Gujarat High Court quashes Section 148 reassessment based on unamended partnership deed and CAG audit note

Background and parties

The Gujarat High Court, in Adani Exports Vs ITO (Gujarat High Court) (R/Special Civil Application No. 3597 of 2016, order dated 05/08/2026), examined the legality of reassessment proceedings initiated under Section 148 of the Income Tax Act 1961 for Assessment Year (AY) 2010-11.

The assessee, Adani Exports, is a partnership firm engaged in manufacturing and exporting gold jewellery from a Special Economic Zone (SEZ) unit at Sachin, Surat. Being an SEZ unit, its profits from export of gold jewellery were eligible for deduction under Section 10AA.

The writ petition challenged:

• The notice dated 27.03.2015 issued under Section 148, and
• The consequential order dated 01.02.2016 rejecting the assessee’s objections to reassessment.

Original assessment proceedings for AY 2010-11

Filing of return and claim under Section 10AA

• The assessee filed its return of income for AY 2010-11 on 29.09.2010 under Section 139(1).
• It claimed a deduction of Rs.149 crores under Section 10AA.
• The return was accompanied by:
  • Audited financial statements,
  • Tax audit report in Form No.3CB read with Rule 6G(1)(b) of the Income Tax Rules, 1962, and
  • Other prescribed forms and annexures.

Scrutiny assessment under Section 143(3)

The case was selected for scrutiny. The Assessing Officer (AO) issued:

• Notice under Section 143(2), and
• Detailed questionnaires and notices under Section 142(1).

In response, the assessee submitted:

• Replies dated 24.11.2011 and 02.12.2011,
• Ledger accounts of partners and details of profit credited to their accounts (pursuant to notice dated 17.11.2011),
• Stock details (in response to notice dated 28.11.2011),
• Purchase invoices,
• Full particulars of gold purchased from Adani Enterprises Limited (AEL), and
• Explanation of the manufacturing process and export of medallions, coins, bangles, chains and other jewellery, including labour and making charges.

After considering:

• The assessee’s written submissions,
• The tax audit report,
• Audited accounts, and
• Other relevant material relating to its SEZ manufacturing and export activities,

the AO completed the assessment under Section 143(3) on 23.12.2011, allowing the Section 10AA claim as supported by Form No.56F.

Events leading to reassessment

CAG audit objection and departmental correspondence

Subsequently, a Revenue Audit (CAG) objection was raised concerning:

1. The absence of interest payment on partners’ capital and its effect on profits and the Section 10AA deduction; and
2. The pricing of gold purchased from AEL vis-à-vis alleged market rates.

Before issuing the reassessment notice, the AO:

• Sought clarifications from the assessee by letters dated 29.05.2013 and 05.08.2013,
• Received a detailed reply dated 06.09.2013, and
• Engaged in correspondence with the audit party.

On the record, there were instances where the AO appeared to dispute the validity of the audit objection, particularly regarding the alleged difference in gold purchase price and the notional nature of the so‑called differential.

Notice under Section 148 and reasons for reopening

Despite the earlier scrutiny and correspondence, the AO issued a notice under Section 148 on 27.03.2015 to reopen AY 2010-11, citing two grounds:

1. Non-payment of interest on partners’ capital

   • The AO proceeded on the basis of the original partnership deed dated 08.05.2006, which contained a clause for payment of interest on the capital/current accounts of partners at 9% or at the rate prescribed under Section 40(b)(iv).
   • According to the AO, failure to charge such interest increased the firm’s profits and resulted in a higher deduction under Section 10AA.
   • On this premise, the AO considered invoking Section 80-IA(10) read with Section 10AA(9) to adjust the profits.

2. Gold purchase from sister concern at allegedly lower price

   • The assessee purchased gold from its group entity and partner, Adani Enterprises Limited (AEL), in which one partner had a 99% profit-sharing ratio.
   • The AO alleged that the purchase price was lower than “market rate” on the corresponding dates, thereby giving rise to profits above ordinary commercial levels and increasing the Section 10AA deduction.
   • This was also projected as a case attracting Section 80-IA(10) read with Section 10AA(9).

The assessee filed detailed objections dated 14.08.2015 challenging the reopening. However, the AO rejected these by order dated 01.02.2016, leading to the present writ petition.

Assessee’s contentions before the High Court

Reopening founded solely on CAG audit objection

Counsel for the assessee argued that: