The Finality of 'Nil' Assessments: Section 156 Demand Notice Validity

The Finality of ‘Nil’ Assessments: Section 156 Demand Notice Validity

This ruling for AY 2012-13 establishes a critical procedural safeguard: the Revenue cannot demand money from a taxpayer without first passing a formal order that justifies that amount. A demand notice is a “shadow” that cannot exist without the “body” of an assessment order.

The Legal Issue

Can the Assessing Officer (AO) issue a Notice of Demand under Section 156 for Dividend Distribution Tax (DDT) if the original assessment order resulted in a “Nil” demand and no fresh reassessment (Section 147) was ever initiated?

Facts of the Case

The Return: The assessee, an SEZ developer, filed its return and disclosed the distribution of profits to shareholders.
The Scrutiny: The AO conducted a regular scrutiny assessment and passed an order under Section 143(3). In this order, the tax demand was explicitly computed as “Nil.”
The Sudden Demand: Four years later, the AO issued a notice of demand under Section 156, demanding tax on those very same distributed profits.
The Missing Link: Crucially, the AO did not reopen the assessment under Section 147, nor did they pass any fresh order to modify the original “Nil” assessment. They simply sent a bill (the demand notice) without a new judgment.

The Decision

The Court ruled in favour of the assessee, quashing the demand notice:

No Order, No Demand: Section 156 states that a notice of demand can only be issued when “any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act.” Since the existing order was a “Nil” demand, there was no legal “order” to support a new financial claim.
Jurisdictional Failure: For the AO to demand a new amount, they were legally required to first reopen the case under Section 147, follow the reassessment procedure, and pass a new order. Skipping this step makes the demand notice void.
Change of Opinion: Since the AO had already scrutinized the distribution of profits in the original assessment and decided not to tax them, trying to tax them later on the same material—without any new information—constitutes a “mere change of opinion,” which is prohibited by law.
Time Bar: The notice was issued after four years. Without validly invoking reopening provisions, the AO lost the jurisdiction to revise their previous stance.

Key Takeaways

The Order is Primary: Always verify if a demand notice (Section 156) is backed by a specific assessment or rectification order. If the underlying order says “Nil” or a different amount, the demand notice is legally defective.
DDT and SEZs: During this period (AY 2012-13), the applicability of Dividend Distribution Tax (Section 115-O) to SEZ developers was a highly litigated issue. If the AO accepted the “Nil” position during scrutiny, they cannot “re-think” it later via a simple notice.
Defense Against “Direct Demands”: If you receive a demand on the portal that doesn’t match your assessment order, it can be challenged as “beyond jurisdiction” using this precedent.
Section 147 is Mandatory: The Revenue cannot take shortcuts. If they want to collect more tax after an assessment is closed, they must follow the Section 147/148 route, including giving the taxpayer an opportunity to be heard.

HIGH COURT OF GUJARAT

Zydus Infrastructure (P.) Ltd.

Deputy Commissioner of Income-tax^*

A.S. Supehia and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 4453 of 2020

FEBRUARY 2, 2026

R.K. Patel, Sr. Adv. and Darshan R Patel for the Petitioner. Ms. Maithili Mehta, Sr. Standing Counsel for the Respondent.

JUDGMENT

Pranav Trivedi, J.- Heard learned advocate Mr.R.K.Patel, learned Senior Counsel appearing with learned advocate Mr.Darshan Patel for the petitioner and learned Senior Standing Counsel Ms.Maithili Mehta for the respondent.

2. Rule returnable forthwith. Learned Senior Standing Counsel Ms.Maithili Mehta, waives service of notice of rule on behalf of the respondent.

3. The present petition under Article 226 of the Constitution of India is preferred assailing the correctness and validity of the Notice of Demand dated 22.01.2020 at Rs.5,02,30,558/- issued under Section 156 of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for short) along with the communication dated 23.01.2020.

4. The brief facts leading to filing of the present writ petition are as under:

4.1 The writ petitioner is a Company incorporated under the Companies Act, 1956 and is inter alia engaged in the development, operation and maintenance of Special Economic Zone.

4.2 The petitioner filed Return of Income for the Assessment Year 2012-13 on 24.09.2012. It is the case of the petitioner that on the basis of full disclosure in the Return of Income, along with necessary annexures and Audit Report, the Assessing Officer issued Scrutiny Notice on 16.09.2014 on 30 different points for processing the assessment.

4.3 It is further the case of the petitioner that while issuing notice for Scrutiny Assessment, one of the point was with regard to distributed profit to the tune of Rs.28,50,00,000/- on which tax was not paid in view of the provisions under Section 115 0 (6) of the Act. On consideration of explanation and evidence on record, the Deputy Commissioner of Income-tax, Circle 4(1)(2) (hereinafter referred to as “the respondent” for short), framed assessment under Section 143(3) of the Act vide order dated 27.01.2015. The respondent accepted the computation sheet given by the petitioner pertaining to dividend distribution tax showing the amount chargeable to tax at zero.

4.4 It is the case of the petitioner that the respondent vide communication dated 23.01.2020 issued Notice of Demand on 22.01.2020 under Section 156 of the Act, intimating the petitioner that an amount to the tune of Rs.5,02,30,558/- is due towards tax payable for the Assessment Year 2012-13. It is the case of the petitioner that such a Notice of Demand was issued without any proceedings initiated for reassessment.

4.5 Being aggrieved by the Demand Notice issued under Section 156 of the Act, issued without any reassessment procedure, the present writ petition is preferred by the petitioner assailing the Demand Notice issued under Section 156 of the Act.

5. Mr.R.K.Patel, learned Senior Advocate appearing with learned advocate Mr.Darshan Patel for the petitioner, made the following submissions:

5.1 It is submitted that there is full and true disclosure by the petitioner during the course of filing of return as well as when original assessment was framed under Section 143(3) and that during the proceedings there is no outstanding demand pertaining to the Assessment Year 2012-13. It is further submitted that the demand of Rs.5,02,30,558/- raised by the respondent vide Notice of Demand under Section 156 of the Act, served to the petitioner vide communication dated 23.01.2020, is ex-facie bad in law as it is contrary to the scheme of the Income-tax Act, 1961.

5.2 Mr.Patel, learned Senior Advocate, would further submit that the Demand Notice and Computation Sheet is bad in law and not enforceable since the same is not co-relatable to any order of assessment or even any order passed by any higher authority. He would further submit that the impugned notice of demand, is not at all supported by any legal provision and hence the same is liable to be quashed.

5.3 Mr.Patel, learned Senior Advocate, referring to Section 156 of the Act, submitted that the ingredients of Section 156 itself indicates that only when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the assessing officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable, which, undisputedly, in the instant case more than six years have passed from the end of the concerned Assessment Year of 2012-13, and moreover, there being no co-relatable assessment or other order as a consequence of which demand of Rs.5,02,30,558/- is reflected in the notice of demand issued by the respondent, and thus, the impugned notice of demand issued under Section 156 of the Act deserves to be quashed and set aside.

6. Per Contra, learned Senior Standing Counsel Ms.Maithili Mehta appearing for the respondent, relied on the affidavit-in-reply filed by the respondent and submitted that there was no need for issuance of notice before making demand under Section 154-O of the Act. It was not disputed by learned Senior Standing Counsel Ms.Mehta that subsequent to framing of assessment, the procedure of reassessment was not undertaken. However, relying on the decision of the Hon’ble Supreme Court in the case of Cognizant Technology Solutions India (P.) Ltd. v. Dy. CIT (SC), it was submitted that Section 115-O does not demand for issuance of Show-cause Notice and then passing an order. It was submitted that there is no legal infirmity that the respondent directly issued Demand Notice under Section 156 asking the respondent to pay dividend tax under Section 115-O (6) of the Act.

7. Heard learned advocates appearing for the respective parties and having gone through the material placed on record and on perusal of the assessment framed under Section 143(3) of the Act as well as the Audit Report of the petitioner filed along with the Return of Income, it is discernible that the petitioner has disclosed fully and truly all material facts, including Note No.28 appended at page 40 of the petition, which is by the auditor to the effect that the petitioner has distributed profit of Rs.28,50,00,000/- to the shareholders before 01.06.2011 which was substantiated by a certified copy of the Board Resolution passed in the annual general meeting. Considering this note only, the respondent -Assessing Officer had framed the assessment.

7.1 It is pertinent to note that considering this note along with the assessment proceedings, the respondent had issued the impugned Notice of Demand under Section 156 of the Act. It is not in dispute that the case of the petitioner was under scrutiny and after calling for information and considering the material available on record, the Assessing Officer passed the order under Section 143(3) of the Act.

7.2 The first issue that needs to be ascertained is as to whether a Demand Notice under Section 156 of the Act can be issued when the assessment order under Section 143(3) had ‘Nil’ demand. Further, Demand Notice under Section 156 of the Act is issued when the assessment order has Nil demand and further proceeding of reassessment under Section 147 are not undertaken. On plain and proper reading of Section 156 of the Act, it is clear that only when tax is due in consequence of any order passed under or in pursuance of the Act, that the Assessing Officer will be expected to serve on the assessee or other person liable, a notice of demand in the prescribed form. In other words, no notice of demand can be issued in the absence of an order passed under or in pursuance of the Act and such an order is required to be in existence before a notice of demand under Section 156 of the Act may be issued. In the instant case, there is no assessment or reassessment order against the petitioner ascertaining the amount of tax and interest liable to be paid. Demand Notice under Section 156 of the Act is a condition precedent to the treatment of the tax as arrears recoverable by coercive procedure prescribed. Therefore, when there are no arrears as per the assessment or reassessment order, the question of notice of demand under Section 156 of the Act does not arise. The present petition succeeds only on this very first aspect itself. The averments made in the affidavit-in-reply as well as the arguments canvassed by learned advocate for the respondent are bereft and devoid of any argument on this principle of law.

7.3 The second aspect that needs to be addressed from the facts of the record is that the impugned notice under Section 156 of the Act is issued after four years without even going for procedure of reopening of the assessment as per Section 147 of the Act. There is no justification to the fact that the Demand Notice issued under Section 156 of the Act is issued straightaway without taking recourse of reassessment under Section 147 of the Act. The liability as per assessment proceeding under Section 143(3) of the Act qua the petitioner was Nil. Therefore, if the revenue had to issue any demand notice then there had to be a recourse of reopening of assessment or change of the original assessment order which may have been available as per the provisions of the Act. Even if hypothetically it had to be assumed that there was an initiation of reopening of assessment in the present case, then it would have been nothing but mere change of opinion by the respondent. The petitioner was under scrutiny and after calling for information and considering the material available on record, the Assessing Officer had passed the order under Section 143(3) of the Act. That same material is subject matter of demand in notice under Section 156 of the Act. Therefore, even if the reassessment procedure was undertaken on the same issue, then it would have been nothing but a mere change of opinion in view of the decision of the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. ITR 561 (SC). Therefore, the contents of Demand Notice are in total contravention of the provisions of the Act.

7.4 Despite the above two issues looming large on the facts of the present case, the only submission or averment made by learned Senior Standing Counsel Ms.Maithili Mehta is with regard to the decision of the Hon’ble Apex Court in the case of Cognizant Technology Solutions (P) Ltd (supra). However, the decision relied upon by the learned advocate for the respondent would not be applicable to the facts of the present case, inasmuch as, the issue in question before the Hon’ble Apex Court was with regard to the assessee having already filed an application before the authority for advance holding under Section 244Q of the Act, and thereby, considering the assessee to be an assessee in default on account of non payment of dividend distribution tax which was prior to the assessment proceedings and the whole case was during the framing of the assessment. In the instant case, the core issue is that after framing of the assessment, which was with Nil liability, and thereafter, beyond a period of four years and without reopening the assessment under Section 147 of the Act, straightaway a Notice of Demand under Section 156 has been issued. This issue was not subject matter of controversy before the Hon’ble Apex Court in the case of Cognizant Technology Solutions (P) Ltd (supra). In view of the same, the decision relied upon by learned Senior Standing Counsel Ms.Mehta for the respondent on the basis of the affidavit-in-reply, would not be of any help to the case of the revenue.

8. For the foregoing reasons enumerated hereinabove, the impugned Demand Notice dated 22.01.2020 issued under Section 156 of the Act, is nothing but a notice beyond jurisdiction and is liable to be quashed and set aside and is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.