Sikkim High Court Quashes Zydus Healthcare Reassessments, Says Audit Objection Isn't New Evidence

The Sikkim High Court on 14 October quashed income tax reassessment proceedings against Zydus Healthcare Limited for three assessment years, holding that an audit objection expressing a contrary opinion on an issue examined during the original assessment cannot, by itself, justify reopening the assessment.

Justice Bhaskar Raj Pradhan observed that the language used in Section 149(1)(b) of the Income Tax Act “clearly contemplates new evidence and not new opinion.”

The Income Tax Department sought to reopen Zydus Healthcare's assessments for assessment years 2015-16, 2017-18 and 2018-19 based on audit objections concerning the company's treatment of excise duty refunds as capital receipts and its claim for depreciation on goodwill arising from amalgamation.

For assessment year 2015-16, the Department questioned the treatment of an excise duty refund of approximately Rs. 23 crore as a capital receipt. For the subsequent assessment years, the audit authorities questioned the depreciation claimed on goodwill, alleging that the original assessments had resulted in lower tax payments.

Zydus Healthcare challenged the reassessment proceedings, arguing that the Department relied on information already available during the original assessments and had not identified any fresh documents or evidence to justify reopening them.

The Department defended the proceedings, contending that audit objections constituted information under the Income Tax Act and that the company had alternative remedies available under the law.

Rejecting this argument, the Court observed that although an audit objection could constitute information for reassessment purposes, it could not automatically confer jurisdiction on the Assessing Officer to reopen a completed assessment. The officer had to independently satisfy the statutory conditions for reassessment.

It clarified that where more than three years had elapsed, the Assessing Officer had to meet the requirements under Section 149(1)(b) of the Income Tax Act. A different interpretation of material already examined during the original assessment did not constitute new evidence.

The Bench also noted that Zydus Healthcare had disclosed the relevant details during the original assessments. In examining the reassessment proceedings and the underlying tax issues, the Court referred to the Supreme Court's decisions in Kelvinator of India, Shree Balaji Alloys and Smifs Securities.

Further, it held that the availability of an alternative appellate remedy did not bar judicial review of reassessment proceedings initiated without jurisdiction.

Accordingly, the High Court quashed the reassessment notices, orders and subsequent proceedings for all three assessment years.

For Zydus Healthcare: Advocates Mukesh M. Patel, Anup Kumar Bhattacharjee, Abhishek Singh and Deepu Prasad.

For the Income Tax Department: Deputy Solicitor General Sangita Pradhan, Advocates Natasha Pradhan, Sittal Balmiki and Amit Kumar Sharma.