Best Judgment Reassessment Is Invalid If Return Filed

Best Judgment Reassessment Is Invalid If Return Filed Is Completely Ignored By Assessing Officer

Issue

Whether a draft assessment order passed on a “best judgment” basis under Section 144, on the false premise that the assessee failed to file a return of income, is legally sustainable when the return was actually filed in response to a Section 142(1) notice.
Whether the period of time spent prosecuting a writ petition before a High Court must be excluded when calculating the statutory limitation period for completing a reassessment under Section 153(2).

Facts

The Transactions: The assessee is a subsidiary company that provided services to its Indian holding company. Payments were made to the assessee without the deduction of withholding tax under Section 195, a matter pending before appellate authorities.
Reassessment Proceedings: The Income Tax Department initiated reassessment proceedings against the assessee for the Assessment Year 2018-19 by issuing notices under Section 148A and Section 148.
Filing of Return: In response to a statutory notice issued under Section 142(1), the assessee successfully filed its return of income for the relevant assessment year.
The Assessment Order: Ignoring the filed return, the Assessing Officer issued a draft assessment order on a best judgment basis under Section 144, erroneously stating that no return of income had been submitted.
The Corrigendum: The department later issued a corrigendum that acknowledged the receipt of the return but left all the adverse conclusions of the original draft assessment order completely unchanged.
Limitation Dispute: A separate legal dispute arose regarding whether the time frame consumed during the pendency of a writ petition should be omitted from the limitation clock for framing the reassessment.

Decision

Best Judgment Order Set Aside: Held that since the assessee had validly filed its return of income, the department could not legally carry out a best judgment assessment on the pretext of non-filing. The draft assessment order and its subsequent corrective corrigendum were set aside in favor of the assessee.
Exclusion of Time Allowed: Held that the time duration actively taken to prosecute a writ petition is legally liable to be excluded while computing the limitation period under Section 153(2), ruling this specific point in favor of the revenue.

Key Takeaways

Filing of Return Ousts Section 144 Jurisdiction: An Assessing Officer cannot resort to a Section 144 “best judgment” assessment arbitrarily when a return of income is available on record. Doing so bypasses normal scrutiny and renders the entire proceeding void.
Superficial Corrigendums Cannot Cure Jurisdictional Defects: Merely issuing a corrigendum to acknowledge a return while mechanically retaining all the predefined conclusions of an erroneous non-filing draft order does not satisfy the requirement of independent application of mind.
Writ Pendency Freezes Limitation Period: For the purpose of statutory deadlines, any period during which tax proceedings are stalled or challenged via a writ petition before the High Court expands the department’s time limit to complete the final assessment.

HIGH COURT OF MADRAS

Global Publishing Solutions Ltd.

Deputy Commissioner of Income-tax International Taxation 1 (2)^*

Senthilkumar Ramamoorthy, J.

WP No. 13130 of 2023
WMP Nos. 12892 & 12893 of 2023

JUNE 9, 2026

G. Shiva Kumar for the Petitioner. B. Ramana Kumar, SPC for the Respondent.

ORDER

1. The petitioner is a subsidiary of a company, Newgen Digitalworks Private Limited (Newgen Digitalworks), registered and resident in India for purposes of the Income-Tax Act, 1961 (the I-T Act). In relation to services provided by the petitioner to the said company, payments were made to the petitioner. Tax was not deducted thereon under Section 195 of the I-T Act. Such non-deduction gave rise to proceedings against the Indian entity. Such proceedings are pending before the appellate authority. Meanwhile, proceedings were initiated against the petitioner by issuing notice under Section 148A. Eventually, notice under Section 148 was issued. Upon receipt thereof, the petitioner filed the return of income for the assessment year 2018-19. Initially, without taking notice of such return of income, a draft assessment order was issued on 30.03.2023 on best judgment basis. Subsequently, a corrigendum was issued on 31.03.2023 after taking note of the return of income. Apart from taking note of the return of income, the conclusion in the corrigendum remained the same. The present writ petition was instituted in the above facts and circumstances.

2. Learned counsel for the petitioner assails the orders impugned herein on two substantial grounds. The first ground of challenge is that proceedings were initiated against Newgen Digitalworks, which is an Indian entity. Depending on the outcome of such proceedings, the entire tax liability of the petitioner would be discharged by the Indian entity. Therefore, the proceedings against the petitioner would result in double taxation. Without prejudice, the second contention is that the show cause notice preceding the draft assessment order was issued under Section 144 of the I-T Act, which is applicable in cases where the return of income is not filed. Given that a return of income was filed by the petitioner and such return of income was not taken into consideration, learned counsel contends that the only legitimate course of action for the Income-tax Department was to initiate proceedings under Section 143 after issuing notice under subsection (2) thereof. Thereafter, the corrigendum is liable to be set aside.

3. In response, Mr.Ramana Kumar, learned SPC, submits that the proceedings against the holding company are confined to the failure to deduct tax at source in terms of Section 195 of the I-T Act. Irrespective of whether deduction is made or not, he submits that the petitioner should have filed a return of income so as to enable assessment. He also submits that the rate of tax applicable to the transaction would depend on the application and interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and the UK. Consequently, he contends that it is not a case of double taxation and that any payment. made by the holding entity in India would be given credit to while determining the tax liability of the petitioner.

4. On examining the draft assessment order, it is clear that the assessing officer recorded that no return of income was filed by the assessee till date. This conclusion is contrary to the materials on record. Pursuant to notice dated 27.03.2023 under Section 142(1) of the I-T Act calling upon the petitioner to file the return of income for the assessment year 2018-19, the petitioner filed the said return on 28.03.2023. Therefore, the assessment should not have been carried out on the basis that no return was filed. Upon noticing this error, a corrigendum was issued on the very next day merely taking note of the return of income and retaining all other conclusions. These facts and circumstances warrant reconsideration of the petitioner’s assessment.

5. Under Section 153(2) of the I-T Act, an order of assessment or reassessment is required to be made within 12 months from the end of the financial year in which the notice under Section 148 was served. The notice under Section 148 is dated 02.05.2022 and the relevant financial year ended on 31.03.2023. If a 12 month period were to be computed therefrom, it would expire on 31.03.2024. The petitioner lodged the writ petition on or about 20.04.2023 and also obtained interim protection. Therefore, the time taken in prosecuting this writ petition is liable to be excluded while computing the period of limitation under Section 153(2).

6. For reasons set out above, this writ petition is disposed of as follows:

The impugned draft assessment order and the corrigendum thereto are set aside.

ii.

It is open to the Income-tax Department to initiate proceedings against the petitioner in accordance with law after taking note of the observations set out in this order. Consequently, connected miscellaneous petitions are closed.

No costs.