Audit Objection Must Specifically Assert Escapement of Income to Sustain Reassessment: Madras High Court Restricts Income Tax Reopening to One Head

“Reopening Under New Income Tax Regime Cannot Be Blanket Fishing Expedition”, Division Bench of the Madras High Court comprising Justices G.R. Swaminathan and K. Rajasekar delivered a significant judgment. The Court addressed crucial questions concerning the validity of reassessment proceedings under the amended Income Tax Act, 1961, and held that reassessment based on ambiguous or incomplete audit objections cannot be sustained under law.

The Court emphatically held that “Audit objection must definitely opine that the assessment was not made as per the statutory provisions. Only then it will qualify to be considered as ‘information’ under Section 148A of the Income Tax Act, 1961.” Consequently, the High Court struck down the reassessment notice except for one narrow head pertaining to disallowance of processing and professional charges.

The case revolved around the Income Tax Department’s move to reopen the assessment for the assessment year 2017-18, under the newly amended Sections 147, 148, and 148A of the Act, alleging escapement of income of over ₹329 crores. The assessee, Mahogany Logistics Services Pvt. Ltd., successfully challenged the reopening before a Single Judge, who quashed the notice on the ground of absence of fresh tangible material and invoked the ‘change of opinion’ doctrine.

Upon the Revenue’s appeal, the Division Bench critically examined the post-amendment legal regime and clarified that the principles of ‘change of opinion’ established in Commissioner of Income Tax v. Kelvinator of India Ltd. do not govern the reassessment framework after the Finance Act, 2021. The Court declared, “It may not be safe to apply the tests evolved under the old regime. The ground beneath the judicial feet has shifted.”

Relying heavily on the Supreme Court’s authoritative decisions in Union of India v. Rajeev Bansal (2024) and Union of India v. Ashish Agarwal (2023), the Bench observed that the substituted sections post 01.04.2021 operate on the touchstone of ‘information suggesting escapement of income’ rather than ‘reason to believe’. The Court explained, “Judicial review at the notice stage is restricted to verifying the existence and sufficiency of ‘information’ as defined under Section 148 of the Act.”

The Court upheld the application of the extended six-year limitation period under Section 149(1)(b), citing the magnitude of the alleged escapement of income, and dismissed the assessee’s plea that the reassessment was time-barred.

However, in a stern reminder to the Income Tax Department, the High Court scrutinised the audit objection which formed the foundation of the reassessment proceedings. It found that the objection conclusively identified potential disallowance only in relation to processing charges of ₹6.98 crore and professional charges of ₹35.73 lakh. Beyond this, the audit note merely recommended further inquiry into the genuineness of borrowings and investments without asserting escapement.

The Court held in clear terms, “Unless the audit objection contains a clear and definite assertion that the original assessment was not done as per the Act, it cannot be treated as valid ‘information’. Fishing inquiries under the guise of reassessment proceedings are not permitted.”

Disapproving the Income Tax Officer’s attempt to rove into other issues, the Bench firmly ruled that, “Reassessment can only be confined to the issue of disallowance of processing and professional charges. The reopening on other heads is legally unsustainable.”

Further addressing the Department’s argument about the premature invocation of writ jurisdiction, the High Court reiterated, “Where jurisdictional preconditions are absent, particularly on limitation and existence of valid information, the writ court is empowered to quash such notices even at the inception stage.”

The Court also noted that the notice under Section 148A(b) did not furnish the audit objection to the assessee, breaching the statutory mandate of fair opportunity. It observed, “The initial notice must be accompanied by a copy of the audit objection or relevant extracts thereof. The absence of such disclosure is fatal.”

While quashing the reassessment notice almost entirely, the Court gave limited relief to the Department by permitting a fresh notice solely on the issue of processing and professional charges within four weeks. “If the Assessing Officer issues a fresh notice within four weeks, it will be deemed to be within limitation but must be restricted to the head of processing and professional charges,” the Court ordered.

Summarising the outcome, the Division Bench concluded, “The order of the Single Judge is modified. The reassessment proceedings are partly quashed and remitted back for fresh proceedings confined to the limited issue identified. The fishing expedition initiated by the Department is impermissible.”

This landmark judgment redefines the contours of reassessment under the amended Income Tax law, asserting a strict jurisdictional threshold for initiating reopening and reaffirming the judiciary’s role in checking arbitrary exercise of power.

Date of Decision: 9th July 2025