respondents failed to adjudicate upon the objections raised by the petitioner before passing the final assessment order, thereby violating the mandatory procedure prescribed under Section 144B.”

The court also referred to Commissioner of Income-Tax v. Kelvinator of India Ltd, stating that reassessment cannot be used as a tool for reviewing past assessments in the absence of fresh material evidence. It recorded:

“Mere change of opinion based on an internal audit review does not constitute a valid reason for reopening a concluded assessment.”

Additionally, the court examined whether the internal audit findings constituted fresh material evidence. It determined that internal audit findings did not introduce any new information beyond what had already been scrutinized during the original assessment. Therefore, relying solely on such an audit to justify reassessment was not legally permissible.

The court further examined procedural lapses, stating:

“The failure to issue a speaking order addressing the objections raised by the petitioner before issuing the final reassessment order is a clear violation of procedural safeguards.”

Given that the impugned notice under Section 148 was issued beyond four years, the court underscored that the first proviso to Section 147 applied. Since the AO had failed to establish that the reassessment was necessitated by the petitioner’s failure to disclose relevant facts, the notice was held to be without jurisdiction.

In light of these findings, the court issued the following directives:

1. The notice dated March 27, 2021, issued under Section 148 for reopening the petitioner’s assessment for AY 2014-15, is quashed and set aside.

2. The assessment order dated March 29, 2022, issued under Section 147 read with Section 144B, is declared null and void.

3. The revenue authorities are restrained from taking any further action based on the impugned notice and order.

Case Title: Crystal Pride Developers v. Assistant Commissioner of Income Tax & Ors.
Case Number: WP (L) No. 12546 of 2022
Bench: Justice G.S. Kulkarni & Justice Advait M. Sethna

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