(2003) 259 ITR 19 (SC)
Income escaping assessment; issue of reassessment notice
On receiving a notice the taxpayer may seek the reasons recorded, which the officer is bound to furnish. The taxpayer may then file objections, and the officer must dispose of them by a speaking order before proceeding with the reassessment.
What procedure must be followed when a taxpayer objects to a reassessment notice — is it obliged to litigate immediately, or may it require the Assessing Officer to deal with its objections first?
The assessee received a notice reopening a completed assessment. It was not told the basis on which the officer had formed the belief that income had escaped assessment, and it challenged the notice directly by writ petition. The High Court declined to entertain the challenge, leaving the assessee to participate in the reassessment and pursue its remedies afterwards. The assessee appealed, and the Supreme Court took the opportunity to lay down the procedure to be followed in such cases generally.
The appeal was disposed of by a short but consequential order which has governed reassessment practice throughout the country ever since.
For the assessee
A taxpayer cannot meaningfully contest a reopening without knowing the grounds on which it rests. Requiring it to undergo a full reassessment before learning the reasons, and only then to challenge the jurisdictional foundation, is both unfair and wasteful of everyone's time.
For the Revenue
The recorded reasons are an internal record supporting the formation of belief, and the statute does not require them to be supplied at the notice stage. The taxpayer's remedies lie in the appellate process once the reassessment has been completed.
The Court laid down a clear sequence. When a notice is issued, the taxpayer should file its return and may then seek the reasons recorded for reopening; the Assessing Officer is bound to furnish them within a reasonable time. On receiving the reasons, the taxpayer is entitled to file objections to the issuance of the notice, and the officer is obliged to dispose of those objections by passing a speaking order before proceeding with the reassessment. The rationale is that the existence of a valid reason to believe is a jurisdictional precondition: if that foundation is absent, the entire proceeding is without authority, and it is in everyone's interest for the point to be addressed at the threshold rather than after a complete reassessment. The requirement of a speaking order ensures that the officer applies his mind to the objections and creates a record capable of review. Although expressed briefly, the direction has been treated as mandatory, and reassessments completed without disposing of objections by a separate reasoned order are routinely set aside.
The procedure was subsequently given statutory form in the inquiry provision introduced in 2021, now reflected in Sections 279 to 281 of the IT Act 2025, under which the material relied on must be supplied and the taxpayer heard before a reassessment notice issues. GKN Driveshafts remains the source of the principle and is still invoked wherever objections are not disposed of by a separate reasoned order, a failure that continues to vitiate reassessments.