Reassessment Grounds Beyond Show-Cause Notice Require Fresh Opportunity: Karnataka HC

Kunjalu Venkatesh Kini Vs Additional Commissioner of Income Tax (Karnataka High Court)

Summary: The Karnataka High Court partly allowed a writ petition challenging the order under Section 148A(3), prior approval under Sections 148A(3) and 151, and the consequential Section 148 notice for assessment year 2021-22. The petitioner, a partner with his spouse in multiple firms, received a show-cause notice dated 27.03.2026 alleging undisclosed business turnover of ₹13,39,14,241. The Court recorded that the notice was issued four days before expiry of the limitation contemplated under Section 149(1)(b). In his reply dated 22.04.2026, the petitioner explained that the amount represented a difference between bank credits and turnover, that every bank credit could not be treated as turnover, and that further clarification would be furnished if required.

The petitioner contended that the subsequent order introduced allegations never included in the show-cause notice: use of multiple firms to park funds and rotate profits, substantial expenses without supporting evidence, unsecured loans involving minimal interest, and adverse observations concerning accounting practices. He argued that the underlying material had not been supplied and that his documents and offer to provide further information had not been properly addressed. The Court also noted a discrepancy in the approval dates: the order referred to approval dated 11.06.2026, whereas the approval document mentioned 27.03.2026, preceding the petitioner’s response. The Revenue submitted that, since proceedings had commenced within time, deficiencies in disclosure and opportunity could be remedied without terminating the entire proceedings.

The Court accepted that the fitness of the case for reassessment should be reconsidered after giving the petitioner due opportunity. It found that the computation of ₹13,39,14,241 had not been furnished and that the additional propositions in the order travelled beyond the show-cause notice. Without disclosure of the computation and supporting particulars, reassessment would risk becoming a roving enquiry rather than an enquiry into definite aspects. Accordingly, the Court quashed the impugned order, prior approval and notice, while restoring proceedings to the Income Tax Officer for fresh consideration. The petitioner was permitted to submit a certified copy of the judgment to both respondents by 30.10.2026. The officer was directed to furnish the computation and underlying information and provide a reasonable opportunity to respond. The approving authority was directed to examine all materials before granting approval. All contentions were left open.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner is a partner in multiple firms engaged in various business activities along with his spouse. The petitioner’s grievance is with the Order under Section 148A(3) of the Income Tax Act, 1961 [for short, ‘the IT Act’]. The proceedings are for the assessment year 2021-22. The details of the impugned order/approval and notice are as follows.

2. The proceedings under Section 148A of the IT Act are commenced with the issuance of the notice under Section 148A(1) of the IT Act dated 27.03.2026 [Annexure – B]. Admittedly, this notice is issued four days prior to the expiry of the limitation that is contemplated under Section 149(1)(b) of the IT Act. The petitioner is put on notice to show cause against business turnover of Rs.13,39,14,241/- not being disclosed in the Return of income. The petitioner is called upon to furnish, amongst others, the computation of income along with the financial statements and a description of the business activities with supporting evidence.

3. The petitioner has responded to this notice on 22.04.2026 stating [a] that the notice mentions a sum of Rs.13,39,14,241/- as business turnover which is not disclosed in the Return of income, [b] that this amount is based on the difference in bank credits and the turnover and [c] that all bank account credits cannot be considered turnover as it includes different entries which are not to be treated as turnover. The petitioner, enclosing documents, has also stated that if any further clarification is required, he would furnish the same. The first respondent has granted approval as is envisaged under Section 148A(3) and Section 151 of the IT Act on 11.06.2026, and the second respondent has passed the impugned Order on 17.06.2026. This Court must at this stage mention that though the first respondent’s approval, in terms of the Order dated 17.06.2026 reads ‘Specified Authority approval date- 11.06.2026’, the approval itself [Annexure – C1] mentions ‘27.03.2026’ [which is on the same date as the notice dated 27.03.2026 under Section 148A(1) of the IT Act and prior to the petitioner’s response.]

4. Mr. S. S. Naganand, the learned Senior counsel for the petitioner, submits that this Court must interfere because:

5. In elaboration, Mr. S. S. Naganand submits that the second respondent has observed in the order under Section 148A of the IT Act that the petitioner is a partner of eight to nine Firms with his wife but this may not be relevant in itself for the purposes of commencing the proceedings for reassessment under Section 147 of the IT Act and that the petitioner, given the circumstances, is engaged in different businesses, including Real Estate and is receiving salary and interest on capital from his own Firms with rate of interest being minimum but there are unsecured loans across Firms. The learned Senior counsel next submits that the second respondent has observed that these Firms are used to park funds in the form of unsecured loans and advances given to others for diversion of profits and rotation of funds, but without an opportunity to the petitioner to show cause against the same as part of enquiry under Section 148A of the IT Act.

6. Mr. S. S. Naganand canvasses that the petitioner has not been put on notice of any material which justifies these and the other allegations mentioned in the order under Section 148A of the IT Act. The learned Senior Counsel also canvasses that

• the second respondent has observed that the petitioner has claimed huge expenses in profit and loss account apart from certain business expenses without any documentary evidence, but the petitioner has not been put on notice of the information that constitutes the basis for this assertion, and
• that the second respondent has made certain adverse observations about the accounting practice and again the petitioner is not informed about the same and that if the petitioner was put on notice of these, he could have explained that he is not a contractor who has to adopt such practice.

7. Mr. M. Thirumalesh, the learned Senior Standing counsel for the respondents and who is assisted by the Mr. Nirmal Mathew, a learned Standing counsel for the respondents, are heard with Mr. S.S. Naganand emphasising the afore for interference with the entire proceedings. The learned Senior Standing counsel submits that because the proceedings are begun in time as contemplated under Section 149 of the IT Act and if the petitioner complains about not being furnished with all information or lack of due opportunity, this Court could pass just orders without jettisoning the entire proceedings.

8. This Court finds reason to accept the submissions on behalf of the Revenue, and notwithstanding a certain amiss in granting prior approval under Section 148A(3) and Section 151 of the IT Act, as this Court is persuaded to opine that the fitness of a case for reassessment must be examined in the peculiarities of this case with all due opportunity to the petitioner. The proceedings are begun with the petitioner being put on notice that a business turnover of Rs.13,39,14,241/- is not disclosed in the Return of Income. The petitioner has filed a detailed response stating that the amount is computed based on a difference in the turnover and the bank credits and that every credit cannot be treated a turnover.

9. Significantly, the petitioner has also stated that if further details are required on this aspect, he would produce the details if made known how the amount of Rs.13,39,14,241/- is computed in the Notice under Section 148A(1) of the IT Act. There is no response in this regard, and it cannot be gainsaid that if further details were required to ascertain fitness of the case for reassessment, it was open to the second respondent to call for such details to justify the further proceedings.

10. This Court also finds that the propositions in the order, such as [a] that the petitioner is a partner of multiple Firms which are used to park funds and rotate profits, [b] that there are huge expenses claimed and [c] that the petitioner receives unsecured loans but minimal rate of interest are all outside the show cause notice. If there is to be any adjudication under Section 148A(3) of the IT Act leading to reassessment proceedings under Section 147 of the IT Act, it must be with notice thereof to the petitioner.

11. Hence, this Court is of the considered opinion that the second respondent ought to have put the petitioner on notice of these propositions with all the requisite details to substantiate such propositions. In the absence of the computation being made available for the sum of Rs.13,39,14,241/- and the details based on which the observations/propositions are put out in the impugned Order under Section 148A(3) of the IT Act, this Court opines that there would be more a roving enquiry in the reassessment than an enquiry on definite aspects. As such, this Court passes the following.

ORDER