Reassessment Cannot Be Used to Reopen Settled Issues Without New Material – Bombay High Court Quashes ₹542 Crore Tax Demand on Tata Communications

Once an Issue is Examined and Pending in Appeal, It Cannot Be Reopened – In a scathing indictment of arbitrary reassessment, the Bombay High Court has quashed a ₹542 crore tax demand against Tata Communications Limited, holding that the Income Tax Department cannot reopen an assessment without fresh material when the issue is already pending in appeal. The court ruled that reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, were without jurisdiction and amounted to a mere change of opinion, which is impermissible under law.

Delivering the judgment in Writ Petition No. 2486 of 2022, a division bench of Justice M.S. Sonak and Justice Jitendra Jain observed, "When an issue has already been examined in assessment and is the subject of an appeal, reopening the case without new material is legally unsustainable. The reassessment powers under Section 147 cannot be used as a backdoor method to review settled matters."

"Reopening an Assessment Without Fresh Evidence is a Clear Abuse of Power" – Court Rejects Tax Department's Justification

The case arose from a corporate guarantee fee dispute for the assessment year 2014-15. Tata Communications had initially declared ₹152.66 crore as guarantee fees charged to its subsidiaries but later revised the figure to ₹34.07 crore, reducing the amount by ₹118.59 crore in its revised return of income.

The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) had already examined the issue in 2018 and made an addition of ₹120.80 crore to the company's income. The company challenged the addition before the Income Tax Appellate Tribunal (ITAT), where the matter remains pending.

Despite this, the Income Tax Department issued a reassessment notice on March 30, 2021, claiming that ₹118.59 crore had escaped assessment. The company challenged the reassessment, arguing that:

• The original assessment had already scrutinized the guarantee fee, and the reassessment amounted to a review of the same findings.

• The issue was pending before the ITAT, barring the tax department from reassessing it.

• There was no fresh tangible material justifying the reopening of the case after four years, as required under Section 147 of the Income Tax Act.

Rejecting the reassessment, the High Court stated, "An assessment can only be reopened if there is a failure to disclose material facts. When the same issue has been examined and subjected to additions, it is illogical to claim that income has escaped assessment. The reassessment proceedings are therefore illegal and must be quashed."

"Pending Appeals Cannot Be Undermined by Reassessment" – Court Calls Out Tax Department for Jurisdictional Overreach

Taking a strong stance against the tax department's attempt to bypass the appellate process, the High Court ruled that reassessment violated the third proviso to Section 147, which states that if an issue is pending before an appellate authority, it cannot be reopened for reassessment.

Justice Jitendra Jain, writing for the bench, observed, "If a matter is pending in appeal, the tax authorities must wait for the outcome. Using reassessment as a tool to preempt an appellate decision is nothing but abuse of power."

The court emphasized that once an issue is pending before the ITAT, the assessing officer has no jurisdiction to reassess the same matter. Calling out the tax department's attempt to reopen a settled issue under the pretext of reassessment, the court declared, "Reopening an assessment on an issue that is already before an appellate tribunal is a clear case of jurisdictional overreach and cannot be sustained."

"Reassessment Powers Are Not Unlimited – Tax Authorities Cannot Reopen Cases Without Justifiable Grounds"

The High Court further clarified that reassessment powers under Section 148 are not meant to be an unchecked tool for the tax department to conduct repeated investigations on the same issue. The court stated, "The purpose of reassessment is to bring to tax any genuinely escaped income. It cannot be used as a tool for endless litigation when there is no new material."

Noting that the tax department failed to produce any fresh tangible material, the court held that the reassessment was nothing more than a second attempt at taxation on the same grounds.

Rejecting the argument that Tata Communications had failed to disclose material facts, the court observed, "There is no allegation in the reassessment notice that the petitioner concealed any income. If all material facts were before the department, reassessment is nothing but a change of opinion, which is not permitted in law."

"Reassessment Proceedings Are Quashed – ₹542 Crore Tax Demand Set Aside"

The High Court, quashing both the reassessment notice and the resulting ₹542 crore tax demand, directed that the proceedings be treated as null and void. The court ruled, "The reassessment proceedings suffer from multiple legal defects. They are based on an issue already scrutinized, pending before an appellate tribunal, and lack fresh tangible material. Consequently, they are without jurisdiction and must be set aside."

Tata Communications was also directed to withdraw its pending appeal before the Commissioner of Income Tax (Appeals) within two weeks, given that the reassessment had been invalidated.

In a strong message to the tax department, the court concluded, "Reassessment cannot be a substitute for an appeal. If a matter is before an appellate authority, the tax department must respect due process and await the outcome instead of resorting to backdoor tactics."

The Bombay High Court’s decision reiterates that tax authorities cannot arbitrarily reopen assessments without fresh evidence. The ruling serves as a major safeguard against misuse of reassessment powers and protects taxpayers from repetitive scrutiny on the same issue.

By clarifying that reassessment cannot be used as a tool to bypass the appellate process, the court has reinforced the principle that tax litigation must follow a fair and transparent process, with checks on the discretionary powers of assessing officers.

Date of decision: 07/03/2025