Reassessment Invalid Where AO Relies Solely on Suspicious Transaction Report (STR) and Ignores Assessee’s Detailed Reply and Evidence Regarding Related Party Transactions

ISSUE

Whether the Assessing Officer (AO) can validly pass an order under Section 148A and issue a reopening notice under Section 148 solely based on inputs from a Suspicious Transaction Report (STR) alleging “circuitous transactions,” while failing to consider the detailed explanation and documentary evidence (bank statements) furnished by the assessee that justified the transactions.

FACTS

The Notice: The Assessing Officer issued a show-cause notice dated 31.03.2025 under Section 148A for Assessment Year 2021-22, proposing to reopen the assessment.
The Allegation: The notice was based on an STR suggesting that the assessee-company (having majority Indian shareholders) engaged in “circuitous” transactions with related parties, leading to an alleged escapement of income of approx. Rs. 12.16 crores.
The Reply: The assessee filed a detailed reply on 17.04.2025, enclosing documentary evidence, including bank statements, to explain the nature and source of the questioned transactions.
The Order: The AO passed an order under Section 148A concluding that income had escaped assessment and issued a notice under Section 148 on the same day.
The Grievance: The AO did not point out any infirmity in the documents produced by the assessee nor doubted their genuineness. The order was passed merely on the basis of the STR findings without duly considering the assessee’s submissions.

HELD

Mechanical Reliance on STR: The High Court held that reopening an assessment merely on the basis of findings emerging from a Suspicious Transaction Report (STR), without an independent application of mind to the assessee’s explanation, is unsustainable.
Failure to Consider Reply: The AO failed to duly consider the detailed submissions and explanations tendered by the assessee. The AO neither doubted the documentary evidence (bank statements) nor pointed out any defect in the material furnished.
No Tangible Material: There was no material or evidence on record beyond the “suspicion” in the STR to suggest actual escapement of income, especially when the transactions were fully disclosed and justified by the assessee.
Verdict: The impugned notice under Section 148 and the order under Section 148A were quashed and set aside. [In Favour of Assessee]

KEY TAKEAWAYS

STR is Not Final Proof: A Suspicious Transaction Report (STR) from the Financial Intelligence Unit (FIU) or other agencies is only a “trigger” for inquiry. It is not conclusive proof of tax evasion. If the taxpayer provides a valid explanation with evidence, the AO cannot stick to the STR blindly.
Order Must Address Reply: Under Section 148A, the AO is legally bound to consider the reply. “Consider” means to intellectually engage with the arguments. If the order ignores the bank statements or explanations provided, it violates the statute.
Circuitous Transaction Defense: Allegations of “layering” or “circuitous transactions” must be backed by evidence of cash movement or lack of commercial substance. If all transactions are through banking channels and documented, the “suspicion” alone cannot justify reopening.

HIGH COURT OF GUJARAT

Vivaansh Edutech (P.) Ltd.

Assistant Commissioner of Income-tax^*

A.S. Supehia and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 14156 of 2025

DECEMBER 16, 2025

Tushar Hemani, Sr. Adv. and Ms Vaibhavi K Parikh for the Petitioner. Ms Maithili D Mehta for the Respondent.

JUDGMENT

A.S. Supehia, J.- Rule. Learned Senior Standing Counsel Ms.Maithili D. Mehta waives service of notice of rule on behalf of the respondent.

2. With the consent of the learned advocates appearing for the respective parties, the matter is taken up for final hearing and is decided by this judgment and order.

3. The petition has been filed seeking the following reliefs:

“(a) quash and set aside the impugned notice dated 19.06.2025 as well as the impugned order dated 19.06.2025 at ANNEXURE “A (COLLY.)” to this petition;

(b) pending the admission, hearing and final disposal of this petition, to stay the implementation and operation of the impugned notice dated 19.06.2025 as well as impugned order dated 19.06.2025 at ANNEXURE “A (COLLY.)” to this petition and stay further proceedings for Assessment Year 2021-22;

(d) to provide for the cost of this petition.”

4. The present petitioner has filed this petition under Article 226 of the Constitution of India challenging the notice dated 19.06.2025 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), as well as the order dated 19.06.2025 passed under Section 148A(3) of the Act, whereby the respondent seeks to reopen the income-tax assessment of the petitioner for Assessment Year 2021-22 (hereinafter referred to as “the year under consideration”). It is the case of the petitioner that the said notice and order are bad in law, illegal, contrary to the provisions of the Act and without jurisdiction.

FACTS :-

5. The petitioner is a company incorporated under the provisions of the Companies Act, 2013, and the majority of its shareholders are citizens of India.

6. The respondent issued a Show Cause Notice dated 31.03.2025 under sub-section (1) of Section 148A of the Act, calling upon the petitioner to show cause as to why a notice under Section 148 of the Act should not be issued for the year under consideration.

7. The petitioner, vide its reply dated 17.04.2025, submitted a detailed response to the said Show Cause Notice.

8. Thereafter, the respondent, by order dated 19.06.2025 passed under sub-section (3) of Section 148A of the Act, concluded that income chargeable to tax to the extent of Rs.12,16,51,000/- had escaped assessment and, accordingly, formed an opinion that it was a fit case for issuance of Notice under Section 148 of the Act. Pursuant thereto, the respondent issued the impugned Notice dated 19.06.2025 under Section 148 of the Act, seeking to reopen the assessment of the petitioner for the year under consideration.

SUBMISSIONS ON BEHALF OF THE PETITIONER BY LEARNED SENIOR ADVOCATE MR. HEMANI :-

9. Learned Senior Advocate Mr.Tushar Hemani, assisted by learned advocate Ms.Vaibhavi K. Parikh, appearing for the petitioner has submitted that the impugned Notice issued under Section 148 of the Act and the consequential order passed under sub-section (3) of Section 148A of the Act for the year under consideration are ex facie bad, illegal, contrary to the provisions of law and in gross violation of the fundamental rights guaranteed to the petitioner under Article 14 of the Constitution of India.

10. It is further submitted by the learned Senior Advocate Mr.Hemani that the jurisdiction under Section 147 of the Act can be assumed by the respondent-authority only upon fulfillment of the mandatory condition that income chargeable to tax has, in fact, escaped assessment. In this regard, he has invited the attention of this Court to the fundamental distinction between the erstwhile provisions of Section 147 of the Act, as applicable up to 31.03.2021, and the substituted provisions brought into force with effect from 01.04.2021. He has further submitted that under the unamended provisions, the Assessing Officer was required to have “reason to believe” that income chargeable to tax had escaped assessment. However, under the amended regime with effect from 01.04.2021, the legislature has consciously done away with the expression “reason to believe”, and the invocation of Section 147 is now strictly contingent upon the existence of actual escapement of income chargeable to tax.

11. It is contended that the foundational requirement of escapement of income chargeable to tax is conspicuously absent. The sole allegation of the respondent revolves around the so-called “circuitous” nature of transactions with related parties. However, no material or evidence whatsoever has been brought on record to indicate any escapement of income arising from such transactions.

12. It is also submitted that the respondent-authority has not found any infirmity or defect in the documentary evidence furnished by the petitioner, including the bank statements reflecting the transactions in question. There is no finding of any exchange of cash, nor is there any material to suggest any return of money after the execution of the transactions through banking channels and the impugned reopening has been initiated mechanically and solely on the basis of inputs received through the STR (Suspicious Transaction Report), without due consideration of the detailed submissions and documentary evidence placed on record.

13. In view of the aforesaid submissions, learned Senior Advocate Mr.Hemani has urged that the present writ petition may be allowed.

SUBMISSIONS ON BEHALF OF THE RESPONDENT :-

14. Per contra, learned Senior Standing Counsel Ms.Maithili D. Mehta, appearing for the respondent, while placing reliance upon the observations recorded in the impugned Notice as well as the impugned Order, has submitted that there exists sufficient material on record to indicate that the petitioner has failed to disclose the loan transactions undertaken for the purpose of fulfilling one of the orders received. It is submitted that the loan amount so obtained was utilised for repayment of services availed. It is further submitted by her that the petitioner-assessee has failed to substantiate the nature of the sales allegedly made to Infinium Motors Private Limited and has not produced any cogent or supporting documentary evidence in that regard. She has further submitted that, despite claiming substantial expenditure towards cost of services amounting to Rs.10,54,40,746/-, the assessee has failed to furnish any satisfactory explanation or supporting material to justify the said claim.

15. In view of the aforesaid submissions, learned Senior Standing Counsel Ms.Mehta has urged that the present writ petition does not merit interference by this Court and the same deserves to be dismissed.

16. We have heard the learned advocates appearing for the respective parties.

ANALYSIS AND CONCLUSION :

17. The respondent has sought to reopen the assessment by invoking the provisions of Section 148 of the Act on the ground that income offered by the petitioner has escaped assessment. A perusal of the impugned notice as well as the impugned order reveals that the respondent has formed such an opinion primarily on the allegation that the petitioner had entered into “circuitous” transactions with related parties. However, we do not find any material or evidence worth the name on record to suggest that there was any escapement of income on account of such transactions, which would invite the rigours of Section 148 of the Act. No finding has been recorded by the respondent-authorities with regard to any exchange of cash or any return of money after the execution of the transactions in question.

18. It is not in dispute that the respondent has reopened the assessment merely on the basis of the findings emerging from the STR (Suspicious Transaction Report), without duly considering the submissions and explanations tendered by the petitioner. We also find that the petitioner had fully disclosed the income and had justified the same in the reply filed before the authorities.

19. Further, it emerges from the record that the respondent has neither doubted the documentary evidence produced by the petitioner nor pointed out any infirmity in the material furnished in relation to the transactions reflected in the petitioner’s bank account. The said documentary evidence has neither been dealt with nor even considered by the respondent while passing the impugned order. In such circumstances, the impugned Notice dated 19.06.2025 as well as the impugned Order dated 19.06.2025 (at Annexure-A) cannot be sustained and deserve to be quashed and set aside.

20. In view of the overall appreciation of facts and the analysis, the present writ petition succeeds and is hereby allowed. The impugned notice dated 19.06.2025 as well as the impugned order dated 19.06.2025 (Annexure-A) are hereby quashed and set aside. Rule is made absolute. No order as to costs.