Reassessment reopening is invalid when based on an inoperative partnership deed and previously examined facts.

The petitioner, a partnership firm engaged in manufacturing and exporting gold jewellery from the SEZ at Sachin, Surat, claimed a deduction of approximately ₹149 crores under Section 10AA of the Income-tax Act, 1961, for AY 2010–11.

After scrutiny under Sections 143(2) and 142(1), during which the petitioner furnished audited accounts, purchase details, stock particulars, partner-ledger accounts and explanations regarding its business and gold purchases, the Assessing Officer completed the assessment under Section 143(3) on 23 December 2011.

Subsequently, based substantially on revenue audit objections, the Assessing Officer issued a notice under Section 148 on 27 March 2015 alleging that: (i) non-payment of interest on partners’ capital had inflated the petitioner’s profits and its Section 10AA deduction; and (ii) gold purchased from sister concern Adani Enterprises Limited (“AEL”) was acquired below the prevailing market price, attracting Section 80-IA(10) read with Section 10AA(9).

The petitioner objected, relying, inter alia, on the amended partnership deed, which had deleted the obligation to pay interest, and on differences in gold fineness and measurement methodology underlying the alleged price discrepancy.

The Assessing Officer rejected the objections on 1 February 2016, leading to the writ petition.

1. Whether the notice under Section 148 was invalid as being founded on a mere change of opinion after the relevant issues had been examined during the original scrutiny assessment.

2. Whether the reopening was invalid because it was based solely or substantially on audit objections despite the Assessing Officer having earlier questioned or rejected the audit objection.

3. Whether the allegation of inflated profits due to non-payment of interest on partners’ capital was sustainable when the amended partnership deed had expressly deleted the obligation to pay such interest.

4. Whether the alleged undervaluation of gold purchases from AEL disclosed any escapement of income when the petitioner had furnished the relevant purchase details and explained the differences in fineness and measurement units during the original proceedings.

The Court applied Sections 147 and 148 of the Income-tax Act, 1961, governing reassessment and issuance of reopening notices, and the doctrine that reassessment cannot be used merely to review an assessment on a change of opinion where the material issue was examined during the original scrutiny proceedings.

It also considered Section 10AA(9), which incorporates Section 80-IA(10), permitting restriction of profits of an eligible business where transactions with related parties result in profits exceeding ordinary commercial profits; however, such provisions require a valid factual and legal basis.

The Court relied on the coordinate Bench decision in Special Civil Application No. 3595 of 2016 and allied matters, decided on 4 July 2016, which held that reopening based solely on an audit objection is invalid where the Assessing Officer does not independently form reasons to believe and that issues already examined cannot ordinarily be reopened on the same material.

Although the present notice was issued within four years from the end of the relevant assessment year, the Court held that the reassessment nevertheless had to satisfy the independent jurisdictional requirements of Section 147.

The Court found that the petitioner had disclosed the relevant material during the original scrutiny assessment, including partner-ledger accounts, purchase invoices, stock details, transactions with AEL and the computation and supporting report for the Section 10AA deduction.

The allegation concerning gold purchases was therefore not based on genuinely new material. Further, the petitioner had explained that the comparison wrongly involved gold of 0.999 fineness against purchases of 0.995 fineness and used a Troy ounce instead of a normal ounce; the Assessing Officer failed to deal with this explanation while rejecting the objections.

On the interest issue, the reassessment proceeded on the original partnership deed dated 8 May 2006, although the deed had been amended on 6 January 2007 with effect from 1 November 2006 to provide that no interest would be payable on partners’ capital.

Since the amended deed removed the alleged obligation, non-payment of interest could not establish artificially inflated profits or justify application of Section 80-IA(10) read with Section 10AA(9).

The Court also found that the reopening was materially influenced by the audit objection and that the Assessing Officer had earlier treated the alleged gold-price difference as notional and had recommended that the objection be dropped.

Accordingly, the reassessment represented an impermissible reconsideration of matters already available to and examined by the Assessing Officer, rather than a lawful formation of belief based on fresh tangible material.

The Court held that the reopening was unsustainable because it rested on issues already disclosed and examined during the original assessment, relied on an inoperative original partnership-deed clause, failed to consider the petitioner’s explanation regarding gold pricing, and was materially founded on the audit objection.

Rule was made absolute.