Delhi High Court Quashes ₹21 Crore Block Assessment Over Failure To Issue Mandatory Scrutiny Notice

The Delhi High Court has reiterated that issuance of a notice under Section 143(2) of the Income Tax Act, 1961, is mandatory for completing block assessments under Section 158BC of the Act.

A Division Bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta relied on Assistant Commissioner of Income Tax vs. Hotel Blue Moon (2010), where the Supreme Court held that the omission to issue such notice is not a curable procedural irregularity.

The High Court thus quashed a ₹21-crore tax addition made against Sun Aero Ltd. during block assessment proceedings.

It observed that the assessment order and the record did not reveal any evidence of notice being issued to the assessee under Section 143(2).

“This leads us to conclude that no notice under Section 143(2) of the Act of 1961 was issued to the appellant during the proceedings under Section 158 BC of the Act of 1961,” it said.

The Court was hearing an appeal filed by Sun Aero Ltd. against an order passed by the Income Tax Appellate Tribunal (ITAT) in September 2016. The company had challenged the validity of block assessment proceedings initiated against it under Chapter XIV-B of the Income Tax Act.

Sun Aero, which claimed to be the wholly owned subsidiary of Sun Air Hotels Ltd., had received ₹21 crore in 1995 when rights in a hotel project on Bangla Sahib Road were transferred back to its parent company. In its return for the assessment year 1995–96, the company claimed exemption from capital gains tax under Section 47(v), on the ground that it was a wholly owned subsidiary of Sun Air Hotels. The claim was accepted by the Assessing Officer in scrutiny proceedings under Section 143(3).

However, following a search conducted in November 2000, the Assessing Officer reopened the issue and passed a block assessment order under Section 158BC, adding ₹21 crore to the assessee's income on the ground that it was not, in fact, a wholly owned subsidiary of Sun Air Hotels. The Commissioner of Income Tax (Appeals) subsequently set aside the addition, holding that the transaction had already been disclosed and scrutinised in regular assessment proceedings.

Before the High Court, the assessee argued that the block assessment proceedings were invalid because no incriminating material had been discovered during the search and because no notice under Section 143(2) had been issued. The Revenue contended that these objections could not be entertained at that stage, as they had not been raised before the Tribunal.

Rejecting the Revenue's preliminary objection, the Bench held that jurisdictional issues can be raised at any stage of the proceedings. It further observed that an assessee can support an order passed by the appellate authority on all permissible grounds without necessarily filing a cross-appeal.

Relying on Hotel Blue Moon (supra) and its own ruling in Principal Commissioner of Income Tax v. Silver Line (2016), the Court held that notice under Section 143(2) is a mandatory prerequisite for completing assessments under Section 158BC. The Bench noted that the Department was unable to produce any material showing that such notice had been issued.

The court also found force in the assessee's contention that the block assessment proceedings could not be sustained in the absence of incriminating material unearthed during the search. It observed that material collected during post-search investigations could not be equated with material found during the search itself. Emphasising that search is the sine qua non for block assessment proceedings.

The court held, “What has been found after the search was a material collected during the course of assessment proceedings and not during the search. And since the impugned assessment order is based upon a material purportedly recovered post search, this cannot be made a basis for raising a demand against the appellant.”

As such, the court quashed both the assessment orders on jurisdictional grounds. It however left the third question relating to the taxability of the ₹21-crore transaction undecided.

For Appellant: Jayant Bhushan and Mr. Sachit Jolly, Senior Advocates with Mr. Siddharth Garg, Advocate.

For Respondent: Siddhartha Sinha, Senior Standing Counsel