Invalidation of Reassessment on Demerged Income: Telangana High Court Quashes Notices in Cyberabad Citizens Health Services Case
The Telangana High Court recently delivered a crucial judgment addressing the validity of reassessment proceedings initiated solely based on data mismatches on the Income Tax Department's Insight Portal. In the landmark case of Cyberabad Citizens Health Services Private Limited Vs DCIT, the Court evaluated whether transitional tax deduction anomalies arising from a corporate demerger could constitute valid "information" to trigger reassessment under Section 148 of the Income Tax Act 1961.
The judicial decision underscores that the statutory mechanism introduced via the Finance Act 2021—specifically Section 148A—serves as a mandatory filtering process. Assessing Officers cannot bypass this objective evaluation by invoking a need for "further verification." Furthermore, the Court provided significant clarity on the extended limitation period under Section 149(1)(b), interpreting the term "reveal" in the context of undisclosed income.
Factual Matrix of the Dispute
The assessee, Cyberabad Citizens Health Services Private Limited, was incorporated in 2008 and operated a multi-speciality hospital. To restructure its operations, the assessee's management resolved to demerge its healthcare services business into another entity, Artmed Healthcare Private Limited, which was incorporated in 2016.
A formal scheme of demerger was presented before the National Company Law Tribunal, Hyderabad Bench. The NCLT sanctioned this scheme via an order dated 08.03.2019. According to the approved scheme, the healthcare operations were transferred to and vested in Artmed Healthcare Private Limited with retrospective effect from the appointed date of 01.04.2017. Post-demerger, the assessee retained ownership of the hospital infrastructure and leased it to Artmed Healthcare Private Limited, earning rental income which was subsequently offered to tax.
Following the NCLT directive, both corporate entities revised their financial statements for the year ending 31.03.2018. Consequently, the entire revenue generated from the healthcare business post the appointed date was absorbed and reflected in the financial records of Artmed Healthcare Private Limited.
For the subsequent financial year ending 31.03.2019 (relevant to AY 2019-20), the assessee submitted its original return of income on 25.10.2019, followed by a revised return on 14.11.2019, declaring a business loss amounting to Rs.1,13,35,168/-. This return was processed by the tax department under Section 143(1) of the Income Tax Act 1961.