Khivraj Motors Vs ACIT (Karnataka High Court)
SAME ₹1.36 CRORE PROPOSED IN HANDS OF FIRM AND PARTNER—KARNATAKA HIGH COURT DIRECTS COMBINED RECONSIDERATION
The Karnataka High Court has set aside an order passed under section 148A(3) and the consequential notice under section 148 where the Income-tax Department proposed to reopen the assessment of a partnership firm in respect of ₹1.36 crore, while proceedings concerning the same amount were also initiated against one of its partners.
Since the proceedings against the partner had already been restored for reconsideration, the Court directed the same jurisdictional Assessing Officer to consider the proceedings against both the firm and the partner comprehensively. The object was to avoid inconsistent conclusions and the possibility of the same income ultimately being assessed twice.
The Court, however, did not decide whether the amount was taxable in the hands of the firm or the partner. It merely restored the proceedings to the pre-reassessment stage.
Facts of the case
Khivraj Motors, a registered partnership firm, received a show-cause notice dated 25 March 2026 under section 148A(1) for AY 2023-24. The notice alleged that income amounting to ₹1,36,18,476 had escaped assessment.
After considering the proceedings, the Assessing Officer passed an order dated 29 June 2026 under section 148A(3), treating the case as fit for reassessment. A consequential notice under section 148 was issued on the same date.
The firm challenged both the order and the notice before the Karnataka High Court.
The principal contention was that Mr. Udai Raj Chordia, a partner of the firm, had also been proceeded against in respect of the very same amount. In his case also, a notice under section 148A(1) had been issued, followed by an order proposing reassessment.
The partner had separately approached the Karnataka High Court in WP No. 25261 of 2026. His specific contention was that the disputed amount had already been offered to tax and, therefore, there was no justification for commencing reassessment proceedings on the footing that such income had escaped assessment.
The High Court had interfered in the partner’s case and restored those proceedings to the Assessing Officer for fresh consideration.
The firm therefore contended that the same ₹1.36 crore could not be assessed both in its hands and in the hands of its partner. It was submitted that income which had already been offered to tax could not again be treated as escaped income.
Revenue’s response
The Revenue submitted that the firm’s contentions involved factual assertions requiring proper verification.
It was argued that a comprehensive examination was necessary to determine whether multiple proceedings had been initiated on the same facts and whether the amount had actually been disclosed and offered to tax. Such an examination could be undertaken by the Assessing Officer after considering the firm’s response to the show-cause notice.
High Court’s decision
The High Court noticed that the proceedings against Mr. Udai Raj Chordia had already been restored to the same jurisdictional Assessing Officer for reconsideration.
In these circumstances, the Court considered that the appropriate course would be to have both proceedings examined together by the same Assessing Officer. This would enable comprehensive adjudication and prevent the matter from reaching conflicting or precipitate conclusions.
Accordingly, the Court quashed the order dated 29 June 2026 passed under section 148A(3) in the firm’s case and the consequential notice issued under section 148.
The proceedings were restored for reconsideration of the firm’s response to the notice dated 25 March 2026 under section 148A(1).
The Assessing Officer was specifically directed to consider whether the firm’s case was fit for reassessment in the light of the proceedings already initiated against its partner, Mr. Udai Raj Chordia.
Author’s comments
The decision addresses an increasingly common situation in reassessment proceedings: the same amount being attributed to two different taxable persons without first determining in whose hands it legally represents income.
A partnership firm and its partners are separate taxable persons. Therefore, merely because the amount is connected with a partner does not automatically establish that it cannot be the firm’s income. The Assessing Officer must ascertain the real nature of the transaction, the person who earned or received the income, the books in which it was recorded and whether it had already been offered and assessed.
Equally, the same income cannot ultimately be taxed substantively in the hands of both the firm and the partner.
The Supreme Court in Lalji Haridas v. ITO, 43 ITR 387 recognised that where there is a genuine doubt regarding the person in whose hands a particular income is taxable, parallel or protective proceedings may be initiated to safeguard the Revenue. However, the dispute must ultimately be resolved and only the assessment in the hands of the correct person can survive.
Therefore, the present decision should not be interpreted as laying down that the Department can never commence proceedings against both a firm and its partner. Protective proceedings may be legally permissible. What is objectionable is the possibility of independent substantive additions being made in both hands without coordination or determination of the correct assessee.
The High Court’s direction for a combined consideration is consequently balanced. It protects the Revenue from a limitation problem while protecting the taxpayers against inconsistent findings and double taxation.
Another important distinction must be noticed. The observation that income already offered to tax cannot be reassessed as escaped income was part of the assessee’s argument. The High Court did not finally record that the ₹1.36 crore had, in fact, been properly offered or assessed in the partner’s hands.
There may be a difference between an amount being mentioned in a return, being credited in the accounts, being included in taxable income and being finally assessed. These aspects remain open for verification.
The decision also does not finally quash the reopening. The original show-cause notice dated 25 March 2026 survives, and the Assessing Officer can once again conclude that reassessment is warranted after considering both sets of proceedings.
The practical ratio is that where the same income is proposed in the hands of two connected but separate assessees, the Assessing Officer must adopt a coordinated and reasoned approach, identify the correct taxable person and ensure that the amount is not ultimately taxed twice.
Cases Discussed
- Lalji Haridas v. ITO, 43 ITR 387 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner, a partnership firm, is aggrieved with the conclusion of the pre-reassessment proceedings under Section 148A(3) of the Income Tax Act, 1961 [for short, ‘the IT Act’] and the issuance of notice under Section 148 thereof. The order under Section 148A(3) is dated 29.06.2026 [Annexure–A] and the impugned notice under Section 148 of the IT Act is also dated 29.06.2026 [Annexure–B].
2. Mr. Narendra Kumar J. Jain, the learned counsel for the petitioner, and Mr. Y. V. Raviraj, the learned Senior Standing Counsel for the respondents, are heard for disposal of the petition with the learned counsel for the petitioner emphasizing the following.
A. The petitioner is issued with the Show Cause Notice dated 25.03.2026 under Section 148A(1) of the IT Act [Annexure–C] in the premise that a sum of Rs.1,36,18,476/- has escaped assessment.
B. Mr. Udai Raj Chordia is a partner of this Firm and he has also been issued with notice under Section 148A(1) of the IT Act resulting in the Order dated 29.06.2026 under Section 148A(3) of the IT Act proposing to reassess the same amount as tax that has escaped assessment in the hands of this person.
C. This Court, in W.P.No.25261/2026 has interfered with the Order dated 27.06.2026 in view of Mr. Udai Raj Chordia’s specific case that this amount has already been offered to tax and therefore, there would be no justification for commencement of even an enquiry to ascertain that it is a fit case for reassessment. The income that is already offered through tax cannot be reassessed on the ground that it has escaped assessment and it definitely cannot be assessed in the hands of both the partner and the Firm.
3. Mr. Y. V. Raviraj submits that the petitioner relies upon a set of factual assertions and there could be a comprehensive consideration such as whether there are multiple decisions on the same facts and that this comprehensive consideration could also be in the light of the petitioner’s response to the Show Cause Notice under Section 148 of the IT Act.
4. However, this Court is of the view that with the proceedings as against Mr. Udai Raj Chordia having already been restored for reconsideration by the same Jurisdictional Assessing Officer, this Court is of the view that a comprehensive adjudication without possibilities of precipitation would be if the Jurisdictional Assessing Officer [the first respondent] were to consider both the restored proceedings against Mr. Udai Raj Chordia and the petitioner. Hence, the following.
ORDER
A. The petition is allowed-in-part and the impugned Order dated 29.06.2026 under Section 148A(3) of the IT Act [Annexure – A] and the notice dated 29.06.2026 under Section 148 of the IT Act [Annexure – B] are quashed restoring the proceedings for reconsideration of the petitioner’s response to the notice dated 25.03.2026 under Section 148A(1) of the IT Act.
B. The first respondent shall consider whether the case would be fit for reassessment in the light of the proceedings commenced against Mr. Udai Raj Chordia in DIN and Notice No.ITBA/AST/F/148A/2026-27/1090563045(1).
