Court sets aside Income Tax orders citing lack of computation details and denial of natural justice in reassessment case involving alleged undisclosed turnover of Rs.13.39 crore.
In a significant ruling on October 7, 2026, the Karnataka High Court, presided over by Justice B. M. Shyam Prasad, quashed the reassessment proceedings initiated against Kunjalu Venkatesh Kini by the Additional Commissioner of Income Tax, Range-1, concerning the assessment year 2021-22. The proceedings, triggered under Sections 147, 148, 148A, 149, and 151 of the Income Tax Act, 1961, were set aside on grounds of procedural infirmities and violation of principles of natural justice.
The case arose when the Income Tax Department issued a notice under Section 148A(1) dated March 27, 2026, alleging non-disclosure of business turnover amounting to Rs.13,39,14,241/- in the petitioner's income tax return. The petitioner responded on April 22, 2026, clarifying that the figure was derived from a difference between bank credits and turnover, pointing out that not all bank credits constitute turnover. He also requested detailed computation of the alleged undisclosed turnover and offered to provide further clarifications.
Despite the petitioner's detailed reply and request for additional information, the Department did not furnish the basis of the computation. Subsequently, prior approval under Sections 148A(3) and 151 was granted on June 11, 2026, and the reassessment order under Section 148A(3) was passed on June 17, 2026.
The petitioner challenged the reassessment order, contending that adverse observations in the order - such as the petitioner's involvement in multiple firms allegedly used for rotating profits, claiming huge expenses without documentary evidence, and obtaining unsecured loans at minimal interest - were not part of the original show cause notice. The petitioner argued these amounted to a denial of a fair hearing and amounted to a roving inquiry beyond the scope of the notice.
The Court agreed with the petitioner's contentions. It observed that the Department failed to provide the computation and material basis for the alleged undisclosed turnover, making the reassessment proceedings unsustainable. The Court also noted a discrepancy in the dates of prior approval, where the approval document was dated March 27, 2026 - the same date as the notice - and before the petitioner's reply, raising questions about the examination of materials before granting approval.
Importantly, the Court held that the adverse propositions made in the reassessment order must be included in the show cause notice to afford the petitioner a fair opportunity to respond, in line with the principles of natural justice.
Accordingly, the Court quashed the order under Section 148A(3), the prior approval under Sections 148A(3) and 151, and the notice under Section 148. It remanded the matter back to the tax authorities for fresh consideration after providing the petitioner with the computation details and a reasonable opportunity to present his case.
This judgment reinforces the requirement of procedural fairness in reassessment proceedings and limits the scope of inquiries to definite aspects clearly communicated to the assessee. The Court's decision serves as a reminder to tax authorities to ensure transparency and adherence to natural justice before proceeding with reassessment actions.
Bottom Line:
Income Tax Act, 1961 - Reassessment proceedings - Order under Section 148A(3), prior approval under Sections 148A(3) and 151, and notice under Section 148 quashed where assessee was not furnished basis of computation of alleged undisclosed turnover and adverse propositions in order were outside show cause notice - Matter remanded for fresh consideration after furnishing computation and granting reasonable opportunity.
Statutory provision(s): Income Tax Act, 1961 Sections 147, 148, 148A(1), 148A(3), 149, 151
