The Bombay High Court has held that an Assessing Officer cannot issue scrutiny notices under Section 143(2), or notices seeking particulars under Section 142(1), in reassessment proceedings before disposing of the taxpayer’s objections to reopening through a speaking order.
The bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla quashed two notices concerning Assessment Year 2012-13, along with any action taken in furtherance of those notices.
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The bench reaffirmed that the Assessing Officer must observe the four-week waiting period after service of an order rejecting reopening objections, as prescribed in Asian Paints Ltd. v. Deputy Commissioner of Income Tax.
The company, engaged in diamond trading, filed its return for AY 2012-13 on September 28, 2012, declaring nil income and claiming a business loss of ₹15,000.
During the original scrutiny assessment, the Assessing Officer sought detailed information about the substantial share premium received by the company. The queries covered the subscribers’ names and PANs, evidence of their identity and creditworthiness, and the computation of share valuation.
The company furnished explanations and supporting documents in response to successive notices. The assessment was completed under Section 143(3) on March 19, 2015, determining total income at nil and disallowing the ₹15,000 business loss.
The issue resurfaced during limited scrutiny for AY 2016-17. The tax department sought explanations concerning a ₹10 lakh credit under the share forfeiture account in the securities premium account shown in the company’s balance sheet.
The company referred to submissions made during the assessment for AY 2012-13 and resubmitted them with further explanations.
On December 31, 2018, the Assessing Officer completed the assessment for AY 2016-17, adding ₹2 crore under Section 68 in respect of shares issued during FY 2011-12 and forfeited during FY 2015-16 for non-payment of call money. The same amount was alternatively added under Section 56(2)(ix).
The company challenged this assessment before the Commissioner of Income Tax (Appeals) on January 25, 2019. The judgment records that the appeal remained pending.
While that appeal was pending, the Assessing Officer issued a notice under Section 148 on March 31, 2019, seeking to reopen the assessment for AY 2012-13. The notice was issued beyond four years from the end of the assessment year and on the last day before completion of six years.
The company filed its return in response on April 10, 2019, and requested the recorded reasons for reopening on April 15, 2019.
However, the Assessing Officer issued a scrutiny notice under Section 143(2) on September 2, 2019. The reasons for reopening were furnished only the following day.
The company submitted objections on October 2, 2019, contending that the share capital and premium transactions had already undergone detailed scrutiny. It argued that reopening amounted to a change of opinion and that it had fully and truly disclosed all material facts.
It also raised objections concerning limitation, application of mind and the approval process.
The Assessing Officer rejected the objections on October 31, 2019, and issued a further notice under Section 142(1) on November 12, 2019.
The principal issue pressed before the High Court was whether the Assessing Officer could begin scrutiny of the return before disposing of the objections to reopening.
The company relied on the Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer, which requires the Assessing Officer to decide reopening objections through a speaking order before proceeding with assessment.
The Revenue argued that this requirement merely prevented the Assessing Officer from passing the final assessment order before deciding the objections.
The bench rejected that interpretation. It explained that a return filed in response to a Section 148 notice is processed as a return under Section 139. Issuing a Section 143(2) notice to scrutinise that return constitutes the starting point of assessment proceedings.
The court reasoned that objections to reopening may challenge whether the jurisdictional requirements for reassessment have been satisfied. The Assessing Officer must first decide those objections before proceeding with scrutiny.
“If one were to issue a Section 143(2) Notice and proceed with the assessment without first disposing of the objections, it would really amount to putting the cart before the horse,” the bench observed. H. P. Diamonds India Pvt. Ltd.
The court held that there was nothing in GKN Driveshafts to support the Revenue’s contention that the restriction applied only to passing the final assessment order.
It consequently ruled that, in reassessment proceedings, neither a Section 143(2) notice nor a Section 142(1) notice could be issued before the taxpayer’s objections were disposed of through a speaking order.
The court separately found that the Section 142(1) notice violated the procedural safeguard recognised in Asian Paints Ltd.
Under that precedent, when an Assessing Officer rejects objections to reopening, further proceedings must remain paused for four weeks from the date the rejection order is served on the taxpayer.
Here, the objections were rejected on October 31, 2019. Even assuming that the rejection order was served on the same day, the notice issued on November 12, 2019, fell within the protected four-week period.
The bench therefore held that the notice was contrary to the law laid down in Asian Paints Ltd. and could not be sustained.
The writ petition had initially been dismissed by the High Court on January 11, 2022.
The Supreme Court set aside that dismissal on May 20, 2022, observing that the order was non-speaking and non-reasoned and that the merits had not been discussed. It remanded the matter to the High Court for a fresh decision through a reasoned and speaking order.
The September 30, 2026 judgment followed that rehearing.
The High Court set aside the Section 143(2) notice dated September 2, 2019, and the Section 142(1) notice dated November 12, 2019. It also quashed any action taken in furtherance of those notices.
The relief was confined to these procedural defects. Since this was the only issue pressed before the bench, the court left the company’s other challenges to reopening undecided and open for consideration if the occasion arose.
Accordingly, the judgment does not decide the change-of-opinion or limitation objections, nor does it determine the merits of the separate ₹2 crore addition for AY 2016-17.
The petition was disposed of without an order as to costs.
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