Income Tax Officer Starts Reassessment Before Deciding Assessee’s Objections; Bombay High Court Quashes Notices, Says Objections Must Be Decided Before Scrutiny Begins
Income Tax Department Issues Scrutiny Notice Before Giving Reopening Reasons; Bombay High Court Says Procedure Puts the Cart Before the Horse
Facts
The petitioner, H. P. Diamonds India Pvt. Ltd., was engaged in the business of trading in diamonds. The dispute concerned Assessment Year 2012-13. The writ petition challenged reassessment proceedings initiated under the Income Tax Act, 1961. H. P. DIAMONDS
For AY 2012-13, the company filed its return on 28 September 2012, declaring nil income and claiming a business loss of ₹15,000. The return was selected for scrutiny. During the original assessment, the Assessing Officer specifically sought extensive information concerning the substantial share premium received by the company, including the identity, PAN and creditworthiness of subscribers and the basis of share valuation. H. P. DIAMONDS H. P. DIAMONDS
H.P. Diamonds furnished explanations and supporting material regarding the share capital and share premium. After scrutiny, the assessment was completed under Section 143(3) on 19 March 2015, determining total income at nil while disallowing the ₹15,000 business loss. H. P. DIAMONDS
Later, during scrutiny for AY 2016-17, questions again arose regarding the share premium. An addition of ₹2 crore under Section 68 was made concerning shares issued during FY 2011-12 and forfeited in FY 2015-16 for non-payment of call money. The same amount was alternatively added under Section 56(2)(ix). H. P. DIAMONDS
On 31 March 2019, the Assessing Officer issued a notice under Section 148 seeking to reopen AY 2012-13. H.P. Diamonds filed its return on 10 April 2019 and requested the recorded reasons.
The critical procedural sequence was:
2 September 2019: Section 143(2) scrutiny notice issued.
3 September 2019: Reasons for reopening supplied to the assessee.
2 October 2019: H.P. Diamonds filed objections.
31 October 2019: Objections rejected.
12 November 2019: Section 142(1) notice issued—before expiry of four weeks from rejection of the objections. H. P. DIAMONDS H. P. DIAMONDS
That sequence ultimately proved fatal to the Revenue’s notices.
Issue
The principal issue pressed before the Bombay High Court was:
Can an Assessing Officer issue a notice under Section 143(2), thereby commencing scrutiny in reassessment proceedings, before furnishing the reasons for reopening and disposing of the assessee’s objections to reopening?
The petitioner argued that doing so violated the mandatory procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO. H. P. DIAMONDS
Petitioner’s Arguments
H.P. Diamonds argued that the Assessing Officer had effectively started the reassessment before the assessee was even given the opportunity to challenge the jurisdictional foundation of reopening.
The Section 143(2) notice had been issued on 2 September 2019, while the reasons for reopening were supplied only on 3 September 2019.
The company contended that under GKN Driveshafts, the statutory sequence was mandatory:
Section 148 notice → return → supply of reasons → objections by assessee → speaking order deciding objections → only thereafter commencement of reassessment.
The petitioner also relied on Asian Paints Ltd. v. DCIT, contending that after objections are rejected, the Assessing Officer must wait four weeks before proceeding further, thereby enabling the assessee to challenge the rejection before the High Court. H. P. DIAMONDS
Revenue’s Arguments
The Revenue argued that H.P. Diamonds was reading GKN Driveshafts too broadly.
According to the Revenue, the Supreme Court merely prohibited the Assessing Officer from passing the final reassessment order before disposing of the objections.
It did not prohibit the Assessing Officer from issuing a Section 143(2) notice before the objections were decided.
Therefore, according to the Revenue, preliminary procedural steps toward reassessment could continue while the objections remained undecided. H. P. DIAMONDS
The Bombay High Court rejected this interpretation.
Court’s Analysis of the Reassessment Procedure
The Court emphasized that the case was governed by the reassessment law as it existed before the amendments effective from 1 April 2021, because the Section 148 notice was dated 31 March 2019. H. P. DIAMONDS
The Court formulated the pre-2021 procedure sequentially:
- The Assessing Officer must have “reason to believe” that income escaped assessment.
- A Section 148 notice is issued.
- The assessee files its return.
- The assessee may request the reasons for reopening.
- The Assessing Officer furnishes those reasons.
- The assessee may file objections.
- Those objections must be disposed of through a speaking order.
- The Assessing Officer must then wait four weeks.
- Only thereafter can the reassessment proceedings proceed.
The sequencing was important because an assessee’s objections may challenge the very jurisdiction of the Assessing Officer to reopen the assessment. H. P. DIAMONDS
Section 143(2) Notice Is the Starting Point of Assessment
This is the most important proposition in the judgment.
The Court examined Sections 148, 143 and 142 together.
Once a return is filed pursuant to a Section 148 notice, it is treated, so far as applicable, as a return under Section 139. If the Assessing Officer wants to scrutinize that return, a Section 143(2) notice is required.
The Court held that issuing the Section 143(2) notice is not merely an innocuous or preliminary administrative act.
It is “really the starting point of the assessment proceedings.” H. P. DIAMONDS
Consequently, issuing Section 143(2) before deciding the objections means that the Assessing Officer has already begun reassessment before deciding whether he possesses jurisdiction to reassess in the first place.
“Putting the Cart Before the Horse”
The Court held that an assessee’s objections can specifically demonstrate that the jurisdictional requirements for reopening have not been satisfied.
Therefore, the Assessing Officer must first rule on those objections.
Only after rejecting them through a speaking order can the officer proceed to scrutinize the return.
The Court observed that issuing Section 143(2) and commencing scrutiny before deciding the objections would effectively amount to:
“putting the cart before the horse.” H. P. DIAMONDS
GKN Driveshafts Applied
The Court relied directly upon the Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. ITO.
It emphasized that the Supreme Court had specifically required the Assessing Officer to dispose of objections through a speaking order “before proceeding with the assessment.” H. P. DIAMONDS
The Revenue’s attempt to reinterpret this as meaning merely that the final assessment order could not be passed before objections were decided was rejected.
The High Court held that there was nothing in GKN Driveshafts supporting such a narrow construction.
Section 142(1) Notice Also Invalid
There was a second procedural violation.
H.P. Diamonds’ objections were rejected on 31 October 2019.
Yet the Assessing Officer issued the Section 142(1) notice on 12 November 2019.
Under the Bombay High Court’s judgment in Asian Paints Ltd. v. DCIT, once an assessee’s objections to reopening are rejected, the Assessing Officer must refrain from proceeding further for four weeks from service of the rejection order.
The purpose is to give the assessee a meaningful opportunity to challenge that decision before the Court. H. P. DIAMONDS
The 12 November notice was therefore premature and contrary to binding precedent. H. P. DIAMONDS
Important Legal Proposition
The Bombay High Court expressly held:
In reassessment proceedings, the Assessing Officer cannot issue either a Section 143(2) notice or even a Section 142(1) notice before disposing of the assessee’s objections to reopening by a speaking order. H. P. DIAMONDS
This makes the judgment significant beyond its individual facts because it identifies the precise procedural point at which an Assessing Officer is regarded as having “proceeded with the assessment” for purposes of GKN Driveshafts.
Change of Opinion Issue Left Open
H.P. Diamonds had also originally challenged reopening on several substantive grounds, including:
- the original assessment had already specifically scrutinized the share premium;
- reopening represented a change of opinion;
- there had been no failure to make a full and true disclosure;
- reopening beyond four years was barred;
- the reasons allegedly demonstrated non-application of mind; and
- the Section 151 approval process was challenged. H. P. DIAMONDS H. P. DIAMONDS
However, the Court did not decide these grounds.
The petition succeeded solely on the procedural issue concerning premature commencement of reassessment. All other contentions were expressly left open for future consideration if the occasion arose. H. P. DIAMONDS
Final Decision
The Bombay High Court:
Quashed the Section 143(2) notice dated 2 September 2019.
Quashed the Section 142(1) notice dated 12 November 2019.
Quashed all consequential action taken pursuant to those two notices.
The remaining contentions were left open.
The writ petition was accordingly disposed of, with no order as to costs. H. P. DIAMONDS
Case Details
Case: H. P. Diamonds India Pvt. Ltd. v. Deputy Commissioner of Income Tax, 14(2)(1), Mumbai & Ors.
Neutral Citation: 2026:BHC-OS:21428-DB
Court: Bombay High Court, Ordinary Original Civil Jurisdiction
Case No.: Writ Petition No. 3233 of 2019
Coram: Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla
Reserved: 28 July 2026
Pronounced: 30 September 2026 H. P. DIAMONDS
Assessment Year: 2012-13
Key provisions: Sections 147, 148, 143(2), 142(1) and 151 of the Income Tax Act, 1961.
Key precedents: GKN Driveshafts (India) Ltd. v. ITO and Asian Paints Ltd. v. DCIT.
Result: Petition allowed on the procedural ground; Sections 143(2) and 142(1) notices and consequential action quashed.
