The Gujarat High Court has quashed a reference made by an Assessing Officer to a District Valuation Officer under Section 142A of the Income Tax Act, 1961, holding it to be a colourable exercise of power designed solely to invoke the statutory exclusion of time under Section 153 Explanation 1(v) and thereby extend the limitation period for completing the assessment. The reference was made on 24 June 2023, a single day before the assessment proceedings for Assessment Year 2021-22 were set to become time-barred on 25 June 2023. The Court found that the Assessing Officer had all necessary material since December 2022 but remained inactive for six months, only to manufacture a valuation reference at the fag end of the limitation period.
Background & Facts
The Dispute
The petitioner, Slimtile Private Limited, a limited company, filed its return of income for Assessment Year (A.Y.) 2021-22 on 14 March 2022, declaring a total income of Rs. 8,17,74,420. The return was selected for scrutiny, and a notice under Section 143(2) of the Income Tax Act, 1961 was issued on 29 June 2022. The petitioner duly responded to subsequent notices under Section 142(1) issued on 12 August 2022, 21 November 2022, and 2 December 2022, furnishing all information and documents sought.
Key Facts
- A search and seizure under Section 132 was conducted at M/s. Ratnakala Exports Pvt. Ltd. on 24 September 2021 (following a survey on 22 September 2021).
- A show cause notice for transfer of the case under Section 127 was issued on 16 November 2021; the case was ultimately transferred from Rajkot to Surat.
- Material derived from the search and survey was forwarded by the Deputy Director of Income Tax (Investigation), Surat, to the Deputy Commissioner of Income Tax, Surat, on 28 December 2022.
- Show cause notices dated 17 June 2023 and 20 June 2023 were issued by the Assistant Commissioner of Income Tax, Central Circle-2, based on search material alleging unaccounted payments of Rs. 1,01,00,113 and Rs. 19,75,00,000.
- The petitioner submitted a detailed reply on 22 June 2023, contesting the notices on merits and specifically questioning maintainability on the ground that proceedings were barred by limitation.
- In response to the limitation objection, the Assessing Officer sent an email on 21 June 2023 (not reflected on the ITBA portal) contending that time stood extended by virtue of the Explanation to Section 153.
- On 24 June 2023, the Assessing Officer made a reference to the District Valuation Officer under Section 142A seeking determination of the fair market value of fixed assets allegedly acquired in the names of individual owners and not used for the petitioner's business.
- The impugned reference order recorded that assessment proceedings were pending and would become time-barred on 25 June 2023, and requested the Valuation Officer to send the report preferably by 30 June 2023.
- Two grounds were cited in the reference: (1) search material showed unaccounted cash payments to the group company M/s. Ratnakala Exports Pvt. Ltd. for share purchase and movable properties, with the petitioner showing an increase in fixed assets totalling Rs. 64,00,02,502; (2) the petitioner had purchased fixed assets in individual names but claimed depreciation on them in its books.
- The petitioner had already furnished a detailed explanation of asset payments (computer, machinery, factory shed, vehicle, furniture, office equipment) via bank transactions in its reply dated 2 December 2022 to the notice dated 21 November 2022.
- The show cause notices dated 17 June 2023 and 20 June 2023 were silent on the aspect of asset valuation.
Procedural History
- 14.03.2022: Return of income filed for A.Y. 2021-22
- 29.06.2022: Notice under Section 143(2) issued
- 12.08.2022, 21.11.2022, 02.12.2022: Petitioner's responses to Section 142(1) notices
- 28.12.2022: Search material handed over to DCIT, Surat
- 17.06.2023 & 20.06.2023: Show cause notices issued for unaccounted payments
- 21.06.2023: Assessing Officer's email (off-portal) claiming extension under Section 153 Explanation
- 22.06.2023: Petitioner's reply contesting limitation and merits
- 24.06.2023: Impugned reference order under Section 142A to District Valuation Officer
- 25.06.2023: Limitation expiry date for assessment proceedings
- 2023: Special Civil Application No. 13575 of 2023 filed before Gujarat High Court
- 25.08.2026: Judgment reserved
- 03.09.2026: Judgment pronounced
Relief Sought
The petitioner sought quashing of the reference order dated 24 June 2023 on the grounds that it was a colourable exercise of power made solely to extend the limitation period for completing the assessment, and that the grounds for reference were legally unsustainable and extraneous to the issues under examination.
The Legal Issue
The central question was whether a reference under Section 142A of the Income Tax Act, made one day before the expiry of the limitation period for completing an assessment, constitutes a colourable exercise of power when the Assessing Officer had all necessary material for months but remained inactive, and the grounds for reference are either legally unsustainable or unrelated to the show cause notices issued.
Arguments Presented
For the Petitioner
Learned advocate Mr. B.S. Soparkar submitted that the reference dated 24 June 2023 was a colourable exercise of power, resorted to with the object and effect of artificially extending the period available for completion of the assessment. The reference sought the Valuation Officer's opinion on the fair market value of tangible assets as on 24 June 2023 while acknowledging that assessment proceedings would become time-barred on 25 June 2023. The reference could not have been made as a legitimate step but was consciously resorted to at the fag end of the prescribed period to invoke the statutory consequence of exclusion of time under Section 153 Explanation 1(v). The second ground (bogus depreciation) was legally unsustainable because even if the premise were correct, the Assessing Officer could simply disallow the depreciation claim; valuation of assets had no bearing on the alleged defect. Reliance was placed on Anand Banwarilal Adhukia v. Deputy Commissioner of Income-Tax, Circle-14 (2016) 75 Taxmann.com 301 (Gujarat) and Me & Mummy Hospital v. Assistant Commissioner of Income-Tax (2014) 45 Taxmann.com 248 (Gujarat).
For the Respondent
Learned Senior Standing Counsel Mr. Karan G. Sanghani conceded that the reference relating to depreciation on assets could not be justified, as it is always open for the Assessing Officer to disallow depreciation without a valuation reference. However, he defended the reference relating to unaccounted cash to the group company M/s. Ratnakala Exports Pvt. Ltd., share purchase, other immovable properties, and increase in fixed assets, contending that determination of true and fair market value vis-a-vis declared investment was necessitated and fell within Section 142A. He submitted that the Assessing Officer had scrutinized seized material and correlated it with audited reports and return disclosures from 28 December 2022 to 17 June 2023, and that the proceedings were subsisting on 24 June 2023 with the reference made before expiry of limitation in accordance with Explanation 1(v) to Section 153(1).
The Court's Analysis
The Court examined the established facts and documentary evidence in detail. It noted that the Assessing Officer, in the impugned order itself, recorded that assessment proceedings were pending and would become time-barred on 25 June 2023. The reference was thus made one day prior to the expiry of limitation, with a request for the valuation report by 30 June 2023.
The Court analysed Section 153 Explanation 1(v), which excludes from the limitation period the time commencing from the date of reference to the Valuation Officer under Section 142A(1) and ending with the date of receipt of the report. The petitioner contended that the Assessing Officer invoked this provision to buy further time and extend the limitation beyond 31 December 2022 to 25 June 2023.
On the second ground (bogus depreciation), the Court observed that the Revenue's counsel fairly accepted that the reference could not have been made on this issue, as the Assessing Officer could always disallow depreciation if found impermissible. The Court held that the Assessing Officer acted illegally to strengthen the first ground and attempted to create another ground of bogus depreciation to extend limitation. It could not be countenanced that the Assessing Officer was ignorant of Chapter IV provisions regulating depreciation while making a reference alleging bogus claims.
On the first ground, the Court found it also appeared intentional and raised to extend limitation. The search material had been handed over on 28 December 2022, yet the Assessing Officer sat on it for six months before issuing show cause notices on 17 and 20 June 2023. Those notices were silent on asset valuation. The petitioner had already tendered a detailed explanation of asset payments on 2 December 2022, after which the Assessing Officer did not choose to reopen or question the asset payments until the reference on 24 June 2023. The Court concluded that the Assessing Officer, fully alive to the limitation expiry, showed remissness in completing the assessment and ingeniously raised two issues to cover up his inaction.
"Thus, the overall analysis and the appreciation of facts manifest that the Assessing Officer has very ingeniously raised two issues for making reference to the District Valuation Officer in order to cover-up his inaction in completing the assessment proceedings before 25.06.2023."
The Court held that the reference was a colourable and impermissible exercise of power, without jurisdiction, and liable to be quashed.
The Verdict
The writ petition succeeded. The impugned order dated 24 June 2023, whereby the Assessing Officer referred the matter to the Departmental Valuation Officer a mere day prior to the assessment proceedings becoming time-barred, was quashed. No costs were awarded.
What This Means For Similar Cases
Colourable References At Fag End Of Limitation Are Impermissible
The judgment establishes a clear principle: a reference under Section 142A made on the eve of limitation expiry, when the Assessing Officer has possessed all relevant material for months but remained inactive, will be scrutinised for colourable intent. Practitioners should:
- Track the timeline of when search/survey material was received by the Assessing Officer versus when the reference was made.
- Highlight any unexplained delay between receipt of material and issuance of show cause notices.
- Demonstrate that the assessee has already furnished detailed explanations on the very issues later cited for valuation reference.
Valuation Reference Cannot Substitute For Direct Adjudication Of Issues
The Court's rejection of the bogus depreciation ground reinforces that a valuation reference cannot be used as a proxy for issues the Assessing Officer is empowered to decide directly. Where the alleged defect is a claim of depreciation on assets not in the assessee's name, the remedy is disallowance under the relevant provisions, not a Section 142A reference. Practitioners should:
- Argue that Section 142A is for expert valuation assistance, not for manufacturing jurisdiction to extend time.
- Cite the Revenue's own concession that depreciation can be disallowed without valuation.
Silence In Show Cause Notices Undermines Subsequent Reference
The fact that the show cause notices issued days before the reference were silent on asset valuation, while the reference suddenly introduced valuation as a critical issue, was pivotal. Practitioners should:
- Compare the scope of show cause notices with the grounds in the reference order.
- Argue that a bona fide valuation requirement would have been reflected in prior notices.
- Use the assessee's prior detailed replies (here, the 2 December 2022 reply) to show the Assessing Officer had all information but chose not to act.
