Telangana High Court Quashes Reassessment Against Cyberabad Citizens Over Demerged Business Income

The Telangana High Court on 7 September set aside the order dated 16 April 2024 passed under Section 148A(d) of the Income Tax Act and the consequential notice under Section 148 issued to Cyberabad Citizens Health Services Pvt. Ltd. for Assessment Year 2019-20.

A Division Bench of Justices P. Sam Koshy and Narsing Rao Nandikonda held that income already disclosed and offered to tax by the entity to which a business was demerged cannot be treated as escaped income merely because the related transactions appeared against the original company's PAN. They observed:

“We are constrained to observe that an order under Section 148A(d) recording, in the same breath, that an amount has already been offered to tax by the entity legally entitled to be assessed on it and yet proceeding to treat the matter as one of escaped income “requiring verification” discloses an absence of the very application of mind that Section 148A is designed to ensure…”

Cyberabad Citizens had been operating a multi-speciality hospital. As part of a business restructuring, it demerged its healthcare services business into Artmed Healthcare Pvt. Ltd. under a scheme approved by the National Company Law Tribunal on 8 March 2019, with effect from 1 April 2017.

After the demerger, Artmed Healthcare reflected the healthcare business and the income arising from it in its books and return and offered the income to tax. Cyberabad Citizens retained the hospital infrastructure and earned rental income by leasing the premises to Artmed Healthcare.

The Income Tax Department subsequently issued a notice under Section 148A(b), alleging that professional receipts of Rs. 1.25 crore, professional and technical service fees of Rs. 43.39 crore, interest income of Rs. 7.59 lakh and contract receipts of Rs. 43.65 lakh had not been disclosed.

In response, Cyberabad Citizens submitted that the transactions related to the demerged healthcare business had already been accounted for and offered to tax by Artmed Healthcare. It also furnished supporting documents.

The Assessing Officer nevertheless passed an order under Section 148A(d), stating that the transactions required “further verification” and that income chargeable to tax had escaped assessment. A notice under Section 148 followed.

Cyberabad Citizens challenged the proceedings, arguing that there was no valid information suggesting escapement of income and that the notice was beyond the prescribed limitation period.

The Revenue argued that the transactions appeared against the petitioner's PAN on the Department's Insight portal because tax had been deducted in its name. It submitted that there was no corresponding information against Artmed Healthcare and contended that the case fell within the extended limitation period under Section 149(1)(b).

The High Court noted that the healthcare business had admittedly been demerged into Artmed Healthcare and that the income relating to it had been disclosed and offered to tax by that company. It held that the appearance of the transactions against the petitioner's PAN did not convert income already disclosed and taxed by Artmed Healthcare into “income that has escaped assessment”.

The Bench also noted that the Assessing Officer's order itself recorded that the transactions had been offered to tax by Artmed Healthcare, yet proceeded on the basis that they required “further verification”.

It observed that Section 148A was intended to operate as a filtering mechanism before reassessment proceedings were initiated and that reassessment could not be commenced merely for a roving or fishing inquiry.

Since the transactions had already been recorded and disclosed in Artmed Healthcare's books and return, the Bench held that the material did not “reveal” undisclosed income meeting the prescribed threshold. It further held that the Department could have verified the explanation against Artmed Healthcare's return and financial statements instead of treating the transactions reflected against the petitioner's PAN as escaped income.

The judges ultimately held that the proceedings were unsustainable both for absence of valid “information” under Explanation 1 to Section 148 and on the independent ground of limitation under Section 149. They stated:

“...we are of the considered opinion that the impugned proceedings, both on the ground of absence of valid “information” within the meaning of Explanation 1 to Section 148 of the Act, and on the independent ground of limitation under Section 149 of the Act, are unsustainable.”

Accordingly, the High Court allowed the writ petition with no order as to costs.

For Petitioner: T. Suryanarayana, Senior Counsel, representing K. Srilatha, Advocate

For Respondent: Bokaro Sapna Reddy, Senior Standing Counsel