Court says reassessment was based on a reading of audit objection and amounted to a mere change of opinion after scrutiny assessment had already accepted the company’s return.
The Gujarat High Court has quashed a reassessment notice and the corresponding order issued to Lodestone Software Services Private Limited for Assessment Year 2022-23, holding that the Income Tax Department acted on a mistaken understanding of the audit objection and without proper application of mind.
A Division Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati ruled that the reopening of assessment under Sections 148A and 148 of the Income Tax Act, 1961 was unsustainable because the company had never claimed the alleged TDS amount as a deduction in its income tax return. The Court found that the reassessment was initiated on the incorrect premise that Lodestone had claimed Rs. 17,54,62,925 as deduction under Section 43B, whereas the return actually reflected only Rs. 51,94,482 towards leave encashment.
The petitioner had filed its return of income on 31 December 2022 declaring total income of Rs. 32,13,74,078. The case was selected for scrutiny, and during the original assessment proceedings the Assessing Officer had specifically sought details regarding TDS, expenses, statutory liabilities and disallowances under Section 43B. Lodestone furnished the required details, including a reply dated 24 January 2024 explaining the TDS position. The assessment was thereafter completed under Section 143(3) on 4 March 2024, accepting the returned income.
However, later an audit objection prompted reopening proceedings. The department alleged that the company had wrongly claimed TDS as a deductible expense. In response, Lodestone argued that the allegation was factually false and that all relevant material had already been examined during the original scrutiny assessment. The company contended that the reopening was nothing but a change of opinion.
The High Court agreed. It observed that the audit objection and the reassessment notice were based on a misreading of the records. The Court noted that the salary expenses and employee benefit costs were shown under separate heads in the financial statements, and the TDS figures mentioned in the proceedings merely reflected tax deducted on various payments, not a deduction claimed by the assessee. Since no fresh or tangible material had emerged after the original assessment, the Court held that the reopening could not be sustained.
Finding that the impugned notice and order suffered from non-application of mind, the Court quashed both and allowed the writ petition.
Bottom Line :
Income Tax Act - Reopening of assessment under Sections 148A and 148 - Where during original scrutiny assessment all details regarding TDS, expenses and deductions were specifically called for and furnished, and Assessing Officer accepted return under Section 143(3), subsequent reopening based on audit objection alleging that TDS was wrongly claimed as deduction, when in fact no such deduction was claimed in ITR, is vitiated by non-application of mind and amounts to mere change of opinion - Reopening liable to be quashed.
Statutory provision(s): Sections 43B, 142(1), 143(2), 143(3), 147, 148A, 148 of the Income Tax Act, 1961
