DCIT Vs Songwon Specialty Chemicals India Pvt Ltd (Supreme Court of India)
The Supreme Court dismissed the Special Leave Petition filed by the Revenue and upheld the judgment of the Gujarat High Court. The Supreme Court found no ground to reopen the assessment and agreed that the High Court rightly quashed the show-cause notices issued under Sections 148A(b), 148A(d), and 148 of the Income Tax Act. With this, the High Court’s ruling attained finality.
Read HC Judgment: Income Tax Reassessment Notice Invalid as AO Relied Only on Faulty Audit Objection
The Gujarat High Court considered two connected writ petitions challenging reassessment proceedings initiated for Assessment Years 2017-18 and 2018-19. The dispute centered on whether reassessment could be opened solely based on an audit objection concerning depreciation on goodwill and certain intangible assets created during the financial year 2014-15 when the petitioner acquired a business on a going concern basis.
The Assessing Officer had issued notices under Section 148A(b) on the basis of an audit objection stating that goodwill valued at ₹67.50 crore was created on amalgamation and that depreciation of ₹6.17 crore allowed in earlier years was incorrect. The audit objection alleged that goodwill created was merely a book entry not permissible under Section 43(1) and Section 43(6), and thus depreciation was wrongly allowed.
In response, the assessee filed a detailed reply, pointing out factual inaccuracies in the audit note. It clarified that depreciation on goodwill had been consistently allowed from Assessment Year 2015-16 onward during regular scrutiny assessments, including for AYs 2015-16 and 2016-17. It explained that the intangible assets were created upon acquisition of Sequent Scientific Limited’s specialty chemicals business, not due to amalgamation, as incorrectly stated in the audit note. The assessee also provided the breakdown of intangible assets, showing that only ₹18.02 crore was goodwill and the rest comprised customer relationships and product technology.
The assessee contended that since depreciation had already been examined and accepted in earlier assessments on identical facts, reopening for subsequent years was impermissible. It argued that reassessment based merely on audit objections, particularly those containing factual mistakes, was invalid.
Despite this, the Assessing Officer passed orders under Section 148A(d), reiterating the substance of the audit objection. The officer maintained that the goodwill was created only through a book entry and depreciation should not have been allowed. The Assessing Officer concluded that Explanation 7 to Section 43(1) and Explanation 2 to Section 43(6) applied, as intangible assets were not in the books of the acquired company before acquisition. The officer rejected the assessee’s request for personal hearing and held that opportunity under Section 148A(b) was sufficient.
The High Court noted that the Assessing Officer failed to consider the assessee’s reply in a meaningful manner. It held that there was a complete non-application of mind, as the officer merely reproduced the reply without dealing with any of the points raised. The Court emphasized that the department had already accepted the assessee’s depreciation claim in earlier years after scrutiny, and therefore reassessment for subsequent years on identical facts was unjustified.
The High Court reiterated that though audit objections may now constitute “information” for reopening under the amended Section 148, this does not permit blind reliance on an audit note without independent verification. The Assessing Officer must apply his mind to the factual record. Merely reproducing an audit objection and ignoring the assessee’s explanation amounts to an invalid exercise of jurisdiction.
The Court concluded that reassessment proceedings could not be initiated when the factual basis of the audit objection was incorrect and the department had accepted depreciation in earlier years. It held that the notice under Section 148A(b), the order under Section 148A(d), and the consequent Section 148 notice suffered from non-application of mind and were contrary to record. Accordingly, the High Court quashed all three actions.
The Supreme Court, after condoning delay, endorsed the High Court’s view that the case did not warrant reopening of assessment. It held that the High Court was correct in quashing the show-cause notices since the facts and circumstances did not justify reopening. The Special Leave Petition was dismissed, thereby affirming the High Court’s reasoning that reassessment based merely on flawed audit objections and without independent evaluation is impermissible.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
