Direct Tax Quarterly Milestones (April-June 2025)

Partners: Himanshu Sinha and Aditi Goyal, Senior Associate: Aishwarya Palan, Associate: Paras Arora

Key Development

High Court of Delhi quashes reassessment initiated solely on an audit objection after a completed scrutiny

The High Court of Delhi has held that initiating reassessment proceedings under the Income Tax Act, 1961 (ITA) based on an audit objection concerning an issue previously examined and concluded in the original assessment amounts to an impermissible review. The proceedings were also barred by limitation.

Springer Healthcare Limited (Petitioner), a UK tax resident, received amounts from its associated enterprise in India on account of finance, sales, and corporate service charges during financial year 2016-17 (assessment year 2017-18). The Petitioner contended that these receipts were not chargeable to tax in India under the India-UK Double Tax Avoidance Agreement (DTAA), as it did not have a permanent establishment in India, and the receipts did not constitute royalty or ‘fees for technical services‘ (FTS) under the DTAA.

The Petitioner’s return was selected for scrutiny. During the assessment proceedings, the Assessing Officer (AO) explicitly examined the taxability of the receipts from finance, sales, and corporate service charges, issuing questionnaires including a show cause notice as to why the receipts should not be taxed as FTS. The Petitioner provided detailed responses explaining the non-taxability of such receipts under the ITA and the DTAA. The original assessment was concluded through an assessment order accepting the Petitioner’s returned income.

Subsequently, the AO initiated reassessment proceedings for AY 2017-18 based on an audit objection suggesting that the receipts should be considered as FTS and taxed accordingly. The Petitioner challenged the initiation of reassessment proceedings before the High Court of Delhi.

The Petitioner argued that initiating reassessment for the taxability of the service charges amounted to a review of the original assessment order, which was impermissible. The issue had been thoroughly examined during the original scrutiny proceedings, and the AO had formed an opinion by accepting the returned income. Therefore, reopening the assessment on this ground constituted a ‘change of opinion‘, which is not a valid basis for reassessment.

The Petitioner further argued that the notice initiating reassessment proceedings was issued beyond the prescribed limitation period. Under the pre-2021 reassessment regime, the limitation period for issuing a notice initiating reassessment was six years from the end of the relevant AY (where income chargeable to tax which had escaped assessment amounted to INR 100,000 or more). However, this was curtailed to four years where an assessment had been made for the relevant AY and there was no failure by the taxpayer to disclose fully and truly all material facts necessary for assessment. The Petitioner contended that the AO had not alleged any failure to disclose material facts in the income tax return. Accordingly, the four-year limitation period from the end of the AY would apply, which expired on 31 March 2022. Therefore, the notice initiating reassessment proceedings could not have been issued after 31 March 2022.

The Court allowed the writ filed by the Petitioner, delivering its decision on the following key legal aspects:

• Change of opinion: The Court emphasised that the power conferred by the ITA is to reassess income that has escaped assessment, not to review a concluded assessment. Citing various Supreme Court decisions including Commissioner of Income Tax, Delhi v Kelvinator of India Limited and Commissioner of Income Tax v Techspan India (P) Ltd., the Court reiterated that reassessment cannot be initiated merely based on a change of opinion by the AO on facts and circumstances already within the AO’s knowledge and considered during the original assessment proceedings. Since the taxability of the receipts was specifically examined during the original scrutiny, revisiting this issue constituted a change of opinion.
• Audit objections as ‘information’: The Court addressed the tax department’s reliance on audit objections constituting ‘information’ forming the basis for initiating reassessment proceedings. While an audit objection is deemed information suggesting income that has escaped assessment, this does not create a mandatory obligation for the AO to issue a reassessment notice if the issue has already been examined and concluded in the assessment. The reassessment procedure prescribed under the ITA requires the AO to provide the taxpayer with the information and consider the taxpayer’s response before deciding whether it is a fit case for issuing a reassessment notice. If the AO is satisfied with the taxpayer’s response, the AO must hold that it is not a fit case for issuing a reassessment notice. Therefore, an audit objection cannot override the principle against reopening based on a change of opinion on an issue previously assessed.
• Limitation period for initiating reassessment: The Court held that the reassessment was barred by limitation. There was no allegation of failure by the Petitioner to disclose material facts in the return. Thus, the six-year limitation period in the pre-2021 reassessment regime was not applicable. The relevant limitation period was four years from the end of AY 2017-18. As the reassessment notice was issued beyond this period, it was time-barred.

This decision is expected to offer substantial relief to taxpayers who have received reassessment notices based solely on audit objections, as it reiterates the fundamental principle that reassessment is for genuine escapement of income based on new information or non-disclosure, not a tool for review of a concluded assessment. This is also a welcome decision for cases where taxpayers have made full and true disclosure, as it affirms that for periods prior to 1 April 2021, reassessments initiated beyond the four-year limitation period remain invalid.

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