Bogus Royalty Expenses Exceed ₹50 Lakh: Bombay HC upholds Income Tax Reassessment Beyond 3 Years [Read Order]

The Bombay High Court at Goa has clarified that income tax reassessment proceedings initiated beyond three years are valid where the alleged bogus royalty expenses exceed ₹50 lakh.

The division bench comprising Justice Bharati Dangre and Justice Nivedita P. Mehta was hearing a petition filed by Molbio Diagnostics Limited, a medical diagnostic device company engaged in providing point-of-care platforms for disease diagnostics. The company had appointed M/s Nexellence Consulting Pvt. Ltd. as consultants for government tenders relating to its products and services.

The assessee’s return was processed under Section 143(1) of the Act. Subsequently, based on information gathered from a survey under Section 133A, the Assessing Officer issued a notice under Section 148A(b) alleging that income had escaped assessment due to bogus royalty expenses. It was alleged that the royalty payments claimed by the assessee were mere book entries made to reduce taxable profits.

By an order under Section 148A(d), the department concluded that the assessee had booked bogus royalty expenses for Assessment Year 2020-21 amounting to over ₹1.50 crore, bringing the case squarely within the ambit of Section 149(1)(b). Accordingly, a reassessment notice under Section 148 was issued.

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The assessee argued that the reassessment was barred by limitation, contending that the escapement of income was below the ₹50 lakh threshold. It submitted that the expenditure was less than ₹50 lakh in respect of both M/s Stellar and M/s Nexellence, and therefore, the notice could not be sustained beyond the statutory period of three years.

Rejecting this contention, the Court held that the jurisdictional requirement of Section 149(1)(b) was met, as the alleged bogus expenses exceeded the statutory threshold. The bench observed that the Assessing Officer had formed a reasonable belief based on material gathered during the survey, and the assessee would have a full opportunity to substantiate its claim during the reassessment proceedings.

Section 149(1)(b) of the Income Tax Act is a jurisdictional fact that must be satisfied before reopening an assessment.

The Court clarified that the assessee’s claim that the expenses were below the ₹50 lakh threshold could not be accepted outright at this stage. Instead, such factual disputes must be examined during reassessment by the tax authorities.

Once the threshold of ₹50 lakh is crossed, reassessment beyond three years is permissible under Section 149(1)(b) of the Income Tax Act.

Concluding the matter, the bench dismissed the writ petition, holding that the reassessment proceedings were not without jurisdiction.

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