Delhi High Court Grants Partial Relief to Huawei in Income Tax Dispute

The Delhi High Court has granted partial relief to Huawei Telecommunications India in income tax proceedings, setting aside reassessment and special audit directions for the financial year 2013–14 while upholding similar actions for 2015–16.

A Division Bench comprising Justice V Kameswar Rao and Justice Vinod Kumar delivered the ruling in a matter arising out of search and seizure operations conducted by the Income Tax Department India in 2022.

“It is clear from the above extract that as contended by Mr. Rai, the intent of the legislature in introducing the words ―volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee‖ was to expand the scope of the powers available to the Assessing Officer under Section 142(2A) of the Act, because the words ―nature and complexity‖ which existed earlier were being given a restrictive meaning. As such, the facts that the accounts of the petitioner are voluminous, and there is multiplicity of transactions in the accounts of the petitioner, would be sufficient for the Assessing Officer to exercise the power under Section 142(2A) of the Act and direct the petitioner to have its accounts audited. Mr. Rai is justified in relying upon the judgment in the Takshashila Realities Private Limited (supra) wherein it was held that apart from the nature and complexity of accounts, even in case of multiplicity of transactions, in the accounts or specialised nature business activity of the assessee and the interests of the Revenue, the Assessing Officer can pass an order for special audit in exercise of powers conferred under Section 142(2A) of the Act”, the Court concluded.

Following the search, tax authorities had initiated reassessment proceedings for the assessment years 2013–14 and 2015–16, along with directions for a special audit under Section 142(2A) of the Income Tax Act 1961.

The department contended that Huawei’s income had escaped assessment. For 2013–14, it alleged that unaccounted receivables relating to customer claims constituted undisclosed income. For 2015–16, it claimed that such escapement was reflected in the form of an “asset.” It further argued that a special audit was necessary due to discrepancies in the company’s Enterprise Resource Planning data, including duplicate and missing entries, making reconciliation with financial statements difficult.

Huawei challenged the proceedings, arguing that the conditions required for invoking Section 142(2A) were not satisfied. It also contended that the reassessment notices were time barred and lacked any incriminating material demonstrating escapement of income above the statutory threshold.

After examining the record, the High Court drew a clear distinction between the two assessment years. For 2015–16, the Bench held that the tax authorities had sufficient material to form a prima facie belief that income had escaped assessment in the form of assets. It also upheld the special audit direction, observing that the volume and complexity of transactions justified such scrutiny.

However, for 2013–14, the Court found that the department had failed to establish the jurisdictional threshold required to reopen the assessment. It held that no concrete incriminating material had been produced linking alleged income escapement to that year.

Accordingly, the reassessment proceedings for 2013–14 were quashed. The Court further ruled that once the reassessment itself was set aside, the direction for a special audit for that year could not survive.

“…. even when the Assessing Officer is in possession of material which is likely to be incriminating for more than one assessment year, he has to necessarily record the reasons to reopen assessment qua each of the assessment years. It is only through such reasons recorded that a co-relation can be made between the material gathered during the search, and a particular assessment year. Any issuance of notice without fulfilling such jurisdictional mandate would amount to a „fishing and roving enquiry‟, which cannot be permitted……Suffice it to state, we have decided issues raised by the petitioner within this narrow compass, i.e., whether the issuance of the notices for reassessments are bad in law being beyond limitation. Any adjudication on the submissions enumerated would require detailed examination of the accounts of the petitioners, and appreciation of evidence, which squarely fall within the domain of the Assessing Officer. It is not for this Court to step into the shoes of the Assessing Officer and decide these issues on merits under writ jurisdiction. As such, the petitioner may raise all these submissions before the Assessing Officer during the reassessment proceedings”, the Court ruled.

The judgment underscores the importance of strict compliance with statutory requirements in reassessment proceedings while also affirming the tax authorities’ power to order special audits in cases involving complex financial records.

Case Title: M/S Huawei Telecommunications (India) Company Pvt. Ltd. v. Assistant Commissioner of Income Tax, Central Circle-2, Delhi & Anr.

Bench: Justice V Kameswar Rao and Justice Vinod Kumar

Date of Judgment: 30.03.2026