Reassessment Proceedings Invalidated for Breach of Mandatory GKN Driveshafts Protocol – ITAT Mumbai

Overview of the Case

In Combine Diamonds Private Limited Vs ACIT (ITAT Mumbai), the Income Tax Appellate Tribunal delivered a significant ruling concerning the procedural sanctity of reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961. The Tribunal quashed the reassessment order entirely, holding that the Assessing Officer's failure to comply with the mandatory sequence of steps prescribed by the Hon'ble Supreme Court in GKN Driveshafts (Ind) Ltd Vs. ITO, [2003] 225 ITR 19 (SC) rendered the entire proceedings void ab initio.

Background and Facts of the Case

Combine Diamonds Private Limited had originally filed its return of income for Assessment Year 2009-10 on 29.09.2009, declaring a total income of Rs. 68,42,900/-. This return was subjected to scrutiny assessment under Section 143(3) of the Income Tax Act, 1961, and a regular assessment order was passed on 29.12.2011.

Trigger for Reopening

The case did not rest there. The Investigation Wing of the Income Tax Department, Mumbai, subsequently forwarded information to the Assessing Officer pertaining to alleged hawala transactions. According to this intelligence, certain dealers had issued tax invoices to various parties — including the assessee — without any actual delivery of goods or materials. The statements of these hawala dealers, recorded by the Investigation Wing, admitted to this modus operandi.

Based on this information, the Assessing Officer issued a notice dated 23.03.2016 under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for AY 2009-10. The alleged hawala purchases identified by the Investigation Wing were attributed to the following parties:

The Assessing Officer formed a belief that the assessee had claimed inflated purchase expenses against these hawala dealers, resulting in income escaping assessment, and that the assessee had failed to fully and truly disclose all material facts during the original scrutiny under Section 143(3).

Chronology of Procedural Events

Understanding the procedural sequence is central to appreciating why the ITAT ruled in favour of the assessee. The timeline of events unfolded as follows:

1. 29.09.2009 – Assessee filed its return of income for AY 2009-10
2. 29.12.2011 – Assessment completed under Section 143(3) of the Income Tax Act, 1961
3. 23.03.2016 – Notice issued under Section 148 for reopening the assessment
4. 04.04.2016 – Assessee responded, requesting that the original return be treated as the return in response to the Section 148 notice; also requested reasons for reopening
5. 21.05.2016 – Assessee repeated its request for reasons recorded
6. 01.07.2016 – Instead of supplying reasons, the AO issued a notice under Section 142(1) of the Income Tax Act, 1961
7. 14.07.2016 – Assessee responded to the Section 142(1) notice
8. 15.07.2016 – On this single date, the AO simultaneously: (a) communicated the reasons recorded for reopening; and (b) issued fresh statutory notices under both Section 142(1) and Section 143(2) of the Income Tax Act, 1961 — without affording any time to the assessee to file objections
9. 06.09.2016 – Assessee filed objections to the reopening
10. 09.09.2016 – AO disposed of objections
11. December 2016 – Assessment order passed under Section 143(3) read with Section 147, making an addition of Rs. 29,35,440/-

Critical Observation: The AO issued statutory notices on the very same day the reasons were communicated — giving the assessee zero time to file objections against the reopening before the assessment machinery was set in motion.