Income Tax Amendment to Section 68 Cannot Be Applied Retrospectively: Gujarat HC

The High Court of Gujarat has ruled that the introduction of the proviso to Section 68 of the Income Tax Act cannot be applied retrospectively, as the same was made effective from 01.04.2023.

The petitioner, Laxmi Infra Developers, has challenged notices issued under Sections 148 and 148A, which claimed that the income of Rs 29.90 crore had allegedly escaped assessment.

In a land deal with Gitanjali Infratech Ltd, the petitioner had entered into a Development Agreement for consideration of Rs 29,90,00,000 by receiving an unsecured loan from Rakesh Girdharlal Gajera. The company had filed its return on October 30, 2018, declaring a total income of Rs 1.94 crore, including an unsecured loan of Rs 29.90 lakh from Rakesh Girdharlal Gajera.

The company’s case was reopened as the officer alleged the income had escaped assessment. The Assessing Officer claimed that the assessee company failed to prove the source of Rs 29.90 crore paid to Gitanjali Infratech Ltd. within the meaning of section 68 of the Income Tax Act.

Before the Gujarat High Court, the company argued that the payments were properly disclosed and were made through proper banking channels. The company also called the orders and notice illegal, arguing that under the scheme of Sections 148 and 148A, AO cannot issue notice unless he has the information suggesting that the income has escaped assessment.

The Income Tax Department argued that the petitioner company did not explain the “source of the source” as per the newly introduced proviso to Section 68 of the Act.

The Court noted that this amendment introduced by the Finance Act, 2022, was effective only from 01.04.2023 and could not be applied retrospectively to the 2018-19 assessment year.

The Court observed and also noted that the petitioner had fully disclosed the source of funds and was not required to further explain the source for the AY 2018-19.

Therefore, the court set aside the notice and the orders.