The Gujarat High Court has quashed an order passed under Section 148A(d) and the consequential reassessment proceedings against a taxpayer after holding that the Assessing Officer (AO) had incorrectly computed the alleged escaped income at ₹70 lakh.
The bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati has found that once the disputed amount was properly examined, the alleged escapement would fall below the statutory threshold of ₹50 lakh, thereby rendering the reopening proceedings time-barred under Section 149 of the Income Tax Act.
The petitioner challenged the order dated July 27, 2022 passed under Section 148A(d) of the Income Tax Act, which had approved reopening of its assessment for Assessment Year (AY) 2013-14. The reassessment proceedings were initiated on the basis of information allegedly unearthed during a search conducted on February 5, 2016 in the case of one Vipul Vidur Bhatt, who was alleged to be involved in providing accommodation entries.
According to the tax department, the petitioner had received accommodation entries aggregating ₹70 lakh through certain entities, resulting in income escaping assessment. Based on this information, a notice under Section 148A(b) was issued, followed by the impugned order under Section 148A(d) and a notice under Section 148.
The petitioner contended that the reopening proceedings were founded on a complete misreading of its books of accounts and ledger entries. It argued that the alleged accommodation entries of ₹70 lakh were wrongly computed because the department ignored the true nature of various debit and credit transactions already disclosed in the records.
The petitioner pointed out that an amount of ₹20 lakh relating to Acute Consultancy Ltd. represented an opening balance. The ₹25 lakh debit and corresponding ₹25 lakh credit relating to Sampada Chemicals Ltd. effectively resulted in a nil transaction for the relevant year. Another ₹25 lakh entry relating to Shyam Alcohol & Chemicals Ltd. was also merely an opening balance.
It was argued that once these facts were properly appreciated, the alleged escaped income would not exceed ₹50 lakh. Consequently, the extended limitation period under Section 149 could not be invoked, making the reassessment proceedings invalid.
The department opposed the petition and maintained that sufficient material existed linking the petitioner with the accommodation entry operator. It relied upon material recovered during the search and the alleged confession of Vipul Vidur Bhatt. According to the department, the routing of ₹25 lakh back to the entry operator did not eliminate the taxability of the entire ₹70 lakh allegedly introduced into the petitioner’s books from unexplained sources.
The department further argued that the threshold prescribed under Section 149 would not protect the petitioner from reassessment proceedings.
The High Court noted that the entire basis of reopening rested on the assumption that income of ₹70 lakh had escaped assessment. However, the Court found merit in the petitioner’s explanation regarding the nature of the entries reflected in its ledger accounts.
The Bench observed that the details of beneficiaries, PAN numbers, and corresponding debit and credit entries had already been furnished and were available with the department. Despite this, the Assessing Officer failed to properly appreciate the transactions and proceeded on an incorrect premise while computing the alleged escaped income.
The Court specifically noted that the ₹20 lakh entry relating to Acute Consultancy Ltd. was merely an opening balance. The ₹25 lakh debit and ₹25 lakh credit entries concerning Sampada Chemicals Ltd. effectively neutralized each other, resulting in a nil transaction. The ₹25 lakh entry concerning Shyam Alcohol & Chemicals Ltd. was also an opening balance.
According to the Court, the Assessing Officer completely ignored the credit entry of ₹25 lakh while computing the alleged escapement. Once this amount was excluded, the alleged escaped income would stand reduced to ₹45 lakh.
The High Court emphasized that once the alleged escaped income fell below ₹50 lakh, the reopening proceedings could not survive in view of the limitation provisions contained in Section 149 of the Income Tax Act. The Court observed that the proviso to Section 149 bars issuance of a notice under Section 148 beyond the prescribed period where the escaped income is below ₹50 lakh.
The Bench also referred to Revenue Instruction No. 1/2022 dated May 11, 2022, issued following the Supreme Court’s decision in Union of India v. Ashish Agarwal, which similarly recognized that reassessment proceedings for AYs 2013-14 to 2015-16 could not continue where the alleged escaped income was below the statutory threshold.
Holding that the Assessing Officer had wrongly computed the alleged escaped income and that the reassessment proceedings were barred by limitation, the Gujarat High Court quashed the order dated July 27, 2022 passed under Section 148A(d) along with the consequential reopening proceedings. The writ petition was accordingly allowed.
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