Bombay High Court sets aside reassessment in Feng Shui Realtors Pvt. Ltd. Vs ITO for AY 2015-16

1. Background of the dispute

In Feng Shui Realtors Pvt. Ltd. Vs ITO, the Bombay High Court examined the validity of reassessment proceedings initiated for Assessment Year (AY) 2015-16 under Section 147 and Section 148 of the Income Tax Act 1961.

The assessee, a company engaged in real estate and steel trading, had:

  • Filed its original return of income on 30/09/2015, declaring a total income of Rs.12,74,850/-.
  • Faced a scrutiny assessment initiated under Section 143(2).
  • Responded to multiple notices under Section 143(1) and furnished all required details.
  • Been subjected to a regular assessment under Section 143(3) culminating in an order dated 29/12/2017.

Despite this completed scrutiny assessment, the Assessing Officer (AO) subsequently issued a notice dated 31/03/2021 under Section 148, alleging escapement of income for AY 2015-16. This reassessment notice, the reasons recorded, the approval under Section 151, the order disposing of objections, and the final reassessment order were all challenged before the High Court.

2. Procedural history and reliefs sought

After receiving the notice under Section 148, the assessee:

  • Filed a fresh return of income in response.
  • Sought and obtained a copy of the reasons recorded for reopening, along with the approval under Section 151.
  • Filed detailed objections through its Chartered Accountant’s letter dated 08/02/2022.
  • Had those objections rejected by an order dated 24/02/2022.

Thereafter, a reassessment order dated 23/03/2022 was passed, along with a consequential demand notice and penalty show-cause notice dated the same day.

The writ petition challenged:

  • The Section 148 notice dated 31/03/2021.
  • The order disposing of objections dated 24/02/2022.
  • The reassessment order dated 23/03/2022.
  • The consequential demand notice and penalty show-cause notice dated 23/03/2022.

The assessee invoked the High Court’s writ jurisdiction under Article 226 of the Constitution of India, primarily on the ground of complete non-application of mind by the AO, the Range Head and the Principal Commissioner of Income Tax (PCIT) while initiating and approving the reassessment.

3. Revenue’s preliminary objection: alternative remedy

On behalf of the Revenue, a preliminary objection was raised that, since a reassessment order had already been passed on 23/03/2022, the assessee ought to pursue the statutory appellate remedy instead of invoking writ jurisdiction.

The Court declined to accept this objection for the following reasons:

  • The matter represented, in the Court’s view, a gross instance of total non-application of mind by the income-tax authorities.
  • Interim relief had already been granted earlier, and multiple opportunities were given to the Revenue to file a reply, including:
    • 25/07/2022 – time granted; ad-interim relief in terms of prayer (d).
    • 05/09/2022 – further eight weeks granted; relief continued till 18/11/2022.
    • 14/11/2022 – additional six weeks granted; relief continued.
  • Even by the date of final hearing, no reply had been filed by the Revenue.

In these circumstances, the Court held that it was appropriate to exercise its jurisdiction under Article 226, notwithstanding the existence of an alternative remedy.

4. Reasons recorded for reopening: key contents and defects

The Court reproduced in full the reasons recorded by the AO for issuing the notice under Section 148. The critical elements of those reasons were:

  1. Assessee particulars – The assessee was identified as M/s. Feng Shui Realtors Pvt. Ltd., PAN AACCF0408Q, with the correct address and income declared at Rs.12,74,850/- for AY 2015-16.

  2. Information from DG GST investigation – The AO relied on information generated through Insight based on an investigation by DG GST, Mumbai into:

    • M/s. Meher [GSTIN 27AAICM6297J2ZR], and
    • M/s. Nyles Sales Agencies Pvt. Ltd. [GSTIN 27AAECN7308P2ZW].

    The reasons summarized that: