Reassessment Quashed as AO Ignored Evidence Proving the Genuineness of a Loan Transaction
Issue
Can a reopening of assessment under section $148$ of the Income-tax Act, 1961, be sustained if the Assessing Officer (AO) completely disregards documentary evidence submitted by the assessee to prove the genuineness of a transaction and instead jumps to a conclusion based solely on third-party information?
Brief Facts
Following a search conducted on the ‘M group,’ the revenue department found documents indicating that one ‘M finance’ was engaged in providing accommodation entries (bogus transactions for cash). The AO identified the assessee as a beneficiary of these entries and issued a show-cause notice to reopen the assessment for the assessment year 2015-16.
In response, the assessee contended that the transaction was not an accommodation entry but a genuine short-term loan. To substantiate this claim, the assessee submitted several documents, including:
- Its confirmation ledger account.
- The income tax return acknowledgment of the lender (M finance).
- Evidence showing the transaction was conducted through proper banking channels (DD/Cheque/RTGS).
Despite this, the AO failed to consider the evidence provided and proceeded with the reassessment, concluding that the assessee had availed a bogus entry.
Decision
The court ruled decisively in favor of the assessee.
It was held that the Assessing Officer’s action of ignoring the documentary evidence on record was arbitrary and legally unsustainable. The court noted that the assessee had provided credible proof to establish the genuineness of the temporary loan.
By failing to examine these documents and jumping to the conclusion that it was an accommodation entry, the AO acted without proper application of mind. Therefore, the very foundation of the reopening was flawed. Consequently, the impugned reopening notice and the subsequent assessment order were quashed and set aside.
Key Takeaways
- Duty to Examine Evidence: An Assessing Officer has a legal obligation to judiciously consider all documents and submissions made by the assessee before drawing an adverse inference.
- Third-Party Information is Not Absolute: Information gathered from a third-party search can form a “reason to believe” to initiate proceedings, but it cannot be the sole basis for an addition if the assessee provides direct and credible counter-evidence.
- Onus of Proof: When the AO alleges a transaction is non-genuine, and the assessee submits prima facie evidence (like bank records, confirmations, and the lender’s tax records) to prove its genuineness, the onus shifts back to the AO to rebut this evidence with concrete findings.
- Arbitrary Orders are Invalid: An assessment order passed without considering the assessee’s reply or the evidence on record is a violation of the principles of natural justice and is liable to be quashed.
HIGH COURT OF GUJARAT
Balkrishna Mangaldas Thakkar
v.
Deputy Commissioner of Income-tax
BHARGAV D. KARIA and Pranav Trivedi, JJ.
R/SPECIAL CIVIL APPLICATION NO. 4200 of 2023
AUGUST 5, 2025
S.N. Divatia for the Petitioner. Mrs. Kalpana K. Raval for the Respondent.
ORDER
1 Heard Mr.S.N.Divatia, learned advocate for the petitioner and Ms.Maithili Mehta, learned Senior Standing Counsel for the respondent.
2. Rule returnable forthwith. Learned Senior Standing Counsel Ms. Maithili Mehta waives service of notice of Rule on behalf of the respondent.
3. By this petition under Article 226 of the Constitution of India, the petitioner has challenged the validity of the order passed under Section 148(d) of the Income Tax Act, 1961 (For short ‘the Act’) dated 31.03.2022 whereby the respondent has held that this was a fit case for issuance of notice under Section 148 of the Act for the reason that income chargeable to tax has escaped assessment and the notice of even date issued under Section 148 of the Act for Assessment Year 2015-16.
4. The assessee filed return of income declaring total income of Rs.74,74,450/- on 28th August, 2015 for the Assessment Year 2015-16. Subsequently the return was processed and order under Section 143(1) of the Act was passed.
5. Thereafter, the respondent issued notice under Section 148A(b) on 17th March, 2022, which reads as under :-
ANNEXURE
“As per the information received from the credible sources that a search action u/s.132 of the Income-tax Act, 1961 was carried in Mehta Soni Group of cases on 30.07.2018. During the course of search action various incriminating documents such as loose papers, digital data were found and seized from the business premises of Mehta Soni Group of cases. On carefully examining the information received from the credible source and also on perusal of the same, it is seen that Mehta Finance has received cash against which Cheque or DD issued to customers. During the course of search action, Shri Dipak Rasiklal Mehta of Mehta Finance was confronted that the main modus operandi of business is received cash from various party/persons(s) and issued Cheque/DD against it. On a careful analysis of the information SO received, it is further seen that, Mehta Soni Group of cases are providing accommodation entries by way of DD/Cheque/RTGS who have come with cash. Moreover, Mehta Finance was engaged in business of money lending and cheque discounting activity. M/S. Mehta Finance charged rate of commission 0.05 to 0.10% per lacs. On perusal of information SO received, it is noticed that, the assessee Balkrishna Mangaldas Thakkar (AAHPT2951L) is one of the beneficiaries who has availed/obtained accommodation entries by way of banking channel against cash to the tune of Rs.1,25,00,000/- under various head from Mehta Finance (AACFM5349L) and other Mehta Soni Group of companies.
Considering the above facts, you are requested to submit your explanation/clarification alongwith supporting documentary evidences, if any, relating to the issue as discussed above on or before the date mentioned in the notice.”
6. The petitioner submitted reply along with the relevant documents to the said notice on 22nd March, 2022 contending that the petitioner has availed the temporary loan from Mehta Finance through banking channel and therefore, the petitioner is not a beneficiary of the alleged accommodation entry, as stated in the notice issued by the respondent under Section 148 A(b) of the Act.
7. The petitioner also contended in the reply that the loan transaction taken by the petitioner from Mehta Finance may not be considered as an “asset” within the meaning and definition as per the Explanation 1 to Section 149(1)(b) of the Act and therefore, the impugned notice, which is admittedly issued beyond a period of three years, is without jurisdiction.
8. Thereafter, respondent passed the impugned order under Section 148A(d) of the Act dated 31.03.2022 and issued notice under Section 148 of even date seeking reopening of assessment proceedings.
9. Mr.S.N.Divatia, learned advocate for the petitioner has submitted that on the face of the record, there is no accommodation entry availed by the petitioner. Mr.S.N.Divatia, learned advocate for the petitioner has referred to the ledger account of the petitioner from the books of Mehta Finance for the Financial Year 2014-15, which shows that the petitioner received Rs.1,25,00,000/- in the last week of March, 2015, which was returned back on the next day. It was pointed out that Rs.50,00,000/- was received on 20th March, 2015 and Rs.75,00,000/- was received on 23th March, 2015 and on 23rd March, 2015, Rs.75,00,000/- were returned and on 24th March, 2015, Rs.50,00,000/- were returned by the petitioner and there is nil balances in the books of the accounts. It was, therefore, submitted that the petitioner has not availed any benefit of accommodation entry and it was a short-term loan availed by the petitioner from the Mehta Finance.
10. It was submitted by Mr.S.N.Divatia, learned advocate for the petitioner that there is no income, which can be said to escape the assessment, more particularly when the petitioner has not availed any benefit out of the alleged accommodation entry admitted by Mr.Dipak Rasiklal Mehta for the Mehta Finance during the course of such proceedings conducted by the respondent authority on 30th July, 2018.
11. It was further submitted that in view of any tangible material available on the record or referred by the Assessing Officer to reopen the assessment so as to hold that the petitioner is a beneficiary of the accommodation entry, it cannot be said to be a fit case to reopen the assessment.
12. On the other hand, Ms. Maithili Mehta, learned Senior Standing Counsel for the respondent has referred to and relied upon the order passed under Section 148A(d) of the Act to submit that there is a categorical finding arrived at by the Assessing Officer that the petitioner is one of the beneficiaries, who has availed / obtained the accommodation entry by way of banking channel against cash to the tune of Rs.1,25,00,000/-. It was, therefore, submitted that the petitioner has also failed to substantiate documentary evidence such as source of huge funds, accountability of inward / outward of the funds, cash / cheque in the books of accounts.
13. It was, therefore, submitted that no interference may be made while exercising the extraordinary jurisdiction by this Court under Article 226 of the Constitution of India.
14. Considering the submissions made by the learned advocates for both sides and on perusal of the documents placed on record, it appears that the petitioner has submitted the documents to show that he has availed a short-term finance between 20th March, 2015 and 24th March, 2015, which cannot be said to be availing the accommodation entry as alleged by the respondent Assessing Officer resulting into any escapement of the income to the tune of Rs. 1,25,00,000/-.
15. The petitioner received Rs.50,00,000/- from the Mehta Finance on 20th March, 2015 and Rs.75,00,000/- on 23rd March, 2015, which was returned on 23rd March, 2015 itself, whereas Rs.50,00,000/- was returned on 24th March, 2015 as is evident from the confirmation ledger account of the petitioner from the books of the Mehta Finance filed by the petitioner along with the acknowledgment of the income tax return filed by the said Mehta Finance with a reply to show that the petitioner has entered into a genuine temporary loan transaction through banking channel. The respondent – Assessing Officer, however, failed to consider such documents on record and has jumped to the conclusion that the petitioner is one of the beneficiaries, who has availed / obtained accommodation entries by way of the banking channel against cash to the tune of Rs.1,25,00,000/- without there being any supporting, independent, tangible material in possession of the Assessing Officer. It is, therefore, evident that the notice issued under Section 148 of the Act for reopening as well as the order passed under Section 148A(d) of the Act are on the basis of the inference drawn pursuant to the search, which had taken place on 30th July, 2018 in case of Mehta Sony Group.
16. In view of the foregoing reasons, the impugned notice dated 31st March, 2022 issued under Section 148 of the Act as well as the order issued under Section 148A(d) of the Act are hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.