Assessment Proceedings on Sanjay Nathalal Shah's Case Time-Barred as Department Delayed Action Despite Receiving Digitally Signed Court Order; Returned Income Deemed Accepted
In a significant judgment delivered on October 5, 2026, the Bombay High Court (Division Bench comprising Justices B.P. Colabawalla and Farhan P. Dubash) ruled in favor of Sanjay Nathalal Shah, quashing a special audit order and its consequential report issued by the Income Tax Department. The Court held that the department's delay in acting on a digitally signed copy of a High Court order, which set aside an earlier special audit direction, led to the assessment proceedings becoming time-barred under Section 153 of the Income Tax Act, 1961.
The petitioner, Sanjay Nathalal Shah, had challenged the validity of a second special audit order dated March 25, 2026, and the ensuing special audit report dated July 21, 2026. The petitioner contended that since the limitation period for completing the assessment had expired, no valid assessment order could be passed, and the returned income should be deemed accepted.
The Court examined the timeline of events closely. The original assessment was to be completed by March 31, 2025. The first special audit was directed on February 10, 2025, leaving only 49 days before the limitation period expired. This first special audit order was quashed by the High Court on January 8, 2026. Importantly, the Court emphasized that under Clause (iv) of Explanation 1 to Section 153, the limitation period excludes the time from the direction of the special audit until the date the order setting aside such direction is received by the Principal Commissioner of Income Tax. Crucially, the statute mentions receipt of a "copy of the order" and not specifically a "certified copy."
Relying on this statutory wording and the High Court's earlier order, which explicitly stated that all concerned must act on a digitally signed copy when produced by fax or email, the Court found that the Income Tax Department received the digitally signed copy by January 10, 2026, through WhatsApp, and by January 12, 2026, by email. The department's claim that the limitation should be computed only from receipt of a certified copy (which was submitted on February 4, 2026) was rejected.
The Court also referred to a 2022 Central Board of Direct Taxes (CBDT) Instruction mandating the formation of cells within the Income Tax Department to immediately track and disseminate High Court orders electronically, underscoring the obligation of the department to promptly act on digitally signed copies without awaiting certified copies.
Given that the limitation period expired on or before March 13, 2026, the subsequent special audit order dated March 25, 2026, and the special audit report were held to be without jurisdiction and invalid. Consequently, relying on the Supreme Court precedent in CIT v. Shelly Products (2003), the Court ruled that since no valid assessment order was passed within the limitation period, the returned income must be deemed accepted.
The judgment reinforces the legal recognition of digitally signed court orders as valid for procedural purposes within tax assessments, highlights the strict adherence to limitation periods in income tax proceedings, and places responsibility on the department to act expeditiously upon receipt of electronic orders.
Bottom Line:
Income Tax - Limitation for completion of assessment under Section 153 of Income-tax Act - For exclusion of period under Explanation 1(iv), receipt of digitally signed copy of order setting aside special audit is sufficient - Receipt of certified copy is not necessary - If assessment is not completed within limitation, subsequent order directing special audit is without jurisdiction and returned income is deemed to be accepted.
Statutory provision(s):
Income Tax Act, 1961 Sections 142(2A), 153 Explanation 1(iv); Constitution of India Article 226
