Shree Mookambika Developers Vs Additional Commissioner of Income Tax (Karnataka High Court)
Section 148A Requires Examination of the Assessee’s Evidence: Karnataka High Court Quashes Reopening Order and Notice
Background of the Case
The Karnataka High Court held that an Assessing Officer must examine the documents furnished by the assessee and record cogent reasons before concluding that a case is fit for issuance of a reassessment notice under Section 148.
The Court intervened where the officer treated bank credits as unexplained without considering the assessee’s specific explanation that the relevant transactions were disclosed in a schedule to its balance sheet.
It quashed the Section 148A(3) order and Section 148 notice dated 16 June 2026, while restoring the matter for fresh consideration. The petition was therefore allowed in part, rather than the reassessment proceedings being permanently terminated.
Bank Credits Alleged to Be Undisclosed Turnover
The petitioner, a partnership firm based in Byndoor, Udupi district, received a show-cause notice under Section 148A(1) dated 27 March 2026.
The notice alleged that business turnover of ₹3,35,80,385 had not been disclosed in its returns.
In its reply dated 23 April 2026, the firm disputed that characterisation. It explained that the amount comprised transactions relating to loans, capital dealings with Ramanath Services, receipts from debtors, proceeds from sale of a vehicle, cash deposits and interest on refund.
The firm furnished bank statements and supporting documents and offered to provide further clarification if required.
Officer Finds ₹3.20 Crore Unaccounted
The Assessing Officer focused on ₹3.20 crore received from Ramanath Services, whose proprietor, Venkatesh Kini, was also the petitioner-firm’s managing partner.
The officer observed that the firm had not explained the purpose of the receipt. He also noted that the amount was not reflected as turnover in the profit and loss account or, according to his findings, as capital or unsecured loan in the balance sheet.
Referring to the absence of an increase in capital or unsecured loans, the officer concluded that the amount had not been accounted for in the books.
He consequently treated the difference between bank credits and turnover as unexplained and proceeded to issue the reassessment notice.
Specific Balance Sheet Disclosure Overlooked
The petitioner pointed out that the transactions with Ramanath Services were specifically disclosed in Entry 2 of Schedule K to the balance sheet, which showed the outstanding loan balances as on 31 March 2021 and 31 March 2022.
The High Court found that this specific explanation had not been considered and described the omission as “too glaring.”
The Court further observed that the officer should have sought clarification regarding the absence of an increase in capital or unsecured loans, particularly when the petitioner had offered to clarify the transactions.
In these circumstances, an effective exercise under Section 148A(3) required examination of the explanation and documents before recording the necessary conclusion.
Fitness for Reassessment Requires Cogent Reasons
The Court held that, before deciding to proceed with a Section 148 notice, the officer should have first examined the documents produced.
He was then required to record an opinion, supported by cogent reasons, explaining why the circumstances justified treating the case as fit for reopening.
The ruling does not require acceptance of every explanation submitted by a taxpayer. It requires a meaningful examination of that explanation, especially where it directly addresses the factual premise on which reopening is proposed.
Here, the assertion that the receipt was absent from the balance sheet could not be sustained without addressing the specific schedule identified by the petitioner.
Approval-Date Controversy Also Raised
The petitioner additionally alleged predetermination, contending that the approval bore the same date as the initial show-cause notice and therefore preceded its response.
The Revenue drew attention to the approval document’s digital signature dated 12 June 2026.
The Court observed that the approval process should involve consideration of the relevant material and should avoid circumstances giving rise to allegations of predetermination, whether caused by a technical glitch or otherwise.
However, it did not terminate the entire proceedings on that ground. It clarified that, once the Section 148A order was quashed, the connected approval would stand dissolved.
Order and Notice Quashed; Fresh Consideration Directed
The High Court quashed the Section 148A(3) order and Section 148 notice, both dated 16 June 2026.
The petitioner was directed to appear before the ITO, Ward–1 and TPS, Udupi, on 30 October 2026, without further notice. It could furnish further clarification sought by the officer.
The officer was directed to consider the explanation in light of the Court’s observations.
Author’s Comments
The decision reinforces that bank credits cannot be characterised as undisclosed turnover without examining their nature and the corresponding accounting disclosures.
Its practical significance lies in the Court’s insistence that a specific reference to a balance-sheet schedule must receive a specific examination. A conclusion that a transaction is unaccounted for requires reconciliation with the records already furnished.
The relief remains procedural. The Court neither accepted the entire ₹3.35 crore as explained nor held that no taxable income had escaped assessment. It required the statutory decision to be taken afresh after proper examination, clarification where necessary and reasoned consideration.
Cases Discussed
No specifically identified judicial precedent is cited by name in the supplied judgment. The Court mentions similar proceedings involving associated concerns without identifying those decisions.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner has called in question the Order/prior approval under Section 148A(3) and Section 151 of the Income Tax Act, 1961 [for short, the IT Act’] and the Notice under Section 148 of the IT Act for the assessment year 2022-23. The details of these impugned Order/prior approval and notice are as follows.
| Particulars | Section of the Income Tax Act, 1961 | Date | Annexure |
| Order | 148A(3) | 16.06.2026 | C |
| Prior Approval | 148A(3) and 151 | 12.06.2026 | C1 |
| Notice | 148 | 16.06.2026 | D |
2. Mr. S. S. Naganand, the learned Senior counsel for the petitioner, submits that the petitioner is issued with Show Cause Notice under Section 148A(1) of the IT Act on 27.03.2026 and this Court must intervene because of the following:
2.1 The petitioner is informed that a business turnover of Rs.3,35,80,385/- is not disclosed in the Returns and that the petitioner, in response, has filed a detailed reply stating that the sum of Rs.3,35,80,385/- is not a business turnover but a loan availed by certain Firms, capital transactions with M/s Ramanath Services, receipts from the debtors, capital receipt arising out of sale of vehicle, cash deposit and interest on refund and producing the bank account statements. The petitioner has also offered to issue clarification if required.
2.2 The second respondent, without considering the same, has passed an Order under Section 148A of the IT Act and has caused the impugned notice opining that the petitioner has not provided the Creditor’s Bank statement and that the matter requires a thorough investigation.
2.3 The second respondent, as required under Section 148A(3) of the IT Act, is obliged to take into account the petitioner’s response and pass an order about the case being fit for reassessment under Section 147 of the IT Act and for notice under Section 148 of the IT Act and unless the second respondent considers the response and opines that it is a fit case, the notice under Section 148 of the IT Act and further proceedings would be a roving exercise which cannot be in law.
2.4 The first respondent’s approval must be after the second respondent records an opinion on the case being fit for reassessment under Section 147 of the IT Act with notice under Section 148 thereof. The notice to the petitioner under Section 148A(1) is dated 27.03.2026 but the first respondent’s approval is dated 27.03.2026 [on the same day and prior to the petitioner’s response]. This demonstrates that there is pre-determination and an enquiry under Section 148A of the IT Act is treated a formality.
3. Mr. M. Thirumalesh, a learned Senior Standing Counsel who accepts notice for the respondents, and who is assisted by Mr. Nirmal Mathew, a learned Standing counsel, is heard for the disposal of the petition in the light of these circumstances. On the petitioner’s case that the first respondent’s approval is pre-dated, the learned Senior standing counsel/Standing counsel inviting this Court’s attention to Annexure-C1 submit that it is digitally signed on 12.06.2026 and they also contend that the second respondent has not permitted a roving exercise in recording fitness.
4. The proceedings are begun with notice under Section 148A(1) of the IT Act based on certain information on business turnover, and the petitioner has responded specifically stating, and enclosing certain documents [as could be seen from the reply dated 23.04.2026 Annexure – B] that the amount is not a business turnover but a loan availed by certain Firms, capital transactions with M/s Ramanath Services, receipts from the debtors, capital receipt arising out of sale of vehicle, cash deposit and interest on refund and producing the bank account statements.
5. The second respondent has recorded reasons as follows:
“The assessee firm in its reply stated that it has received a sum of Rs. 3.20 crores from Ramantath [sic] Services. The owner of Ramanath Services is Mr. Venkatesh Kini and the managing partner of this firm is also Mr. Venkatesh Kini. The assessee firm has not mentioned the purpose for which this amount has been received from it’s Managing partner, Mr Venkatesh Kini proprietor of Ramanath Services. It is seen from the profit and loss account that assessee firm has not made any sales or purchases for the year under consideration. Assessee firm is not showing any income from business for which it is registered as real estate. A sum of Rs.3.20 crores received from Mr Venkatesh Kini Prop of Ramanath Services is not reflected in profit and loss account as turnover nor in the Balance sheet of the assessee firm as capital or unsecured loan. It is observed from the Balance sheet, that there is no increase in capital during the year, nor there is an increase in unsecured loan, therefore, this amount has not been accounted in the books of account of the assessee firm. Therefore, in the absence of valid explanation from the asseesee for the difference in bank credits and turnover of Rs.Rs.[sic] 3,35,80,385/-, this remains unexplained.
As the assessee has no valid explanation for the nature and source of the above mentioned transactions, remains unexplained. Thus, income arising out of the above transactions has not been offered for tax for the relevant A.Y. 2022-23 as per the provisions of the Income Tax Act 1961. It is therefore clear that the assessee does not have any explanation as to why a notice u/s 148 of the IT Act should not be issued. As there is information available with the department as per para 1 above which suggests that the Income of the assessee has escaped assessment, it is necessary to make an assessment of the income.”
6. The petitioner’s specific case is that the capital transactions with M/s Ramanath Services are specifically mentioned in Entry-2 Schedule-K of its Balance Sheet disclosing the loan outstanding as of 31.03.2021 and 31.03.2022. This specific reply has not been considered, and this is too glaring. Further, the second respondent should have called for clarification on the absence of increase in the capital or the unsecured loan as offered by the petitioner for an effective consideration under Section 148A(3). This Court in the Writ Petitions filed by the proprietor/associated concerns has intervened in similar circumstances to restore the proceedings.
7. These circumstances persuade this Court to opine that the second respondent, to conclude that there must be proceedings with issuance of notice under Section 148 of the IT Act, should have first examined the documents produced by the petitioner and then record an opinion, offering cogent reasons, on the circumstances that justify the case being fit for issuance of notice under Section 148 of the IT Act.
8. Further, this Court must also observe that the second respondent, while granting approval under Section 148A(3) and Section 151 of the IT Act, should have looked into all these and then granted approval, and, significantly, should have ensured that there is no reason for the assertions that there is pre-determination because of a technical glitch or otherwise. This Court, where similar circumstances are canvassed on behalf of the petitioner’s associate companies, has refused to set at naught the entire proceedings on this ground. This Court also observes that with the Order under Section 148A of the IT Act being quashed, the first respondent’s approval [as per Annexure-C1] will stand dissolved. Hence, the following. ORDER
A. The petition is allowed in-part.
B. The following order/notice are quashed.
| Particulars | Section of the Income Tax Act, 1961 | Date | Annexure |
|---|---|---|---|
| Order | 148A(3) | 16.06.2026 | C |
| Notice | 148 | 16.06.2026 | D |
C. The petitioner, without further notice, shall appear before the Income Tax Officer, Ward-1 and TPS, Udupi [the second respondent] on 30.10.2026 and will be at liberty to file any further clarification that the second respondent may seek, but the second respondent must consider the explanation offered in the light of this Court’s observation as afore.
