Reassessment Initiated on Surmises and Conjectures Regarding Cessation of Liability Is Legally Impermissible

By | October 3, 2026
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Reassessment Initiated on Surmises and Conjectures Regarding Cessation of Liability Is Legally Impermissible

Issue

Whether reassessment proceedings under Section 148 read with Section 148A can be validly initiated based on vague assumptions and conjectures that an assessee “might have claimed” deduction of interest liability which subsequently ceased to exist.

Facts

  • The petitioner-company underwent Corporate Insolvency Resolution Process (CIRP); following non-approval of a resolution plan, liquidation was ordered, and the petitioner was sold as a going concern to ATPL under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016.
  • Under the sale agreement, the petitioner was acquired on a “clean slate,” extinguishing past liabilities and investigations.
  • A search on CFM Asset Reconstruction Company (CFM ARC) revealed that the petitioner’s NPAs were acquired by CFM ARC, the bankers’ liability had ceased, a No Dues Certificate was issued, and no interest deduction had been claimed in the profit and loss account since FY 2015-16.
  • Based on the search on CFM ARC, the Assessing Officer issued a show-cause notice under Section 148A(1), alleging that the NPAs were assigned at a heavily discounted price and proposing to invoke Section 41(1) and Explanation 1(b) to Section 115JB(2) on the presumption that the petitioner “might have claimed” an unpaid interest deduction.
  • Identical reopening notices issued against the petitioner on the same alleged ground of cessation of interest liability had already been quashed by the High Court in earlier proceedings.

Decision

  • Held in favor of the assessee; reassessment proceedings initiated on mere surmises, conjectures, and hypothetical assumptions that the assessee “might have claimed” a deduction are invalid.
  • Reopening was legally unsustainable as the petitioner had been acquired on a “clean slate” pursuant to liquidation proceedings, and no interest deduction had actually been claimed for the relevant period.
  • The impugned notice issued under Section 148 and the order passed under Section 148A(3) were accordingly quashed and set aside.

Key Takeaways

  • No Reopening on Surmises: Reassessment proceedings under Section 148 cannot be sustained on vague suspicions or hypothetical presumptions that an expenditure “might have been claimed.”
  • Requirement of Tangible Material: The Assessing Officer must possess concrete, verifiable material demonstrating an actual tax escapement rather than relying on speculative inferences drawn from third-party searches.
  • Clean Slate Protection: A successful bidder taking over a company as a going concern in liquidation under IBBI Regulations acquires it on a “clean slate,” protecting it from extinguished past claims and liabilities.
  • Pre-condition of Section 41(1): Invoking Section 41(1) for remission or cessation of trading liability requires prior allowance or deduction of that specific liability in an earlier assessment year.
HIGH COURT OF GUJARAT
Vimal Oil and Foods Ltd.
v.
Assistant Commissioner of Income-tax
A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.
R/SPECIAL CIVIL APPLICATION NO. 12220 of 2026
SEPTEMBER  8, 2026
Tushar Hemani and Ms. Vaibhavi K Parikh for the Petitioner. Aaditya D. Bhatt for the Respondent.
JUDGMENT
A.S. Supehia, J. – Rule. Learned Senior Standing Counsel Mr.Aaditya D. Bhatt, waives service of notice of Rule on behalf of the respondent.
2. By way of this writ-petition under Article 226 of the Constitution of India, the petitioner has challenged the Notice dated 29.06.2025 issued under the provision of Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) as well as the order dated 29.06.2025 passed under sub-section (3) of Section 148A of the Act, seeking to reopen the income tax assessment of the petitioner for the Assessment Year (for short, ‘A.Y.’) 2021-22.
3. The reopening of the assessment is sought by issuance of the Notice dated 30.03.2025 under sub-section (1) of Section 148A of the Act calling upon the petitioner to show cause as to why Notice under Section 148 of the Act should not be issued. From the contents of the Notice, it is reflected that the same is premised on a search and seizure action carried out on 08.12.2021 in the case of CFM Asset Reconstruction Private Limited (for short ‘CFM ARC’) and related entities. The details of NonPerforming Assets (for short ‘NPA’) of the petitioner acquired by CFM ARC were tabulated, which mentions about the acquired debts aggregating to Rs.9,454.85 lakhs (Principal Rs.8,102.05 lakhs + interest Rs.1,352.80 lakhs) at a cost of Rs.5,050 lakhs. It is mentioned that the petitioner “might have claimed deduction of interest on such loans” which was never paid and now the liability has ceased to exist, and that such cessation of liability of interest may attract the provision of Section 41(1) of the Act and waiver of loan may attract Explanation 1(b) to Section 115JB(2) of the Act to the tune of Rs.1,352.80 lakhs. By assigning this reason, the Notice has been issued.
3.1 The petitioner furnished a detailed reply to the show cause notice vide letter dated 10.04.2025. The petitioner invited the attention of the respondent-Assessing Officer that the petitioner had undergone the Corporate Insolvency Resolution Process (for short ‘CIRP’) initiated vide order dated 19.12.2017 passed by the National Company Law Tribunal (for short ‘NCLT’), Ahmedabad Bench, in a petition filed by Bank of Baroda under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short ‘the Code, 2016’), whereupon the entire Board of Directors was suspended and an Interim Resolution Professional was appointed. Ultimately, the NCLT vide order dated 19.12.2019 ordered liquidation of the petitioner. The liquidator thereafter issued an invitation for Expression of Interest to sell the petitioner as a ‘going concern’ together with all the connected licenses, permissions, trademarks, patents, registrations, formulations and property rights in accordance with the provision of the Code, 2016. The liquidator thereafter executed a sale agreement dated 03.03.2021 in favour of Arrhum Tradelink Private Limited (for short ‘the ATPL’), thereby selling the petitioner to ATPL as a going concern. Thus, it was submitted that the petitioner has been taken over by ATPL on a “clean slate” with a clear understanding that all past liabilities / investigations shall stand extinguished.
3.2 The petitioner further pointed out that the very same amount of Rs.1,352.80 lakhs had already been made the subject matter of reopening against the petitioner for the earlier Assessment Years 2017-18, 2019-20 and 202021, which reopening had been challenged before this Court, and that the same income cannot be assessed more than once in different assessment years. Despite the aforesaid clarification and a request to drop the reassessment proceedings, the respondent vide order dated 29.06.2025 under sub-section (3) of Section 148A of the Act concluded that there is an escapement of income to the tune of Rs.13.52 crore, and accordingly, issued a Notice dated 29.06.2025 under Section 148 of the Act.
4. Learned Senior Counsel Mr. Tushar Hemani appearing for the petitioner has submitted that on the acquisition of the petitioner by ATPL as a going concern on the “clean slate” principle, the impugned notice and the impugned order seeking to reopen the case of the petitioner is not tenable in the eye of law.
4.1 He has referred to various clauses of the sale agreement dated 03.03.2021 in favour of ATPL and has submitted that all the past liabilities / investigations got extinguished, and hence, the reopening is not permissible. In support, he has placed reliance on the judgment of the Coordinate Bench of this Court in the case of KRBL Limited v. State of Gujarat   (Gujarat).
4.2 It is further pointed out that the petitioner never claimed a deduction of the interest in question (i.e. Rs.13.52 crore payable to Andhra Bank, subsequently named as CFM ARC); that the liability of the bankers had ceased to exist and even a NOC / No Due Certificate is issued in favour of the petitioner; that the said bank had become NPA since financial year 2015-16 and the petitioner had not claimed interest in the profit and loss account since financial year 2015-16; and that the reopening is premised on conjectures and surmises, inasmuch as the Assessing Officer has himself expressed that the petitioner “might have claimed” deduction of interest on such loan, though the profit and loss accounts could have been verified by the Assessing Officer before reopening of the assessment.
4.3 Learned Senior Counsel has, in particular, submitted that the controversy raised in the present petition is squarely covered by the common oral judgment dated 30.06.2026 rendered by a Division Bench of this Court in Vimal Oil and Foods Ltd. v. Asstt. CIT [2026] 188  (Gujarat)/Special Civil Application No.13194 of 2023 (with Special Civil Application Nos. 9025 of 2024 and 9080 of 2024) in the petitioner’s own case, wherein this Court, on the very same set of facts and on the self-same alleged cessation of interest liability of Rs.1,352.80 lakhs, has quashed and set aside the reopening for the earlier assessment years. Thus, it is urged that the reopening of the assessment for A.Y. 2021-22 may be quashed and set aside.
5. Opposing the present petition and the foregoing submissions, learned Senior Standing Counsel for the Revenue has submitted that the reopening of the assessment may not be quashed and set aside, as it appears that the petitioner, while adopting the CIRP, has tried to evade the tax liability. It is submitted that the Assessing Officer, while examining the huge difference between the assignment value and the acquisition value of the NPA transferred to CFM ARC at a heavily discounted price, has noticed that the amount of haircut was no longer a liability to be payable by the petitioner to the respective banks; that in all probability the petitioner might have claimed a deduction of interest on such loan which was never paid; and that, the liability having ceased to exist, the cessation of liability of interest may attract Section 41(1) of the Act and the waiver of loan may attract Explanation 1(b) to Section 115JB(2) of the Act, to the tune of Rs.1,352.80 lakhs. Thus, it is urged that the writ-petition may not be entertained.
6. We have heard the learned advocates for the respective parties at length and have perused the material on record.
7. The established facts from the pleadings and the documents on record are that the petitioner company has undergone a CIRP, which was initiated vide order dated 19.12.2017 passed by the NCLT, Ahmedabad Bench. Since the resolution plan was not approved, the NCLT vide order dated 19.12.2019 ordered liquidation of the petitioner. These liquidation proceedings, initiated by the liquidator, culminated into the sale agreement executed on 03.03.2021 in favour of ATPL, thereby selling the petitioner as a going concern.
8. In terms of Regulation 32(e) of The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, the petitioner was acquired as a going concern by ATPL, and the petitioner has been taken over by ATPL on a ‘clean slate’ with a clear understanding that all the past liabilities / investigations shall stand extinguished, as per the sale agreement dated 03.03.2021 read with the provisions of the Code, 2016.
9. The Revenue has sought to reopen the assessment of the petitioner for A.Y. 2021-22, on the basis of a search and seizure action which was carried out on 08.12.2021 in the case of CFM ARC. The show cause notice dated 30.03.2025 under sub-section (1) of Section 148A of the Act was issued to the petitioner by alleging that, on the acquisition of the debts of the petitioner by CFM ARC at a heavily discounted price, the amount of haircut was no longer a liability payable by the petitioner to the respective banks, and that the petitioner might have claimed a deduction of interest on such loan which was never paid and the liability of which has now ceased to exist.
10. We find that the controversy arising in the present petition stands squarely covered by the common oral judgment dated 30.06.2026 rendered by a Division Bench of this Court in the petitioner’s own case in Special Civil Application No. 13194 of 2023 (with Special Civil Application Nos.9025 of 2024 and 9080 of 2024), whereby the reopening of the assessment of the petitioner for the earlier Assessment Years, premised on the very same alleged cessation of interest liability of Rs.1,352.80 lakhs and on the identical set of facts, came to be quashed and set aside. This Court, in the said judgment, after referring to the decision of the Coordinate Bench in the case of KRBL Limited (supra), which in turn placed reliance on the settled legal position enunciated by the Hon’ble Supreme Court in the case of Ghanshyam Mishra & Sons (Private) Limited v. Edelweiss Asset Reconstruction Company Limited 166 SCL 237 (SC), held that the purchaser of a corporate debtor as a going concern is entitled to a “clean slate” and that the past liabilities cannot be foisted upon such purchaser.
11. In the instant case, as in the case of the earlier assessment years, the reopening is premised on surmises and conjectures expressed by the Assessing Officer. The reopening is premised on a presumption that the petitioner “might have claimed” deduction of interest on the loans, which was never paid, and that now the liability has ceased to exist. The Assessing Officer has ignored and failed to examine that the petitioner has never claimed a deduction of such interest payable to Andhra Bank (subsequently named as CFM ARC); that the liability of the bankers has ceased to exist and even a NOC / No Due Certificate is issued in favour of the petitioner; that the said bank has become NPA since financial year 2015-16; and that the petitioner had not claimed interest in the profit and loss account since financial year 2015-16. When the petitioner had clarified this aspect, it was always open for the Assessing Officer to verify the same from the profit and loss account of the petitioner before reopening the assessment.
12. We may further observe that the very same alleged cessation of interest liability of Rs.1,352.80 lakhs, arising out of the self-same transaction, has already been made the subject matter of reopening against the petitioner for the earlier Assessment Years 2017-18, 2019-20 and 2020-21, which reopening has been quashed by this Court by the aforesaid judgment dated 30.06.2026. One and the same amount cannot be brought to tax repeatedly in different assessment years, and the repeated invocation of Section 147 of the Act on the identical foundation is impermissible.
13. We may also notice that the impugned order under subsection (3) of Section 148A of the Act does not even advert to, much less deal with, the “going concern / clean slate” defence and the binding precedents specifically relied upon by the petitioner in its reply, and instead proceeds to reject the reply on the untenable ground that the onus lay upon the petitioner to prove that it had not entered into the transactions. Such an approach, which reverses the settled position and disregards authentic and contemporaneous statutory records, cannot be sustained.
14. Thus, in the wake of the settled legal precedent and the judgment dated 30.06.2026 passed by this Court in the petitioner’s case and the reopening being premised on surmises and conjectures, the action of reopening calls for interference. Accordingly, the writ-petition stands allowed. The impugned notice dated 29.06.2025 issued under Section 148 of the Act and the impugned order dated 29.06.2025 passed under sub-section (3) of Section 148A of the Act, for the Assessment Year 202122, are hereby quashed and set aside. Rule is made absolute. There shall be no order as to costs.