Gujarat High Court Holds Income Tax Reassessment Invalid Where GST Cancellation Basis Was Set Aside by Appellate Authority

Background: The petitioner, engaged in the business of trading in precious metals and gems, challenged the reopening of his income tax assessment for Assessment Year 2021-22. The Income Tax Department had issued a show cause notice under Section 148A(1) of the Income Tax Act, alleging escapement of income based on information from the GST Department and the cancellation of the petitioner’s GST registration. The GST registration had been cancelled on grounds of availing ineligible Input Tax Credit (ITC) from non-genuine suppliers and issuing invoices without actual supply of goods.

GST Proceedings and Appellate Order: The petitioner contested the GST cancellation, submitting documentary evidence to support the genuineness of his transactions. Despite this, the GST registration was cancelled. On appeal, the Appellate Authority restored the GST registration, holding that the cancellation was arbitrary, lacked proper verification, and was effected without granting an opportunity of hearing as required under the CGST Rules. The Appellate Authority found no evidence of fraudulent ITC or violation of GST law.

Income Tax Reassessment Proceedings: Despite the appellate order in the petitioner’s favour, the Income Tax Department proceeded to issue an order under Section 148A(3) and a notice under Section 148, seeking to reopen the assessment. The petitioner argued that the entire basis for reopening—the GST cancellation—had been conclusively set aside, and that the income tax authorities failed to consider this crucial development.

Court’s Reasoning: The Gujarat High Court examined the pleadings and documents, noting that the reassessment proceedings were premised solely on the GST cancellation order, which had been reversed by the competent appellate authority. The Court emphasized that the Appellate Authority’s order specifically found no fraudulent ITC or violation of GST law, and that this finding was a vital aspect that should have been considered by the income tax authorities before proceeding with reassessment.

The Court further observed that there was no other material in the possession of the income tax authorities to justify the reopening of the assessment. The petitioner had supplied the appellate order to the authorities, but it was not considered in the impugned reassessment order or notice.

Decision: The High Court held that, in light of the categorical findings of the GST Appellate Authority, the reopening of the assessment was unwarranted and invalid. The impugned order under Section 148A(3) and the notice under Section 148 were quashed and set aside. The writ petition was allowed, and the rule was made absolute.

This decision underscores the principle that income tax reassessment proceedings cannot be sustained when their sole foundation—a GST cancellation—has been conclusively set aside by the competent appellate authority, and where no independent material exists to justify reopening.