Court holds reassessment invalid due to absence of `information' of escaped income and rejects extended limitation period claim under Income Tax Act
In a significant ruling dated September 7, 2026, the Telangana High Court (Division Bench) has set aside the reassessment proceedings initiated by the Income Tax Department against M/s. Cyberabad Citizens Health Services Private Limited ("the petitioner") for the assessment year 2019-20. The court held that the initiation of reassessment under Section 148 of the Income Tax Act, 1961 was without jurisdiction due to the absence of valid "information" suggesting escaped income, and the notice was barred by limitation.
Background:
The petitioner, engaged in healthcare services, underwent a corporate restructuring through a demerger sanctioned by the National Company Law Tribunal (NCLT), Hyderabad Bench, on March 8, 2019. Under the scheme, the healthcare services business was transferred from the petitioner to Artmed Healthcare Private Limited ("Artmed Healthcare") with effect from April 1, 2017. Consequently, the income from healthcare services post-demerger was reflected in the financial statements and tax returns of Artmed Healthcare.
The petitioner filed its original and revised returns for the year ending March 31, 2019, declaring a loss and disclosing rental income from leasing healthcare infrastructure to Artmed Healthcare. Tax was deducted at source (TDS) in the petitioner's name for certain payments made by customers before the NCLT order, but Artmed Healthcare duly offered the related income to tax and claimed TDS credit.
Issue and Proceedings:
The Income Tax Department, relying on flagged transactions in its "insight portal," issued a notice under Section 148A(b) and subsequently under Section 148 of the Act, alleging that the petitioner had failed to report professional receipts, fees for services, interest income, and contract receipts aggregating to substantial sums. The Department claimed income had escaped assessment and sought reassessment.
The petitioner responded with detailed explanations and documents demonstrating that the flagged income was duly disclosed and taxed by Artmed Healthcare post-demerger. Despite this, the Assessing Officer proceeded with reassessment, citing the need for further verification due to lack of transaction details.
Contentions:
The petitioner challenged the reassessment on multiple grounds:
1. Lack of Valid "Information": The initiation of reassessment requires "information" as defined under Explanation 1 to Section 148, which must suggest income has escaped assessment. The petitioner argued that income was neither undisclosed nor escaped but was properly accounted for by Artmed Healthcare, and mere reflection of transactions under the petitioner's PAN due to transitional issues did not amount to escaped income.
2. Limitation Bar: The notice was issued beyond the ordinary three-year period prescribed under Section 149(1)(a). The Department invoked the extended limitation period under Section 149(1)(b), which requires "revelation" of undisclosed income exceeding Rs. 50 lakhs. The petitioner contended there was no such revelation since the income was already disclosed in Artmed Healthcare's books.
3. Failure to Verify Explanation: The Department failed to verify the petitioner's explanation and supporting documents against the records of Artmed Healthcare, thereby proceeding mechanically without objective satisfaction.
The Department argued that the information triggering reassessment fell within the definition under Explanation 1 to Section 148, and the extended limitation period applied as the income allegedly escaped assessment by more than Rs. 50 lakhs. It contended that the insight portal flagged transactions only against the petitioner, and the Department was unaware of their demerged status until the petitioner's response.
Judgment:
The Telangana High Court examined the scope of "information" under Explanation 1 to Section 148 and the limitation provisions of Section 149. The court emphasized:
- The "information" must point to income that has escaped assessment, not income merely attributed to the wrong PAN due to corporate restructuring.
- The petitioner's income from healthcare services was fully disclosed and taxed by Artmed Healthcare post-demerger, and the flagged transactions reflected transitional TDS entries that do not amount to undisclosed income.
- The Assessing Officer's order admitting the income was offered to tax but still seeking "further verification" lacked application of mind and was unsustainable.
- The extended limitation under Section 149(1)(b) applies only when undisclosed income exceeding Rs. 50 lakhs is "revealed" through books or documents. Here, there was no "revelation" since income was already disclosed in Artmed Healthcare's books.
- The Department failed to cross-verify the petitioner's explanations with Artmed Healthcare's records, a step easily within its means, rendering the reassessment a fishing inquiry.
Conclusion:
The court held that the reassessment proceedings initiated under Section 148 were without jurisdiction and barred by limitation. The impugned order dated April 16, 2024, and the notice under Section 148 for the assessment year 2019-20 were quashed. The writ petition was allowed, with the court cautioning that reassessment cannot be initiated on mere suspicion or unverified information, especially in cases involving corporate restructuring.
Significance:
This ruling clarifies the prerequisites for reassessment under the Income Tax Act, emphasizing that "information" must indicate genuinely escaped income and that limitation provisions protect taxpayers from arbitrary or prolonged tax proceedings. It also highlights the necessity for tax authorities to verify explanations and documents before initiating reassessment, especially in complex corporate restructuring cases.
Bottom Line:
Income Tax Act - Proceedings under Sections 148 and 148A - Initiation of reassessment proceedings requires valid "information" as defined under Explanation 1 to Section 148 of the Act - Extended limitation period under Section 149(1)(b) requires "revelation" of undisclosed income exceeding Rs.50,00,000/-.
Statutory provision(s): Income Tax Act, 1961 Sections 148, 148A, 149(1)(a), 149(1)(b)
