Section 147 Income Tax Act: Supreme Court Says Reassessment Cannot Continue After TDS Default Is Rejected

The Supreme Court has held that reassessment proceedings under Section 147 of the Income Tax Act cannot be sustained if they were initiated on the ground that an assessee failed to deduct Tax Deducted at Source (TDS), but an appellate authority subsequently finds that the assessee was not liable to deduct tax under Section 201 of the Act.

A Bench of Justices J B Pardiwala and K Vinod Chandran clarified that once the alleged TDS default, which formed the basis for initiating reassessment, is found to be non-existent, the Revenue cannot keep the proceedings alive by relying on other grounds to justify reassessment.

Section 147 of the Income Tax Act allows the Income Tax Department to reassess an assessee's income if it has reason to believe that some income has escaped assessment.

Section 201of the Act allows the Department to treat a person who was required to deduct TDS but failed to do so as an 'assessee-in-default' and recover the unpaid tax.

Court was dealing with an appeal filed by the Principal Officer of LG Electronics India Private Limited against the refusal of the high court to interfere with notices issued under Sections 147/148 of the Income Tax Act for the assessment years 2006-07, 2007-08 and 2008-09.

The reassessment proceedings were initiated on the allegation that LG Electronics Korea and other associated enterprises had a permanent establishment (PE) in India, requiring LG Electronics India to deduct TDS on remittances made to them.

The Revenue alleged that the failure to deduct TDS resulted in disallowance of the expenses under Section 40(a)(i) of the Act and, consequently, income had escaped assessment.

The notices under Section 148 were issued on March 28, 2013, March 21, 2014 and March 31, 2015 for the respective assessment years.

Before the high court, the assessee had argued that the reassessment proceedings were barred by limitation and amounted to a mere change of opinion. It also relied on the Double Taxation Avoidance Agreement (DTAA) between India and Korea.

The high court, however, declined to interfere with the notices. It noted that proceedings had also been initiated against LG Electronics Korea and related entities to tax the income in their hands, while proceedings under Section 201 had been initiated against LG Electronics India for failure to deduct tax at source.

The high court also noted that a survey under Section 133A had led to the proceedings for disallowance of expenses under Section 40(a)(i). It left the question relating to the DTAA to be considered during the reassessment proceedings and rejected the assessee's limitation argument, observing that there had been no disclosure regarding the permanent establishment of the Korean company in India.

The Supreme Court, however, took note of the subsequent developments in the Section 201 proceedings.

The Bench found that those proceedings had been carried in appeal and, pursuant to directions of the Dispute Resolution Panel (DRP), the First Appellate Authority had modified the order by determining profits at a 20% markup on 50% of the salary cost of expatriate employees attributed to the permanent establishment of LG Korea in India.

Court also noted that the assessment proceedings against LG Korea were subsequently quashed by the ITAT for non-implementation of the DRP's directions. The appellate orders for assessment years 2005-06 to 2010-11 were not challenged on account of the low tax effect.

Importantly, in the proceedings under Section 201, the ITAT held that there was no tax liability on the payee, LG Korea, and consequently no obligation on LG Electronics India to withhold tax under Section 195.

The assessee was therefore held not liable to be treated as an "assessee-in-default" under Section 201.

The Bench held that once the assessee could not be treated as an assessee-in-default under Section 201, there could be no disallowance of expenses under Section 40(a)(i).

"If the assessee cannot be treated as an ‘assessee-in-default’ under Section 201, necessarily there can be any disallowance made under Section 40(a) (i) of the IT Act and hence even if the reassessment proceedings have been carried out, we are of the opinion that it requires no remand to the Assessing Officer," the Bench said.

Court also rejected the submission of the Additional Solicitor General that reassessment could be sustained on other grounds.

It held that the notice under Section 147 was specifically based on the alleged default under Section 201 and the consequent disallowance of expenses under Section 40(a)(i).

"If the ground on which reassessment is found to be initiated is untenable, then there is no question of any other ground coming forth in the reassessment proceedings being utilized for the purpose of determining escapement of income," the Bench held.

Court consequently held that the reassessment proceedings for assessment years 2006-07 to 2008-09 were unenforceable and directed the assessee to produce its judgment and the ITAT's order in the Section 201 proceedings before the Assessing Officer, who was directed to close the reassessment proceedings.

The appeals were accordingly allowed.

Case Title: Principal Officer LG Electronics India Pvt Ltd Thr Its Authorized Signatory Mr Ashish Agrawal Vs Assistant Commissioner of Income Tax, NOIDA and Anr

Bench: Justices J B Pardiwala and K Vinod Chandran

Date of Judgment: October 07, 2026