Reassessment Order Based on Mere Suspicion Without Materials

Reassessment Order Based on Mere Suspicion Without Materials Countering Assessee’s Documented Explanations Quashed

Issue

Whether a reassessment notice under Section 148 and order under Section 148A(3) based on Suspicious Transaction Reports (STRs) can be sustained when the Assessing Officer fails to substantively deal with the assessee’s supporting documents and possesses no material indicating bogus transactions or income escapement.

Facts

STR Flagging: For Assessment Year 2021–22, the assessee-firm was flagged through a Suspicious Transaction Report (STR) due to large bank credits and high-value non-cash transactions involving immediate debits.
Information Furnished: In response to summons issued under Section 131(1A), the assessee provided relevant details and documentation to the tax authorities.
Detailed Explanation to SCN: Following a show-cause notice under Section 148A(1), the assessee produced audited financial statements, partners’ capital accounts, and tax audit reports.
Inter-se & Loan Explanation: The assessee explained that the flagged transactions were inter-se transactions among partners and unsecured loans obtained from eight specific entities.
Reassessment Order Issued: Without substantively addressing or verifying the assessee’s explanations and supporting documentary proof, the Assessing Officer issued an order under Section 148A(3) and a notice under Section 148 alleging escapement of income.

Decision

Mere Suspicion Invalidates Reassessment: The High Court/Tribunal held that the Revenue possessed no independent material or third-party information demonstrating that the bank transactions were bogus or constituted accommodation entries leading to income escapement.
Inter-se Transactions Verified: Since the transactions were inter-se between partners and supported by audited records, mere suspicion arising from high-value bank movements could not justify reopening an assessment.
Notice & Order Quashed: The impugned order passed under Section 148A(3) and the notice issued under Section 148 were quashed, deciding the issue in favor of the assessee.

Key Takeaways

Suspicion Is Not Material for Reopening: High-value transactions or automated STR flags create suspicion, but reassessment under Section 148A requires concrete, tangible material indicating actual income escapement.
Duty to Reasonably Evaluate Evidence: The Assessing Officer cannot mechanically issue Section 148 notices by ignoring or failing to substantively rebut audited books, partners’ capital accounts, and financial records submitted by the assessee.
Inter-se Partner Transactions: Transactions occurring internally among partners or supported by verifiable accounting entries do not automatically amount to unexplained cash credits under Section 68 without evidence proving them to be accommodation entries.

HIGH COURT OF GUJARAT

Venus Infrabuild

Deputy Commissioner of Income-tax

A.S. Supehia and Vaibhavi D. Nanavati, JJ.

R/SPECIAL CIVIL APPLICATION NO. 14402, 15414 and 16071 of 2025

JULY 27, 2026

Ms Vaibhavi K Parikh for the Petitioner. Varun K.Patel for the Respondent.

JUDGMENT

A.S. Supehia, J. – Since the issue involved in all these writ petitions is same, the same is decided by present common judgment wherein Special Civil Application No.14402 of 2025 is taken up as a lead matter.

2. The petitioner is a partnership firm incorporated under the Partnership Act, 1932 has been issued a show cause notice dated 13.03.2025 under Sub Section (1) of Section 148A of the Income Tax Act, 1961 (for short ‘the Act’) seeking reopening of the assessment on the basis of Suspicious Transaction Report (for short ‘STR’) conducted by Deputy Director of Income Tax (Investigation) (for short ‘DDIT’) which is assailed by the petitioner in the present writ petition alongwith impugned notice under Section 148 of the Act and the order passed under Section 148A(3) of the Act dated 25.06.2025. Pursuant to the notice issued to the petitioner, the petitioner vide letters dated 29.03.2025 and 09.04.2025 explained its business of development and constructions and all the transactions with its partners alongwith documentary evidence. However, by the impugned order dated 25.06.2025 passed under Section 148A(3) of the Act was concluded that there is escapement of income chargeable to tax to the tune of Rs.61,83,23,518/-.

3. Learned Senior Advocate Mr.Tushar Hemani appearing for the petitioner submitted that in the present case the provisions of Section 147 of the Act are not attracted as no income chargeable to tax has escaped assessment. It is contended that the reply filed by the petitioner to the show cause notice is not appropriately dealt with and the same is cursorily referred in the impugned order and hence it calls for interference and may be quashed and set aside.

3.1 He has submitted that the STR is premised on the suspicions of huge credits in the bank account, high value non-cash transactions routing of funds which is in fact with the partners of the firm which has been duly reflected in the accounts of the partners as well as the present petitioner.

3.2 It is submitted that the Assessing Officer has alleged escapement of income on account of transaction with Venus Infrastructure Development Private Limited (for short ‘VIDPL’) which is a partner in the petitioner’s partnership firm and there cannot be any escapement of income in the hands of partnership firm on account of credits in the capital account of a partner.

3.3 It is further submitted that there is no evidence with the respondent in the nature of any incriminating material or seized material indicating that the transactions appearing in the bank account of the petitioner are bogus or accommodation entries which results into escapement of income. Finally, while pointing out to the reasons assigned in the impugned order, it is contended by learned Senior Advocate Mr.Hemani that the Assessing Officer has alleged that since M/s.Venus Infrabuild i.e. the petitioner does not have any loan providing business and neither it had requirement of funds, the high value transactions are suspicious in nature which can never be a reason for reopening the assessment.

3.4 He submitted that if it was the case of the Revenue that the petitioner was providing loan despite not having loan providing business, for which there are other statutory provisions to take care of that but, the reopening cannot be premised on such a reason. Thus, it is urged that the impugned order is required to be quashed and set aside.

4. Opposing the present writ petition learned Senior Standing Counsel Mr.Varun K. Patel has urged that, at this stage, the assessment may not be interfered with since the petitioner’s reply has been duly considered by the Assessing Officer and prima facie opinion is formed that income chargeable to tax has escaped assessment. While referring to the provision of Section 148A of the Act, it is contended that the information suggesting the escapement of taxable income was flagged on the Insight Portal for Financial Year 2020-21 relevant to Assessment Year (for short ‘A.Y.’) 2021-22, and upon analyzing such transaction pattern, it has been observed that there were credits followed by immediate debits on the same or very next day.

4.1 He submitted that huge funds were received and transferred to various entities i.e. Rajesh Sunderdas Vaswani, Venus Infrastructure Development Private Limited etc., which points out to the suspicious transactions, and hence, the same would attract the provision of Section 148 of the Act. Thus, it is urged that petition may not be entertained.

5. We have heard the learned counsel appearing for the respective parties at length. The petitioner on being issued the show cause notice dated 13.03.2025 under Sub Section (1) of Section 148A of the Act, alleging suspicious transaction based on the STR conducted by DDIT, filed detailed reply on 29.03.2025 and 09.04.2025. The grounds of suspicious contained in the STR is huge credits in the bank account, high value non-cash withdrawals in the bank accounts and routing of funds. i.e. the credits in the bank account followed by immediate debits on the same very next day. Thus, the STR reported total credits of Rs.89.86 crores and total debits of Rs.89.77 crores. The petitioner was accordingly issued summons under Section 131(1A) of the Act on 20.01.2024 and 31.01.2024 calling upon for various details and documentary evidence which were responded by the petitioner via letters dated 25.01.2024 and 02.02.2024.

6. The petitioner pursuant to the show cause notice dated 13.03.2025 filed the detailed reply, as mentioned herein above, furnishing documentary evidence of the transactions in question such as audited financial statements, partners capital account, tax audit reports, etc. However, the aforesaid reply was not accepted, and ultimately the impugned order dated 25.06.2025 was passed under Section 148A(3) of the Act alleging that the escapement of income chargeable to tax to the tune of Rs.61,83,23,518/-.

7. Upon reviewing the impugned order, we note that the Assessing Officer failed to address both the contents of the reply and the documentary evidence submitted by the petitioner on 29.03.2025. A perusal of the reply reveals that the petitioner explicitly detailed its transactions with VIDPL and referenced eight other entities from which unsecured loans were obtained during the years under consideration. The petitioner also mentioned that it received funds from and also provided funds to its partners, namely (1) Rajesh S. Vaswani and (2) Venus Infrastructures and Developers Private Limited (VIDPL). Furthermore, details regarding interest incurred on unsecured loans from its partners were clarified, and the petitioner asserted that it did not charge interest on loans extended to Mahika Infra LLP and Venus Palm Infraspace LLP. It was finally submitted that the entire investment in the stock is partly out of partner’s capital of Rs.22,58,34,379/- and partly out of unsecured loan of Rs.32,24,81,267/-. Further explanation was given that so far as the interest-free loans and advances are concerned, the same were out of interest-free funds available in the form of interest-free unsecured loan, hence the question of disallowance under Section 36(1)(iii) of the Act does not arise. While passing the impugned order, the Assessing Officer has not delved into such reasoning and the documentary evidence given by the petitioner, except that the bank statement which flagged the transactions were pasted in the impugned order and ultimately, in paragraph No.4.2 of the impugned order, the reopening of the assessment has been justified by opining as under :-

“4.2 It is also highlighted that M/s Venus Infrabuild do not have loan providing business neither it had requirement of funds & entering into high financial transactions when compared with the income shown in ITR for A.Y 2021-22 as NIL puts the assessee under suspicion.”

Thus, the reopening is premised on the ground that the transactions with the partners appeared to be doubtful, and the petitioners does not have loan-providing business and neither it had requirement of funds.

8. Nothing is pointed to us that in what manner the loans provided between partners inter se constitute an escapement of income. It is not the case of the Revenue that it is in possession of any information or material or any statement of third party indicating that the transactions appearing in the bank accounts are bogus or are forming part of accommodation entries which ultimately resulted in the escapement of income chargeable to tax. We do not doubt the action of the Revenue in reopening the assessment on the basis of the STR. However, the mere suspicion without any material justifying such suspicion cannot be made a basis for reopening the assessment, more particularly in wake of the fact that the transactions on which the suspicion is premised is inter se between the partner

9. Therefore, we quash and set aside the impugned show-cause notice and order. The respondent failed completely to justify reopening the assessment based on the petitioner’s lack of fund requirements or the fact that it is not in a lending business. In this context, any potential regulatory violations concerning their business nature are governed by other relevant laws. The captioned writ petitions succeed. The impugned show cause notice dated 25.06.2025 as well as the impugned order dated 25.06.2025 are quashed and set aside.