Natural Justice Violated as Assessee’s Explanations Were Not Properly Examined Before Reopening

Ojaswini Retailers Private Limited & Anr. Vs Union of India & Ors. (Calcutta High Court)

Summary: The Calcutta High Court quashed the reassessment order passed under Section 148A(3) and the consequential notice issued under Section 148 for AY 2019-20, holding that the Assessing Officer failed to adequately consider the assessee’s replies and supporting documents before concluding that income had escaped assessment. The Court observed that although the petitioners had furnished explanations and banking records in response to the show cause notice, the impugned order dealt only with partial bank statements and ignored the explanations offered regarding the transactions. Mere same-day routing of funds through banking channels, without analysing the commercial rationale and materials produced by the assessee, could not justify the formation of belief that the transactions were accommodation entries. Finding the order perverse and contrary to the mandate of Section 148A, the Court directed the Assessing Officer to conduct a fresh examination after granting an effective hearing and passing a reasoned order in accordance with law.

Core Issue. The principal issue before the High Court was whether the Assessing Officer validly formed a belief that income had escaped assessment under section 148A(3) without properly considering the assessee’s replies and supporting materials submitted in response to the show-cause notice under section 148A(1), and whether such non-consideration amounted to a violation of the principles of natural justice.

Facts. The petitioners challenged the order dated 30.06.2025 passed under section 148A(3) and the consequential notice issued under section 148 on 30.06.2025 for AY 2019-20. The reassessment proceedings were initiated based on information suggesting that transactions undertaken by the petitioners with M/s Dhansidhi Developers Pvt. Ltd. and M/s Foremost Enterprises Pvt. Ltd. lacked commercial substance and represented accommodation entries. In response to the show-cause notice dated 19.03.2025, the petitioners filed detailed replies on 11.04.2025 and 19.06.2025, along with bank statements and supporting documents. The petitioners contended that all transactions were routed through regular banking channels and that mere same-day movement of funds could not automatically lead to the conclusion that the transactions were sham or represented money laundering.

AO’s Findings. The Assessing Officer observed that the petitioners had furnished only selected portions of bank statements. According to the Assessing Officer, the bank statements revealed a pattern where substantial amounts were credited and debited on the same day or immediately thereafter, leaving minimal balances and indicating circular movement of funds. The Assessing Officer concluded that the entities involved were shell companies providing accommodation entries. It was further held that no credible evidence had been produced to establish the genuineness of the transactions apart from bank routing and that the entities lacked the financial capacity to undertake such transactions. On this basis, the Assessing Officer passed the order under section 148A(3) and issued notice under section 148.

High Court Findings  The High Court observed that although the impugned order referred to partial bank statements, it did not deal with the explanations furnished by the petitioners in their replies dated 11.04.2025 and 19.06.2025. The Court found that the Assessing Officer had merely referred to circular movement of funds and lack of commercial substance without examining the commercial rationale behind the transactions or the materials produced by the petitioners.

The Court held that section 148A specifically requires the Assessing Officer to consider the assessee’s reply before deciding whether it is a fit case for issuance of notice under section 148. In the present case, the replies and explanations furnished by the petitioners had not been considered in their entirety. The order therefore suffered from non-application of mind and violation of the principles of natural justice.

The Court further held that a mere allegation of circular transactions, without proper analysis of the supporting material and explanations furnished by the assessee, could not constitute a valid basis for formation of belief regarding escapement of income. The genuineness and creditworthiness of the transactions required fresh examination after granting an effective opportunity of hearing.

Held. The High Court quashed the order dated 30.06.2025 passed under section 148A(3) as well as the consequential notice issued under section 148 for AY 2019-20. The matter was remanded to the Assessing Officer with directions to reconsider the genuineness and creditworthiness of the transactions with M/s Dhansidhi Developers Pvt. Ltd. and M/s Foremost Enterprises Pvt. Ltd., after granting a proper opportunity of hearing and passing a reasoned order in accordance with law. The assessee was directed to furnish complete banking records and supporting evidence, and the Assessing Officer was directed to complete the exercise by 15.07.2026.

Summary 

Section 148A mandates meaningful consideration of the assessee’s reply and supporting material before formation of belief regarding escapement of income. An order under section 148A(3) cannot be sustained where the Assessing Officer merely refers to suspicious banking patterns or circular transactions without examining the assessee’s explanations and evidence. Non-consideration of the reply filed by the assessee amounts to violation of the principles of natural justice and vitiates the reassessment proceedings.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

1. Affidavit of service filed on behalf of the petitioners be taken on record.

2. The present Writ petition has been filed challenging the Order dated 30′ June 2025 passed under Section 148A(3) of the Income Tax Act, 1961 (hereinafter referred to as the said Act) and the consequential notice dated 30′ June 2025 issued under Section 148 of the said Act for Assessment Year 2019-20.

3. The core issue involved herein is whether the Assessing Officer validly formed the opinion that income has escaped assessment without considering the reply and materials submitted by the petitioners and whether the principles of natural justice has been violated.

4. The Learned Counsel appearing for the petitioners submit that the impugned order dated 30′ June 2025 suffers from a legal infirmity as the same has been passed without considering the two replies dated 11t^h April 2025 and 19t^h June 2025 filed by the petitioners in response to the show cause notice dated 19t^h March 2025 issued under Section 148A(1) of the said Act.

5. It is further submitted that the finding recorded by the Assessing Officer that the transaction with M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd. lacked commercial substance, is perverse, arbitrary and unsustainable in law.

6. The order passed by the Assessing officer is in gross violation of the principles of natural justice as the petitioners have not been granted an effective opportunity to rebut the allegations, despite having submitted banking statements and other documents. The transactions in question have been carried out through legitimate banking channels and the petitioners have produced the bank statement of their accounts with Federal Bank Ltd. and M/s. Foremost Enterprise Private Ltd. with IDBI Bank. Mere routing of funds in the same day cannot ipso facto lead to a conclusion of accommodation entry of money laundering, thus, the impugned Order dated 30t^h June 2025 as the notice issued under Section 148 of the even date are liable to be set aside.

7. The Learned Counsel appearing for the income tax authorities vehemently opposes the Writ Petition and submits that the reply of the petitioners has duly been considered and draws the attention of this court to the penultimate paragraphs of the impugned order dated 30th June 2025 which is reproduced below:

“1. In reply to notice under sub-section (1) of section 148A of the Act, the assessee company furnished copies of its bank statement only for the period from 26/ 09/ 2018 to 11/ 10/ 2018; from 03/12/2018 to 01/02/2019 and 19/ 03/2019 to 30/ 03/2019 in respect of the bank account No. 13040200026947 maintained with Federal Bank, Bhowanipore Branch, Kolkata and also bank statement of M/ s. Foremost Enterprises Put. Ltd only for the period from 28/ 02/ 2019 to 05/ 04/ 2019 of the bank account No. 0263102000017462 maintained with IDBI Bank, Kankurgachi Branch, Kolkata. Perusal of these part bank statements reveal the pattern of transactions, wherein substantial amounts are credited to and debited from the accounts of the entities on the same day or following day leaving the minimal balance in account, indicates a circulatory movement of funds rather than genuine business transactions. Hence, it is clear that all the concerned entities from where the assessee company received funds/ money are paper/ shell entity, which has been used for providing accommodation entries.

1. The transactions with is Foremost Enterprises Pvt. Ltd. and Mis Dhansidhi Developers Pvt. Ltd. lack commercial substance as no credible evidence was provided to establish the genuineness of the transactions, apart from banking channel routing. The use of legitimate banking channel doesn’t make a transaction genuine if it’s part of scheme to launder unaccounted money.

1. M/s Foremost Enterprises Pvt. Ltd. and M/s Dhansidhi Developers Pvt. Ltd. were found to have weak financial. Their financial standing, as revealed by ITR and Insight data, does not support their ability to undertake such transactions. It indicates their use as conduit for routing unaccounted funds.”

8. It has been specifically recorded that the petitioners being the assessee furnished only partial bank statements for selected period. Upon perusal of the statements reveals a pattern wherein substantial amount has been credited and debited on the same day or through immediate routing, indicating lack of commercial substance.

9. It is further submitted that apart from routing through banking channels, no evidence has been provided to establish the genuineness of the transaction. The use of a legitimate banking channels does not render a transaction genuine if it is a part of scheme to launder unaccounted money.

10. The petitioners have already participated in the proceedings by filing a reply to the show cause notice issued under Section 148A(1) of the said Act, cannot be challenged in the present Writ Petition.

11. A summons under Section 131(1A) dated 28^th October 2025 has been issued seeking details regarding the nature of business and relationship with other entities. The same has been returned back undelivered by Speed Post with an endorsement “addressee cannot be located” and the same has subsequently been served by email. Despite service, the assessee did not comply.

12. It is further submitted that the Writ Petition is premature and de void of merit. The Assessing Officer has acted in accordance with law based on the information received from ADIT(I85V) Unit II (1) Kolkata.

13. After hearing the rival contention of the parties and upon perusing the available records this Court is of the prima facie view that it is apparent from the impugned order the Assessing Officer has not considered the replies dated 11′ April 2025 and 19′ June 2025 in their entirety. The order records only the submission of the partial bank statements but does not deal with an explanation offered by the petitioners.

14. The findings arrived by the Assessing Officer is perverse, and without jurisdiction as the order does not record a detail finding with regard to the income alleged to have escaped assessment for Assessment Year 2019-20. Mere reference to circular transactions, without analyzing the commercial rational or materials furnished cannot sustain the formation of the believe under Section 148A(3) of the said Act. Since the mandate of Section 148A requires the Assessing Officer to consider the reply from the assessee and decide by passing an order whether it is a fit case to issue notice under Section 148. In the present case since the specific replies have been filed, non-consideration thereof, vitiates the order.

15. The genuineness and the creditworthiness of the transactions with M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd. requires fresh examination after affording an opportunity of hearing.

16. In view of the above the impugned order dated 30t^h June 2025 along with the consequential notice issued under Section 148 of the said Act are hereby quashed and set aside.

17. The respondent No. 3 being the Assessing Officer is directed to revisit the issue regarding the genuineness of the transactions with M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd. and pass a reasoned order in accordance with law upon affording an opportunity of hearing to the petitioners and other beneficiaries before arriving at a conclusion with regard to the income alleged to have escaped assessment for Assessment Year 2019­20. The petitioners are directed to produce all banking statements to demonstrate and prove that the circular movements of funds are genuine in nature. The entire exercise shall be completed peremptorily by 15^th July 2026. The decision taken by the Assessing Officer shall be communicated to the petitioner within a week thereafter.

18. With the above observation and direction the Writ petition is disposed of by quashing and setting aside the order dated 30.06.2025.

19. Since no affidavit has been called for the allegations made in the Writ petition are deemed not to have been admitted.

20. There will be no order as to costs.