Facts of the Case

The petitioner, Kurz India Private Limited, filed a writ petition challenging the notice dated 28 March 2021 issued under Section 148 of the Income Tax Act, 1961 for Assessment Year 2015–16.

The reopening of assessment was initiated on the allegation that the petitioner had claimed deduction of ₹1,54,05,798/- towards contingent liability. However, the petitioner contended that no such deduction was ever claimed and that the amount was only disclosed as a contingent liability in the audited financial statements in compliance with Accounting Standard AS-29.

Further, the petitioner argued that the original assessment had already been completed under Section 143(3) after examining the same material.

Issues Involved

  1. Whether reassessment proceedings under Section 148 are valid when based on incorrect factual assumptions.
  2. Whether reassessment can be initiated without any fresh tangible material.
  3. Whether reassessment based on review or re-appreciation of existing material is permissible.
  4. Whether non-consideration of objections amounts to non-application of mind.

Petitioner’s Arguments

  • The petitioner never claimed the contingent liability as a deduction; it was merely disclosed in notes to accounts.
  • The reopening was based on incorrect facts, as contingent liability cannot be treated as revenue expenditure.
  • The reassessment was initiated purely on re-examination of the same audited accounts, which had already been scrutinized earlier.
  • There was no fresh material to justify reopening of assessment.
  • The order disposing objections failed to address the petitioner’s submissions, showing lack of application of mind.

Respondent’s Arguments

  • The Assessing Officer sought to examine the increase in contingent liability relating to statutory forms under Central Sales Tax.
  • It was contended that further clarification was required regarding the financial disclosures.
  • The respondent requested time to file a counter affidavit.

Court’s Findings / Order

  • The Court observed that the reassessment was based on an erroneous assumption that contingent liability had been claimed as expenditure.
  • It held that contingent liabilities are only required to be disclosed and cannot be treated as deductible expenses.
  • The Court found that the order disposing objections suffered from complete non-application of mind.
  • There was no fresh material to justify reopening, and the “reason to believe” lacked rational nexus.
  • Consequently:
    • The notice under Section 148 dated 28 March 2021 was quashed.
    • The order dated 27 December 2021 rejecting objections was also set aside.

However, liberty was granted to the Assessing Officer to initiate fresh proceedings if new material arises.

Important Clarification

  • Contingent liability is not a deductible expense; it is only a disclosure requirement under accounting standards.
  • Reassessment cannot be used as a tool for review of concluded assessments.
  • Fresh tangible material is mandatory for initiating reassessment proceedings.
  • Orders passed without addressing objections reflect non-application of mind and are liable to be quashed.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:817-DB/MMH03032022CW14092022_193302.pdf

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