Reassessment Cannot Be Initiated On Mere Suspicion Without

Reassessment Cannot Be Initiated On Mere Suspicion Without Information Indicating Escapement Of Recorded Business Income

Issue

Whether reassessment under Section 148 can be initiated on the basis of a Suspicious Transaction Report (STR) flagging high-value transactions, when all transactions are duly recorded in books of accounts and there is no material indicating that the entries were bogus or resulted in tax escapement.

Facts

Assessee & Assessment Year: The case pertains to the assessee for Assessment Year 2020-21.
Basis of Reopening: Reassessment proceedings were initiated under Sections 148A and 148 based on a Suspicious Transaction Report (STR) flagged on the Insight portal regarding an ICICI Bank account.
Flagged Transactions: The STR reflected transactions amounting to approximately ₹45.50 crores in the bank account of the assessee’s LLP and ₹499.65 crores in the bank account of the assessee’s sole proprietorship.
Compliance to Summons: In response to summons issued under Section 131(1A), the assessee submitted comprehensive books of accounts, including audit reports, balance sheets, profit and loss accounts, bank books, cash books, and ledgers of transacting parties.
Order under Section 148A(3): Revenue issued a show cause under Section 148A(1) alleging non-response, and subsequently passed an order under Section 148A(3) alleging income escapement of approximately ₹499.65 crores based on same-day credit-debit patterns and large transfers.
Lack of Unrecorded Material: Revenue did not possess any material or information demonstrating that the recorded transactions between the assessee, the partnership firm, or the proprietorship were bogus or constituted accommodation entries leading to tax escapement.

Decision

Invalidity of Reopening: In favor of Assessee. The court held that since all transactions were duly recorded in the books of accounts and provided to the department, mere suspicion without supporting material does not justify reopening an assessment.
Quashing of Order: Reassessment proceedings and orders issued under Section 148A(3) based purely on high-volume, recorded banking patterns without evidence of unrecorded income or bogus entries are unsustainable in law.

Key Takeaways

Suspicion vs. Information: High-value banking transactions or STR flags on internal tax portals constitute points of inquiry, but cannot automatically serve as “information” indicating income escapement unless backed by material proving the entries are bogus or accommodation in nature.
Disclosure in Books of Accounts: Where transactions are fully reflected in audited financial statements, bank books, and ledgers, Section 147/148 cannot be invoked on the ground of same-day banking flows or volume alone.
Threshold for Reassessment: Reopening requires tangible material establishing a direct link to escaped income, rather than speculative assumptions drawn from disclosed routine business transactions.

HIGH COURT OF GUJARAT

Rajesh Sunderdas Vaswani

Deputy Commissioner of Income-tax

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NOS. 15090 & 15138 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 both these writ petitions is same, the same is decided by present common judgment wherein Special Civil Application No.15090 of 2025 is taken up as a lead matter.

2. The petitioner who is the partner of Venus Infrabuild as well as the proprietor of Sundardeep Builders, is challenging the show cause notice dated 26.06.2025 issued under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) as well as the impugned order dated 26.06.2025 passed under Section 148A(3) of the Act for Assessment Year (for short ‘A.Y.’) 2020-21.

2.1 The respondent issued the show cause notice dated 15.03.2025 under sub-section (1) of section 148A of the Act whereby the Petitioner was called upon to show cause as to why notice under section 148 of the Act should not be issued for the year under consideration.

2.2 The petitioner is one of the entity who has made transactions with M/s. Sundaram Landscape LLP and M/s. Sunderdeep Builders during the year under consideration. The petitioner, vide letters dated 09.04.2025, 18.04.2025 and 10.06.2025, furnished detailed replies to the said show cause notice.

2.3 The respondent, vide order dated 26.06.2025 passed under subSection (3) of section 148A of the Act, concluded that there is escapement of income chargeable to tax to the tune of Rs. 499,65,23,000/-.

3. Learned Senior Advocate Mr.Tushar Hemani appearing for the petitioner submitted that the provision of Section 147 of the Act can be invoked by the income tax department only if any income chargeable to tax has “escaped assessment”.

3.1 It is submitted that in the present case, the very pre-requisite for invoking Section 147 of the Act (i.e. escapement of income chargeable to tax) is not proved.

3.2 It is submitted that the amount of escapement of income of Rs.499,65,23,000/- arrived at by the respondent in the impugned order only relates to transactions in bank account of M/s.Sunderdeep Builders (proprietorship concern of petitioner) and does not relate to transaction with M/s. Sundaram Landscape LLP. The finding of the respondent that the Petitioner has not submitted any details of documents to prove the nature or genuineness of the transactions is factually incorrect. The Petitioner has placed on record the following documents in reply to summons issued by the investigation department:

Audit report and financial statements of the Petitioner

Bank book of all the bank accounts

Cash book

Ledgers of all the parties called for by the investigation department with whom transactions are made through the bank account in question.

3.3 It is submitted that the petitioner has furnished the books of accounts of M/s.Sunderdeep Builders including cash book, bank book, financial statements, etc. and hence, the finding that the petitioner has failed to explain the nature of the transactions in the bank account is incorrect since the nature of all the transactions are evident from such books of accounts.

3.4 It is submitted that the respondent has raised doubts regarding genuineness of transactions in the bank account. However, except for the suspicions raised in Suspicious Transaction Report (for short ‘STR’) regarding pattern of transactions appearing in the bank account, there is no evidence with the Respondent like some seized material, statement of third party, etc. indicating that such transactions are bogus or accommodation entries which resulted in the escapement of income chargeable to tax.

3.5 Thus, it is urged that the reopening of the assessment merely on the basis of analysis of STR without any concrete material is bad in law and required to be quashed and set aside. Moreover, it is also informed by learned Senior Advocate Mr.Hemani that the assessment against M/s.Sunderdeep Builders is already dropped by the Revenue.

4. Opposing the present writ petition learned Senior Standing Counsel Mr.Varun K. Patel has submitted that the Revenue had received the information suggesting the escapement of taxable income on the insight portal and on analysis of the same and looking to the transaction pattern it was observed that on 31.01.2020, Rs.60 crores were credited through transfers from Infi M and M Developers LLP on the same day and same amount got debited through internet fund transfer.

4.1 He submitted that there were other similar transactions relating to Raghuleela Infra Energy Private Limited of Rs.15 crores dated 19.03.2020 and since the transactions appear to be suspicious, the reopening is valid and hence, the same may not be interfered with at this stage.

5. We have heard the learned advocates appearing for the respective parties at length. The respondent by the impugned notice as well as order has sought reopening of the assessment for financial year 2020-21. The petitioner was issued the show cause notice dated 15.03.2025 under Section 148A(1) of the Act on the basis of the STR which was flagged on the insight portal relating to the transaction for the A.Y. 2020-21 in ICICI Bank account of partnership firm M/s.Sundaram Landscape LLP. Thus, it is not in dispute that the petitioner is a partner of M/s Sundaram Landscape LLP. The STR also reflected the transactions of bank account of M/s.Sundardeep Builders which is the proprietorship concern of the present petitioner.

6. The STR reflected an amount of Rs.45.50 crores of the ICICI bank account of Sundaram Landscape LLP and amount of Rs.499.65 crores of Sundardeep Builders. A summon was issued by the Investigation Department under Section 131(1A) of the Act. The petitioner accordingly responded to the summon by filing a detailed reply on 05.02.2025 giving all the audit report, balance sheets, P&L etc. However it is interesting to note that, in the show cause notice under Section 148(1) of the Act dated 15.03.2025 it is recorded that the petitioner had not responded till date which is a factually incorrect statement recorded in the impugned show cause notice.

7. The reopening under the provision of Section 147 of the Act is permissible only if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment. In the present case, the provisions have been invoked on STR by alleging that the transactions by the petitioner with its partnership and proprietorship are doubtful. The petitioner in his reply had pointed out all the details with its partnership firms and the proprietorship. However, in the impugned order dated 25.06.2025 passed under Section 148(A)(3) of the Act it has been recorded that the petitioner assessee has not submitted any details or documents to prove the nature of genuineness of the transaction which is also an incorrect fact recorded in the impugned order. It is further recorded that the petitioner (assessee) in his reply in response to the show cause has not submitted any details regarding nature of such transactions or pattern of this transaction which runs contrary to the reply filed by the petitioner dated 10.04.2025. It is not the case of the Revenue that they are in possession of any material or any information which would indicate that the transactions entered by the petitioner with its partnership firm or proprietorship are bogus and are accommodation entries which resulted into escapement of income chargeable to tax.

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 was 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 partners, and are fully disclosed. All the transactions are recorded in the books of accounts providing details of transactions of both the firms, and were furnished to the investigation department.

9. Thus, we are inclined to quash and set aside the impugned show cause notice as well as the impugned order as the respondent is miserably failed before us to justify the reopening of the assessment. The impugned show cause notice dated 26.06.2025 as well as the impugned order dated 26.06.2025 are quashed and set aside.