Bombay HC: Reassessment Scrutiny Cannot Begin Before Assessee’s Objections Are Decided

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 01.10.2026

Bombay HC: Reassessment Scrutiny Cannot Begin Before Assessee’s Objections Are Decided

In an important ruling on the procedural safeguards governing income-tax reassessment proceedings, the Bombay High Court has held that an Assessing Officer cannot proceed with reassessment by issuing a notice under Section 143(2) before disposing of the assessee’s objections to reopening through a speaking order.

The Division Bench held that issuance of a Section 143(2) notice marks the starting point of assessment proceedings once a return has been filed in response to a Section 148 notice. Consequently, in reassessment proceedings, the Assessing Officer must first decide the assessee’s objections to reopening before issuing notices under Section 143(2) or Section 142(1).

The Court accordingly set aside the Section 143(2) notice dated 2 September 2019 and the Section 142(1) notice dated 12 November 2019 issued to H. P. Diamonds India Pvt. Ltd., together with all consequential action taken pursuant to those notices.

Background: Share Premium Scrutinised in Original Assessment

• H. P. Diamonds India Pvt. Ltd. is engaged in the business of trading in diamonds. For Assessment Year 2012-13, it filed its return of income on 28 September 2012 declaring nil income while claiming a business loss of ₹15,000.
• The return was selected for scrutiny, and a notice under Section 143(2) was issued on 6 August 2013. During the scrutiny proceedings, the Assessing Officer issued several notices under Section 142(1), including specific queries relating to the large share premium received by the company.
• The company was asked to provide details including the names and PANs of subscribers, evidence concerning their identity and creditworthiness, and computation of share valuation. The petitioner submitted explanations and supporting documents. H. P. Diamonds India Pvt. Ltd.
• The original assessment was ultimately completed on 19 March 2015 under Section 143(3), determining the company’s total income at nil while disallowing the ₹15,000 business loss.

Subsequent Assessment and ₹2 Crore Addition

• For Assessment Year 2016-17, the company’s return was again taken up for limited scrutiny concerning whether funds received in the form of share premium were from disclosed sources and had been correctly offered to tax.
• That assessment resulted in an addition of ₹2 crore under Section 68 in relation to shares issued during FY 2011-12 and subsequently forfeited during FY 2015-16 for non-payment of call money. The same amount was alternatively added under Section 56(2)(ix).
• H. P. Diamonds challenged that assessment before the Commissioner of Income Tax (Appeals). H. P. Diamonds India Pvt. Ltd.

Assessment for AY 2012-13 Reopened After Four Years

• While the appeal concerning AY 2016-17 was pending, the Assessing Officer issued the impugned Section 148 notice on 31 March 2019, seeking to reopen the assessment for AY 2012-13.
• The notice was issued after four years and on the last day before completion of six years from the end of the relevant assessment year.
• In response, the petitioner filed its return on 10 April 2019 and requested the recorded reasons for reopening on 15 April 2019.
• Crucially, however, before the reasons were supplied, the Assessing Officer issued a Section 143(2) notice on 2 September 2019. The reasons for reopening were supplied only on the following day, 3 September 2019.

H. P. Diamonds Challenges Reopening Procedure

• The petitioner filed objections to reopening on 2 October 2019. Among other grounds, it argued that the reassessment represented an impermissible change of opinion, since the issue concerning share capital and share premium had already been specifically examined during the original scrutiny assessment.
• It further contended that there had been no failure on its part to fully and truly disclose material particulars and that the reopening beyond four years was therefore barred.
• The Assessing Officer rejected the objections on 31 October 2019.
• Thereafter, without waiting four weeks, another notice under Section 142(1) was issued on 12 November 2019 seeking further information.

Core Question Before the Bombay High Court

Although several grounds challenging reopening were raised, the principal issue pressed before the High Court was narrower:

Can an Assessing Officer issue a Section 143(2) notice in reassessment proceedings before disposing of the assessee’s objections to reopening?

• H. P. Diamonds relied upon the Supreme Court’s ruling in GKN Driveshafts (India) Ltd. v. Income Tax Officer & Ors., (2002) 125 Taxmann 963 (SC).
• The petitioner argued that the Supreme Court had prescribed a sequence under which the Assessing Officer must furnish the reasons for reopening, permit objections and dispose of those objections by a speaking order before proceeding with the assessment.

Revenue’s Argument

• The Revenue contended that GKN Driveshafts was being read too broadly.
• According to the Department, the Supreme Court’s direction that objections must be disposed of before “proceeding with the assessment” merely meant that a final assessment order under Section 143(3) read with Section 147 could not be passed before deciding the objections.
• The Revenue argued that this did not prevent the Assessing Officer from issuing a Section 143(2) notice in the meantime.
• The Bombay High Court rejected this interpretation.

Section 143(2) Notice Is the Starting Point of Assessment Proceedings

• The High Court examined the statutory scheme existing before the amendments that came into effect from 1 April 2021, since the impugned Section 148 notice had been issued on 31 March 2019.
• The Court explained that after a return is filed pursuant to a Section 148 notice, the return is treated, so far as may be, as a return furnished under Section 139.
• If the Assessing Officer intends to scrutinise that return, a notice under Section 143(2) must be issued. Thereafter, notices under Section 142(1) may seek further particulars, eventually leading to reassessment under Section 143(3) read with Section 147. H. P. Diamonds India Pvt. Ltd.
• Accordingly, the Court characterised the Section 143(2) notice as the starting point of the assessment proceedings.

Objections Must Be Decided Before Section 143(2) Notice

• The High Court held that once an assessee files objections challenging the jurisdictional basis of reopening, those objections must first be determined.
• If the objections are accepted, the reassessment proceedings would naturally be dropped. If they are rejected, the Assessing Officer may thereafter proceed with the assessment.
• The Court therefore held that issuing a Section 143(2) notice and proceeding with reassessment without first deciding the jurisdictional objections would effectively amount to “putting the cart before the horse.”

Supreme Court’s GKN Driveshafts Ruling Applied

• The Bombay High Court found support in the Supreme Court’s decision in GKN Driveshafts (India) Ltd.
• The Court noted that the Supreme Court had expressly required an Assessing Officer to dispose of an assessee’s objections by a speaking order before proceeding with the assessment.
• Rejecting the Revenue’s interpretation, the Bombay High Court held that GKN Driveshafts cannot be restricted to mean merely that the final assessment order cannot be passed before the objections are decided.
• Instead, the procedural protection operates before the Assessing Officer proceeds with assessment itself.

AO Cannot Issue Section 142(1) Notice Either Before Deciding Objections

• The Court went a step further and expressly held that, in reassessment proceedings, the Assessing Officer cannot issue either:
• a notice under Section 143(2), or even a notice under Section 142(1), before disposing of the assessee’s objections by passing a speaking order.
• This forms one of the most important propositions emerging from the judgment.

Four-Week Cooling-Off Period Under Asian Paints Must Be Respected

• The High Court also examined Asian Paints Ltd. v. Deputy Commissioner of Income Tax, (2009) 308 ITR 195 (Bom).
• Under Asian Paints, once the Assessing Officer rejects the assessee’s objections to reopening, the officer should not proceed further for four weeks from service of the order rejecting the objections. The purpose is to provide the assessee an opportunity to challenge that decision before the Court.
• In H. P. Diamonds’ case, objections were rejected on 31 October 2019, but the Assessing Officer issued a Section 142(1) notice on 12 November 2019—before expiry of the four-week period.
• The High Court held that this was clearly contrary to the law laid down in Asian Paints and could not be sustained.

Final Decision: Notices Quashed

The Bombay High Court ultimately:

• set aside the Section 143(2) notice dated 2 September 2019;
• set aside the Section 142(1) notice dated 12 November 2019; and
• quashed all actions taken in furtherance of those two notices.
• The writ petition was accordingly disposed of and the Rule made absolute, with no order as to costs.
• Importantly, the Court expressly stated that because this was the only issue pressed before it, the other contentions raised in the writ petition were not adjudicated and were left open to be raised in future if the occasion arose.
• Therefore, the judgment should not be read as the High Court deciding the petitioner’s separate arguments concerning change of opinion, limitation, full and true disclosure, or validity of the Section 148 notice itself.

Key Legal Takeaway

The Bombay High Court has laid down a clear procedural sequence for reassessment proceedings governed by the pre-1 April 2021 regime:

• Reasons for reopening → Assessee’s objections → Speaking order deciding objections → Four-week waiting period where objections are rejected → Further reassessment proceedings.
• An Assessing Officer cannot jump ahead in this sequence by issuing a Section 143(2) or Section 142(1) notice before deciding the assessee’s objections.
• The ruling therefore reinforces that procedural safeguards in reassessment proceedings are not merely formal requirements. The jurisdictional challenge to reopening must first be dealt with before the Assessing Officer moves into scrutiny of the reassessment return.

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Source: Bombay High Court

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