Gujarat High Court annuls Section 148 notice where reopening rested on incorrect transaction facts

Background of the dispute

The writ petition was filed by Hiramoti Texchem Pvt. Ltd. Vs ITO (Gujarat High Court) challenging a notice issued under Section 148 of the Income Tax Act 1961 for AY 2013-14. The core issue before the Gujarat High Court was whether reassessment could be initiated when the very foundation of the “reason to believe” – namely, an alleged payment to a supplier – was demonstrably incorrect on facts.

The assessee had already undergone regular scrutiny for the relevant year, culminating in an order under Section 143(3). The subsequent attempt to reopen the assessment was premised on information from the Investigation Wing regarding alleged suspicious transactions with M/s. Manibhadra Textile Company, a proprietorship concern of **Shri Bhavesh Sureshchandra Shah`. The Court examined whether such information, without proper verification against the assessment records and while ignoring actual ledger positions, could justify reopening.

Chronology of assessment and reassessment actions

Original assessment proceedings

  • The assessee filed its return of income for AY 2013-14 on 27.09.2013, declaring income of Rs.23,08,270/-.
  • The case was picked up for scrutiny.
  • An assessment under Section 143(3) was completed on 30.12.2015, determining the total income at Rs.23,08,270/-, i.e., the same amount as originally declared.

Thus, a regular scrutiny assessment had already been concluded, after which the matter attained finality at the assessment level for that year.

Initiation of reassessment under Section 148

Subsequently:

  • A notice under Section 148 dated 28.03.2019 was issued to reopen the assessment for AY 2013-14.
  • The Assessing Officer furnished the recorded reasons for reopening via letter dated 02.05.2019.
  • The assessee filed detailed objections on 04.12.2019, contesting both the factual basis and the legal validity of the reopening, and requested that the reassessment proceedings be dropped.
  • The objections were disposed of by the Assessing Officer through a communication dated **11.12.2019`.

The reassessment was thus formally set in motion four years after completion of the original Section 143(3) assessment.

Basis of reopening: Investigation Wing report

Information received by Assessing Officer

The reopening was anchored on an investigation report from the ADIT (Investigation) / DDIT (Inv.), which contained information about cash withdrawals from the bank account of M/s. Manibhadra Textile Company, a proprietorship of **Shri Bhavesh Sureshchandra Shah`. As per the report:

  • The bank account of M/s. Manibhadra Textile Company reflected credits from three concerns, including the assessee.
  • After receiving such credits, the proprietor allegedly withdrew funds through self-cheques and cash.
  • Based on this, the Investigation Wing raised suspicion regarding the genuineness and nature of the credits and withdrawals.

In the recorded reasons, the Assessing Officer treated an amount of Rs.16,14,883/- as a deposit by the assessee into the bank account of M/s. Manibhadra Textile Company and characterised it as a high-value transaction which, according to him, was not commensurate with the income disclosed by the assessee in the return.

This alleged payment of Rs.16,14,883/- during AY 2013-14 to M/s. Manibhadra Textile Company formed the primary basis for alleging escapement of income and for invoking Section 148.

Assessee’s objections before the Assessing Officer

The assessee, in its objections to the reopening, advanced multiple factual and legal contentions.

Factual contentions

The assessee categorically asserted that:

  • It had not made any payment to M/s. Manibhadra Textile Company during AY 2013-14.
  • The figure of Rs.16,14,883/-, referred to in the reasons for reopening, was not a current year payment, but was merely the opening balance in the ledger account of M/s. Manibhadra Textile Company.
  • During the year, in fact, M/s. Manibhadra Textile Company had returned Rs.2,00,000/- to the assessee on 23.05.2012.