Section 148A Reassessment Quashed Over Unexamined Loan Confirmations

Vrinda Marketing Enterprises Vs ACIT (Karnataka High Court)

Karnataka HC Quashes Reassessment Proceedings, Allows Assessee to Furnish Loan Confirmations

Introduction

The Karnataka High Court partly allowed two writ petitions filed by Vrinda Marketing Enterprises, setting aside the impugned reassessment proceedings and permitting the firm to furnish loan confirmations and further clarification.

The dispute arose from amounts treated by the Department as alleged undisclosed business turnover, which the petitioner explained as unsecured loans. The Court considered that the suitability of the cases for reassessment could be examined after allowing the petitioner to provide supporting material.

The relief was procedural. The Court did not finally determine whether the disputed receipts constituted loans or taxable income.

Background of the Dispute

The petitioner, a partnership firm, challenged proceedings concerning Assessment Years 2021-22 and 2022-23, as identified in the substantive discussion of the order.

For each year, the challenge covered an order dated 16 June 2026 under Section 148A(3), prior approval dated 12 June 2026 under Sections 148A(3) and 151, and a consequential notice dated 16 June 2026 under Section 148 of the Income Tax Act, 1961.

The Department had issued show cause notices under Section 148A(1) concerning alleged undisclosed business turnover of ₹72,79,580 for AY 2021-22 and ₹82,24,948 for AY 2022-23.

The petitioner was asked to explain the transactions and furnish supporting documents, including financial statements, balance sheets and profit and loss accounts.

Petitioner’s Explanation: Receipts Were Unsecured Loans

The petitioner submitted that it had filed detailed responses to both notices. According to the firm, the disputed receipts represented unsecured loans, which did not constitute business turnover.

It stated that it had furnished particulars of the persons or entities providing the loans, together with copies of their ledger accounts. It had also offered to provide additional information if required.

The petitioner’s grievance was that the subsequent orders proceeded on objections concerning the bank statements, a mismatch and the absence of confirmations from the persons who had advanced the loans.

The firm maintained that these matters could have been addressed through further clarification and supporting documents before deciding whether reassessment should proceed.

Objections Regarding Bank Statements and Confirmations

The petitioner explained that there was a typographical error in mentioning the financial year of the bank statement. It asserted that the relevant bank statements had nevertheless been produced.

It further submitted that, had it been specifically called upon to furnish confirmations from the persons who extended the unsecured loans, it would have done so.

These submissions placed the adequacy of the opportunity to clarify the transactions at the centre of the dispute. The issue before the Court was whether the impugned proceedings should stand without allowing that clarification.

The Court heard the Revenue’s standing counsel on whether interference was warranted and, if so, on the appropriate terms.

Reference to an Earlier Similar Order

The petitioner placed reliance on the High Court’s order in W.P. No. 28272/2026, involving similar circumstances.

As recorded in the present order, the Court in that matter had restored proceedings for reconsideration and permitted the taxpayer to furnish further clarification sought by the authority.

Although a deficiency in prior approval had also been argued there, the approach highlighted before the Court was reconsideration of the reassessment decision after allowing additional explanation.

The High Court found sufficient similarity in the circumstances to adopt a comparable course in the present petitions.

High Court’s Findings

The Court observed that there could be something amiss in the manner in which prior approval had been obtained. However, it did not develop a separate, detailed ruling on the validity of the approval process.

Instead, it considered that the fitness of the cases for reassessment under Section 147 could be adjudged after providing an opportunity to submit confirmations from the persons concerned and any further details required.

Accordingly, the Court intervened to enable reconsideration on a fuller factual record.

This distinction is material: the order permits further examination of the petitioner’s explanation rather than accepting the loan claim as conclusively established.

Operative Directions

The writ petitions were allowed in part. The operative order expressly quashed the Section 148A(3) orders, the prior approval orders, and the Section 148 notices identified in its table.

The petitioner was directed to appear, without further notice, before the Income Tax Officer, Ward 1 and TPS, Udupi, on 16 October 2026.

It was permitted to furnish further clarification sought by the officer. The officer was required to consider the explanation in light of the Court’s observations.

Key Takeaway

The decision underscores the importance of examining an assessee’s explanation and supporting material before deciding whether reassessment is warranted.

Where disputed receipts are explained as unsecured loans, questions concerning bank records and lender confirmations may require further clarification. Here, the Court enabled that exercise while leaving the substantive tax treatment open for reconsideration.

Cases Discussed

• Earlier Karnataka High Court order in W.P. No. 28272/2026 (Karnataka High Court). The petitioner relied on this earlier order involving similar circumstances, where proceedings were restored for reconsideration with liberty to provide further clarification. The supplied judgment does not identify the parties to that proceeding or provide a reliable decision date, and an exact TaxGuru judgment page has not been established.

FULL TEXT OF THE ORDER OF KARNATAKA HIGH COURT

The petitioner [common in both these petitions] has called in question the following which relate to Assessment Years 2021-22 and 2022-24. The details of the impugned Order and the Notice in the petition in W.P.No.29722/2026 read as under:

The details of the impugned Order and the Notice in the petition in W.P.No.29723/2026 read as under:

2. Sri S.S.Naganand, the learned Senior Counsel for the petitioner, submits that this Court must intervene because of the following reasons.

[A] The petitioner is issued with notices under Section 148A(1) of the IT Act to show cause against the alleged undisclosed business turnover of Rs.72,79,580/- for the assessment year 2021-22 and Rs.82,24,948/- for the assessment year 2022-23. The petitioner is called upon to furnish documents to explain transactions along with the financial statement, balance sheet and profit and loss account and report.

[B] The petitioner has filed a detailed response to each of these notices furnishing the details of those entities/persons from whom unsecured loan, which do not constitute a turnover, along with copies of the ledger account of those persons and also offering to furnish further information if required, but the orders under Section 148A(3) of the IT Act is in the premise [i] that the petitioner has furnished wrong bank statements, [ii] that there is mismatch and [iii] that the petitioner has not produced confirmation from those who have extended bank loans.

[C] There is a typographical error in mentioning the financial year of the bank statement, but the relevant bank statements are produced; and if the petitioner was called upon to furnish confirmation from each of those who have extended unsecured loan, the petitioner would have.

3. Sri M. Dilip, a learned standing counsel for the respondents, is heard on whether this Court must interfere on any of the grounds and if the Court must, then the terms thereof with Sri S. S. Naganand placing on record a copy of this Court’s order in W.P.No.28272/2026 [T-IT]¹, stating that in similar circumstances this Court, even though the petitioner in such case argued on the deficiency in the prior approval, has only interfered with the order under Section 148A(3) of the IT Act restoring the proceedings for re-consideration with liberty to such petitioner to file further clarification that the second respondent may seek.

4. This Court, even in these writ petitions because of the similarities in the circumstances, though there could be some amiss in how the prior approval has come about, is only inclined to set aside the proceedings as fitness of the cases for reassessment under Section 147 of the IT Act can be adjudged with opportunity to the petitioner to file confirmation from the persons and to furnish further details if required for assessment of the fitness of the case. As such, this Court interferes with the order under Section 148A(3) of the IT Act and the notice under Section 148 of the IT Act in the following terms.

ORDER

[A] The petitions are allowed – in – part.

[B] The following are quashed.

[C] The petitioner, without further notice, shall appear before the Income Tax Officer, Ward 1 and TPS, Udupi [the second respondent] on 16.10.2026 and the petitioner will be at liberty to file any further clarification that the second respondent may seek but the second respondent mut consider the explanation offered in the light of this Court’s observation as afore.

Note:

¹ This petition is disposed of on 09.19.2026