The Bombay High Court has granted an unconditional stay on an income tax demand of approximately ₹15.96 crore after finding prima facie substance in the taxpayer’s contention that the reassessment notice was time-barred. The court also noted that the assessment appeared to be high-pitched, with the addition amounting to almost five times the returned income.
The division bench of Justice B. P. Colabawalla and Justice Farhan P. Dubash set aside the Principal Commissioner of Income Tax’s order rejecting the stay application and directed that the entire demand arising from the reassessment order be stayed until the taxpayer’s appeal before the Commissioner of Income Tax (Appeals), or CIT(A), is decided.
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The dispute concerned Assessment Year 2017–18. The assessee filed its return of income on October 30, 2017, declaring taxable income of approximately ₹3 crore.
Following scrutiny, the Assessing Officer determined the total income at ₹4.18 crore. A subsequent rectification order dated March 31, 2021, assessed the income at approximately ₹4.35 crore. The assessment involved an addition of ₹1,34,82,639 on account of an allegedly bogus claim for labour charges.
The taxpayer challenged the addition before the CIT(A), which directed its deletion. The Assessing Officer subsequently gave effect to the appellate order and recomputed the taxpayer’s total income at ₹3,00,60,630.
The department issued a show cause notice under Section 148A(b) of the Income Tax Act, asking why the assessment should not be reopened. The taxpayer submitted its response on April 10, 2024.
The department rejected the explanation and passed an order under Section 148A(d) on April 17, 2024. A notice under Section 148 was issued on the same day.
The Deputy Commissioner of Income Tax subsequently passed a reassessment order on January 16, 2026, under Section 147 read with Section 143(3), accompanied by a demand notice under Section 156.
The taxpayer appealed against the reassessment and, on March 23, 2026, applied under Section 220(6) for a stay of the entire demand. However, the Principal Commissioner rejected the application on July 28, 2026, permitting the Assessing Officer to proceed with recovery.
Before the High Court, the taxpayer argued that the authority had failed to consider the merits of its challenge while rejecting the stay application.
Its principal contention was that the notice issued under Section 148 was barred by limitation under Section 149(1)(b). It also emphasised the disproportionate size of the addition compared with its returned income.
The court clarified that the limitation objection had not been raised in the stay application itself, but had specifically been raised before the CIT(A). The bench considered this objection significant because it went to the root of the reassessment proceedings.
The taxpayer sought an unconditional stay pending appeal and indicated that the CIT(A) could be asked to decide the appeal within a reasonable timeframe to protect the Revenue’s interests.
The Revenue relied on CBDT Instruction No. 1914 dated December 2, 1993, as subsequently modified by office memorandums.
It argued that a stay pending an appeal before the CIT(A) required payment of 20% of the total demand. On that basis, the department opposed an unconditional stay and sought a deposit of at least 20% before recovery of the balance could be suspended.
The High Court nevertheless found that the particular facts justified staying the entire demand without imposing that payment condition.
The bench observed that although the impugned order recorded some of the taxpayer’s contentions, it did not examine them even on a prima facie basis, proceeding on the footing that the appeal was pending before the CIT(A).
After examining the record, the court found prima facie substance in the taxpayer’s limitation argument. It expressly left the final determination of that issue to the appellate authority.
The bench also observed that the assessment appeared high-pitched because the addition was almost five times the returned income. These circumstances supported an unconditional stay of the entire demand.
The court further criticised the Principal Commissioner’s reliance on gross turnover of ₹76.51 crore to conclude that the taxpayer was in a sound financial position.
It noted that, for Assessment Year 2017–18, the taxpayer’s gross turnover was approximately ₹109.52 crore, while its income was only around ₹3 crore.
The bench therefore found that the stay rejection proceeded on a mistaken premise about the taxpayer’s financial position, overlooking the distinction between turnover and income.
The High Court directed that the entire demand arising from the reassessment order dated January 16, 2026, remain stayed until disposal of the appeal.
It requested the CIT(A) to decide the appeal expeditiously, preferably within six months from the date the High Court’s order is brought to its attention.
The court expressly stated that its observations were only prima facie. The CIT(A) must decide the appeal independently, on its merits and in accordance with law, without being influenced by those observations. Accordingly, the ruling grants protection from recovery; it does not finally decide whether the reassessment was time-barred or delete the tax demand.
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