Delhi High Court Quashes Reassessment, Special Audit Against Huawei For AY 2013-14; Upholds Reopening For AY 2015-16

The Delhi High Court has granted partial relief to Huawei Telecommunications (India) in a batch of petitions challenging special audit directions and reassessment proceedings initiated by the Income Tax Department.

A Division Bench of Justices V. Kameswar Rao and Vinod Kumar partly allowed the petitions, setting aside the special audit directions and reassessment notices for Assessment Year (AY) 2013-14, while sustaining the proceedings for AY 2015-16.

The case arose from a search and seizure operation conducted in February 2022, following which the Revenue initiated reassessment proceedings and directed a special audit under Section 142(2A) of the Income Tax Act, 1961.

The company challenged both the reassessment notices issued under Sections 148/143(2) and the special audit directions, contending that the statutory preconditions were not satisfied.

For AY 2013-14, the Revenue argued that there is an escapement of income in the nature of an asset, being receivables on account of counter claims and warranty.

As per Revenue, the entire claims towards customer claims and warranty are to be borne by Huawei's overseas Associated Enterprise.

The court, however, found that the Revenue had failed to demonstrate the existence of any incriminating material showing escapement of income in the form of an “asset” exceeding ₹50 lakh, as mandated under Section 149(1)(b) of the Act.

The Court also observed that the issue relating to “provision for customer claims” had already been examined during original assessment proceedings and decided in favour of the assessee by the Income Tax Appellate Tribunal, thereby attaining finality.

In this backdrop, the Bench held that reopening the assessment on the same issue, without any fresh incriminating material, was impermissible. Accordingly, the reassessment notices for AY 2013–14 were quashed.

“...even in cases of search, the jurisdictional requirement set out in Section 153A of the Act needs to be fulfilled, by way of recording of reasons detailing as to how, income in the nature of an asset has escaped assessment,” it said.

On the special audit directions, the Court held that the power under Section 142(2A) cannot be exercised mechanically. It emphasized that the Assessing Officer must form an objective opinion based on factors such as complexity of accounts, volume, multiplicity of transactions, or doubts about correctness.

It found that the Revenue had primarily relied on alleged discrepancies in ERP data and duplication of entries for certain financial years, which were explained by the assessee as clerical errors during data extraction.

It thus observed that mere volume of transactions or existence of ERP data does not by itself establish “complexity” warranting a special audit.

The Court also noted that the authorities had not undertaken a proper examination of the accounts before invoking the provision, and that the direction appeared to be based on vague and unsubstantiated grounds.

As such, the Court set aside the special audit directions for AY 2013–14.

For AY 2015- 16, the Court held that the reassessment proceedings are not barred by limitation and thus upheld the notice for the same.

“Reassessment has been initiated pursuant to evidence that has been unearthed during the search that suggest that there are receivables in the nature of reimbursement of the provisions for warranty. It has been stated that since such receivables have not been recorded in the books of the assessee, income has escaped assessment in the nature of an asset…the receivables at the hand of the petitioner would be an asset for the purpose of Section 153A of the Act. As such, the notice dated 31.03.2023, for AY 2015-16 being within ten years of the end of the relevant assessment year 2015-16, meets the requirement under Section 153A and also Section 149(1) of the Act. Therefore, the said notice cannot be said to be beyond limitation,” the order states.

For Petitioner: Senior Advocates Arvind Datar and Tarun Gulati with Advocate Kishore Kunal, Ankita Prakash and Anuj Kumar.

For Respondents: Indruj Singh Rai SSC, Sanjeev Menon, Rahul Singh JSCs and Advocates Gaurav Kumar, Siddharth Burman