No Borrowed Satisfaction: Gujarat HC Strikes Down Notice Issued Under Section 148

The petitioner submitted her return of income for AY 2017-18, reporting Rs. 146,14,640, out of which short-term capital gains on sale of shares of Kushal Tradelink Limited were also included and tax was paid accordingly. On the basis of evidence obtained during search operations in the Kushal Group and information provided through the Insight Portal, the Assessing Officer, vide notice under Section 148A(b), charged the petitioner with having made short-term capital gains of Rs. 56,21,939 by accommodation entries, thus bringing about unaccounted income.

The Assessing Officer noted reasons to the effect that the transactions were fudged and profits were fictitious. Accordingly, objections were filed by the petitioner pointing out that all transactions were properly reported in the return of income and books of account, tax was paid, and the reasons did not mention particulars of the said manipulation. It was also argued that the notice was issued mechanically without the Assessing Officer having an independent belief that income had escaped assessment. The department contended that as the return was made under Section 143(1) and no scrutiny assessment was made, reopening was allowed within four years, specifically when the Insight Portal indicated the petitioner as a beneficiary of accommodation entries.

Main Issue: Whether the notice of reassessment dated 30.06.2022, issued under Section 148 of the Income Tax Act for AY 2017-18, could be maintained where the reasons noted were nebulous, imprecise, and indicated borrowed satisfaction instead of an independent mind application on the part of the Assessing Officer.

HC Held: The Court scrupulously went through the reasons entered by the Assessing Officer and held them to be vague, generic, and indefinite. It observed that the notice did not establish any direct link between the petitioner’s specific transactions and the information said to have been unearthed from the Kushal Group. Instead, the Assessing Officer had merely lifted generic information from the Insight Portal and the outcome of search proceedings without conducting any independent verification or analysis of the petitioner’s case. The High Court held that such mechanical reproduction of external inputs, without proper examination of the facts of the assessee’s return, cannot be regarded as an independent formation of belief. It emphasised that the jurisdictional requirement under Section 148 demands the Assessing Officer to apply his mind and record clear reasons for the belief that income has escaped assessment, which was clearly missing in the present matter.

Proceeding further, the Court held that the reopening of an assessment cannot be justified on the basis of borrowed satisfaction. Since the petitioner had already disclosed the impugned capital gains in her return of income, paid the due tax, and no tangible material specific to her case was shown in the recorded reasons, the foundation of the reassessment collapsed. The Court thus held that the challenged notice dated 30.06.2022 issued under Section 148 of the Act for the AY 2017-18 was unsustainable in law. Consequently, the petition was granted, the Rule was made absolute, and no order as to costs was made.

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