Karnataka HC Quashes Ex Parte Reassessment and Restores Proceedings for Fresh Response

Sainarayan Rathi Vs Assessment Unit (Karnataka High Court)

Ex Parte Reassessment Over Investments from Permanent Alimony Set Aside: Karnataka High Court Grants Fresh Opportunity After PAN Transfer

The Karnataka High Court has set aside an ex parte reassessment order passed against an assessee who claimed that she had not received the statutory notices and that the investments questioned by the Income-tax Department were made out of permanent alimony received following her divorce. The Court considered that a detailed explanation from the assessee would facilitate a complete adjudication and therefore restored the reassessment proceedings with a fresh opportunity to respond.

The petitioner, Sainarayan Rathi, was originally residing in Bengaluru. After her marriage, she shifted to Tamil Nadu. Following the conclusion of divorce proceedings, she relocated to Bengaluru. These changes in residence subsequently gave rise to an issue concerning the territorial jurisdiction over her PAN.

For Assessment Year 2021-22, reassessment proceedings were initiated against her by issuance of a notice under Section 148 dated 27 March 2025. During the proceedings, a notice under Section 142(1) was issued on 10 July 2025, followed by a show-cause notice dated 3 February 2026 proposing completion of assessment under Section 144.

According to the petitioner, she did not receive any of these notices and was consequently unable to participate in the proceedings or place her explanation before the Income-tax authorities. The assessment was thereafter completed ex parte on 18 February 2026 under Section 147 read with Sections 144 and 144B.

The assessment order was accompanied by the computation sheet and a notice of demand under Section 156. Penalty notices were also issued under Section 274 read with Section 272A(1)(d) for alleged non-compliance and under Section 274 read with Section 271AAC(1) in relation to the addition made in the assessment.

The assessee challenged the reassessment order, computation sheet, demand notice, penalty notices and the original notice issued under Section 148 before the Karnataka High Court.

Revenue Initially Objected to Territorial Jurisdiction

The Revenue raised a preliminary objection that the petitioner’s PAN jurisdiction was with the Income-tax authorities in Tamil Nadu. It was therefore contended that the petitioner could not invoke the writ jurisdiction of the Karnataka High Court merely because she was presently residing in Bengaluru.

The Court had earlier, on 22 July 2026, taken note of the petitioner’s peculiar personal circumstances. She had moved to Tamil Nadu following her marriage and was compelled to relocate to Bengaluru after the conclusion of divorce proceedings. Her grievance concerning reassessment also related to investments which, according to her, had been made from the permanent alimony received after divorce.

In view of these circumstances, the Court granted the petitioner liberty to approach the Principal Commissioner of Income Tax-3, Chennai, seeking transfer of her PAN jurisdiction. The concerned authority was expected to consider the application having regard to the particular circumstances recorded by the Court.

When the petition was subsequently heard, it was brought on record that the petitioner’s PAN jurisdiction had been transferred to Circle 1(1), Bengaluru. The High Court held that this development effectively answered the Revenue’s objection regarding territorial jurisdiction.

Assessee Claimed Notices Were Never Served

The substantive issue before the Court was the manner in which the reassessment had been completed. The petitioner asserted that she had not participated because none of the relevant notices had been served upon her.

She further contended that she possessed a satisfactory explanation for the source of the investments which had triggered the reassessment. According to her, the money came from permanent alimony received pursuant to the divorce settlement. Had she been given an effective opportunity, she could have produced the relevant settlement documents, bank statements and investment particulars before the Assessing Officer.

The reassessment, however, was completed under Section 144 without considering this explanation because the petitioner had not participated in the proceedings.

Detailed Response Preferable to Ex Parte Conclusion

The High Court observed that the controversy could be more appropriately resolved by allowing the petitioner to file a detailed response to the notice under Section 142(1) and the show-cause notice proposing an ex parte assessment.

The Court found that, considering the petitioner’s change of residence, transfer of PAN jurisdiction and the explanation offered concerning the source of money, a proper adjudication after hearing the assessee was preferable to allowing an ex parte determination to stand.

The Court therefore interfered with the completed assessment and restored the proceedings to the stage at which the petitioner could respond to the notices.

Assessment, Demand and Penalty Notices Quashed

The High Court allowed the writ petition in part and quashed the reassessment order dated 18 February 2026 passed under Section 147 read with Sections 144 and 144B. The accompanying computation sheet and notice of demand under Section 156 were also quashed.

The penalty notices issued under Sections 272A(1)(d) and 271AAC(1) were similarly set aside. The petitioner was granted liberty to file her response to the notice dated 10 July 2025 under Section 142(1), as enabled by the Income-tax authorities after the Court’s order.

Importantly, the Court did not quash the original notice dated 27 March 2025 under Section 148. Therefore, the reassessment proceedings themselves were not terminated. They were restored for fresh consideration after giving the petitioner an opportunity to participate.

Author’s Comments

The decision is an example of the High Court balancing procedural fairness with the Revenue’s right to examine the source of an investment. The assessee was not granted immunity from reassessment. Instead, the ex parte assessment, consequential demand and penalty notices were removed so that the issue could be determined after considering her explanation.

The case also highlights the practical importance of updating the PAN jurisdiction, registered address, email and mobile details following marriage, separation, divorce or permanent relocation. Faceless proceedings may be conducted electronically, but outdated jurisdictional or contact particulars can still result in missed notices and ex parte assessments.

The assessee must now substantiate the permanent-alimony explanation through the divorce decree or settlement, proof of receipt through banking channels, bank statements tracing the investment and an asset-wise reconciliation. Although permanent alimony may explain the source of funds, the assessee must still establish a clear evidentiary trail.

The principle emerging from the ruling is straightforward: where non-participation is plausibly explained and the assessee offers a verifiable source for the disputed investment, adjudication after hearing the assessee is preferable to sustaining an ex parte tax demand.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner was residing in Bengaluru but shifted to Tamil Nadu after her marriage only to relocate back to Bengaluru after the conclusion of the divorce proceedings. The Petitioner has called in question the following:

2. The Revenue’s initial objection was about the petitioner invoking this Court’s jurisdiction when the PAN jurisdiction was with the Income-tax Authorities in the State of Tamil Nadu. This Court, on 22.07.2026, recording the petitioner’s circumstances and her case that she was constrained to move back to Bangalore after the divorce and that the reassessment proceedings are because of the investments made out of the permanent alimony received, has reserved liberty to the petitioner to apply with the Principal Commissioner of Income Tax-3 [Chennai] for transfer of the PAN observing that such application must be considered in the light of the peculiarities recorded.

3. It is now brought on record that the petitioner’s PAN is now within the jurisdiction of Circle 1[1], Bengaluru. This Court must observe that this answers the Revenue’s objections about the territorial jurisdiction, and the question for consideration is the terms upon which the petition must be disposed of with the petitioner not having participated in the reassessment proceedings asserting that she was not served with any of the notices and contending that she can explain the source of money which affords the reason for the proposed reassessment.

4. Sri Rajeev Channappa Nulvi, the learned counsel for the petitioner, and Sri Vinayaka S Pandit, the learned Standing Counsel for the Revenue, are heard. This Court is of the view that in the circumstances, there must be interference for restoration of the reassessment proceedings with opportunity to the petitioner to respond to the Show Cause Notice dated 03.02.2026 [SCN for proceedings under Sec. 144] /Section 142(1) Notice dated 10.07.2025 of the Income Tax Act, 1961, as this Court opines that a detailed response explaining the circumstances would enable a complete adjudication with due opportunity rather than an ex parte conclusion. Hence the following,

ORDER

The petition is allowed in-part quashing the following with liberty to the petitioner to file response to the Notice dated 10.07.2025 under Section 142(1) Notice of the IT Act as enabled by the authorities after this order.