The Bombay High Court has ruled that an Assessing Officer cannot issue a notice under Section 143(2) of the Income Tax Act to scrutinise a return in reassessment proceedings before deciding the assessee's objections to reopening the assessment.

A Division Bench of Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla held that issuing a Section 143(2) notice amounts to proceeding with the assessment. The Assessing Officer must therefore first dispose of the assessee's objections to reopening through a speaking order.

“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.

The ruling came in a petition filed by H.P. Diamonds India Pvt. Ltd. concerning the reopening of its assessment for the 2012-13 assessment year. The company's main contention was that the reassessment could not proceed after the Assessing Officer issued a Section 143(2) notice before supplying the reasons recorded for reopening.

Under the reassessment law applicable to the case, the Assessing Officer could issue a Section 148 notice where he had “reason to believe” that income had escaped assessment.

After receiving the notice, the assessee could file its return and seek the reasons for reopening. Once those reasons were supplied, it could file objections to the reopening.

The Supreme Court's ruling in GKN Driveshafts (India) Ltd. requires the Assessing Officer to dispose of those objections through a speaking order before proceeding with the assessment. The Bombay High Court held that issuing a Section 143(2) notice itself amounts to proceeding with the assessment.

In this case, the Assessing Officer issued the Section 143(2) notice on September 2, 2019. The reasons for reopening were supplied to the company only on September 3. H.P. Diamonds filed its objections on October 2, challenging the reopening on several grounds, including that it amounted to a change of opinion after the original assessment had examined the company's share premium transactions.

The Assessing Officer rejected the objections on October 31, 2019. He then issued a Section 142(1) notice on November 12, before four weeks had elapsed from the rejection of the objections.

Section 142(1) enables the Assessing Officer to call for further particulars and details from the assessee during the assessment process. The court held that the November 12 notice was contrary to the law laid down in Asian Paints Ltd. v. Deputy Commissioner of Income Tax, under which the Assessing Officer cannot proceed further for four weeks from the date the order rejecting the objections is served on the assessee.

The four-week window is intended to give the assessee an opportunity to challenge the rejection of its objections before the reassessment proceeds. In this case, the court assumed that the rejection order was served on October 31 itself. The November 12 notice was therefore issued before the four-week period had expired.

The Revenue argued that GKN Driveshafts only prevented the Assessing Officer from passing an assessment order under Section 143(3) read with Section 147 before deciding the objections. It contended that there was no bar on issuing a Section 143(2) notice in the meantime.

The Bench rejected that interpretation. It observed that once a return is filed in response to a Section 148 notice, issuing a Section 143(2) notice starts the process of scrutinising whether the assessee has understated income, claimed excessive loss or underpaid tax.

“Before issuance of a Notice under Section 143(2) [in reassessment proceedings] the Assessing Officer must dispose of the objections filed by the Assessee with a speaking order,” the bench ruled.

The court accordingly 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 court clarified that the case was governed by the reassessment law as it stood before April 1, 2021. The other contentions raised by H.P. Diamonds against the reopening were not ruled upon and were left open to be agitated in the future if the occasion arises.

For Petitioner: Advocates Devendra H. Jain, along with Shashank Mehta and Saukhya Lakade

For the Respondents/Revenue: Advocate Akhileshwar Sharma, 

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Case Title :  H. P. Diamonds India Pvt. Ltd. v. Deputy Commissioner of Income Tax, 14(2)(1), Mumbai & Ors.Case Number :  Writ Petition No. 3233 of 2019 HP DIAMONDSCITATION :  2026 LLBiz HC(BOM) 544
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