Karnataka HC Quashes Reassessment Notices Over Unverified Bank Credit Explanations

Modinno Innovations India Private Limited Vs ACIT (Madras High Court)

Bank Credits Disputed as Turnover: Karnataka High Court Quashes Reassessment Proceedings for Fresh Consideration

The Karnataka High Court has set aside reassessment-related orders and notices issued to Modinno Innovations India Private Limited, allowing the company an opportunity to substantiate its explanation that bank credits included advances rather than turnover.

Justice B.M. Shyam Prasad partly allowed Writ Petition Nos. 29486 and 29627 of 2026 by an order dated 6 October 2026, bearing neutral citation 2026:KHC:55454.

The Court directed reconsideration of the fitness of the cases for reassessment, after permitting the company to furnish confirmations and further clarification. It did not finally determine whether the disputed credits were taxable or whether income had escaped assessment.

Background of the Reassessment Dispute

The petitions concerned Assessment Years 2023-24 and 2024-25.

The company challenged orders passed under Section 148A(3), prior approvals under Prior approval for reassessment under Section 151 Sections 148A(3) and 151, and consequential notices under Section 148 of the Income-tax Act, 1961. The challenged instruments were dated 19 June 2026.

According to the petitioner, the department initiated proceedings based on bank credits and their apparent difference from the income-tax returns filed.

The company disputed the inference drawn from those credits. Its explanation was that the receipts could not all be treated as turnover because they included advances received from other entities.

Company Supplied Details and Offered Further Clarification

The petitioner submitted that it had responded to the notices under Section 148A(1) by explaining the nature of the credits.

It stated that it supplied details of the entities that had provided advances, along with their balance sheets and profit-and-loss reports.

The company also expressly offered to produce further documents or clarification if the department required them.

Its grievance was that the authority did not seek any additional information before rejecting the explanation. Instead, the Section 148A(3) orders proceeded on the ground that the petitioner had failed to produce confirmations from the respective parties.

The petitioner therefore sought another opportunity to address the specific evidentiary deficiency identified by the department.

Missing Confirmations Became the Central Issue

The dispute before the Court was not simply whether the company had submitted a response. The concern was whether the authority should reconsider that response after receiving party confirmations and supporting information.

The petitioner maintained that it had already disclosed the source entities and offered further assistance. It objected to rejection for want of confirmations without a further request to furnish them.

The Court considered that the suitability of reassessment could be assessed after giving the petitioner an opportunity to provide the missing material.

This approach preserved the department’s ability to examine the credits while ensuring that the company could substantiate its explanation.

Objection Concerning Prior Approval

The petitioner also questioned the chronology of the prior approval.

Counsel argued that approval should follow an assessment of whether the case was fit for reopening and alleged a defect in how the approval had been obtained.

The Court observed that there could be something amiss in the approval process. However, it did not deliver a conclusive ruling establishing the precise defect or its independent legal consequences.

Instead, it adopted the course of setting aside the challenged proceedings and allowing reconsideration with further material.

The decision should therefore not be read as a definitive pronouncement on every approval-related argument raised by the petitioner.

Similar Earlier Order Considered

The petitioner placed before the Court an earlier order in W.P. No. 28272/2026, involving similar circumstances.

As recorded in the present order, that case also involved an objection concerning prior approval. The Court had restored the proceedings for reconsideration, with liberty to furnish additional clarification.

Following a similar approach here, the Court held that the fitness of reassessment under Section 147 could be examined after the company supplied confirmations and any other required details.

The relief thus enabled a fresh examination rather than permanently preventing reassessment.

Orders, Approvals and Notices Quashed

The Court partly allowed both petitions.

The operative order quashed the challenged Section 148A(3) orders, prior approval orders and Section 148 notices dated 19 June 2026.

It directed the petitioner to appear, without further notice, before the officer specified in the operative direction on 30 October 2026.

The company was permitted to furnish further clarification sought by the authority. The authority, in turn, was required to consider the explanation in light of the Court’s observations.

These directions restored the opportunity for meaningful consideration of the company’s documents and explanation.

Conclusion

The ruling grants the company a renewed opportunity to establish that the disputed bank credits included advances and were not entirely turnover.

It does not hold that every bank credit is non-taxable, accept the advances as conclusively proved, or finally bar reassessment.

The outcome requires the authority to reconsider the matter after receiving confirmations and relevant details. The company’s substantive tax position, and whether the statutory conditions for reassessment are satisfied, remain open for determination through that process.

Cases Discussed

W.P. No. 28272/2026 (Karnataka High Court; earlier order cited in the judgment; parties and complete citation not identified in source) — Similar procedural relief cited by petitioner; no additional holding attributed.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner [common in both these petitions] has called in question the following which relate to Assessment Years 2023-24 and 2024-25. The details of the impugned Order and the Notice in the petition in W.P.No.29486/2026 read as under:

The details of the impugned Order and the Notice in the petition in W.P.No.29627/2026 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 put on notice under Section 148A(1) of the Income Tax Act, 1961 [for short, ‘the IT Act’] to show cause against the alleged income chargeable to tax which has escaped assessment based on the bank credits and the difference as understood from the bank credits and the ITR filed.

[B] The petitioner has responded to these notices stating that the bank credits cannot be taken as turnover because they also contain advances received by the petitioner. The petitioner has furnished the details of the entities who have given advances, their balance sheet and profit and loss report also stating that if further clarification is needed, the petitioner would produce the same.

[C] The petitioner has not been called upon to furnish any further detail but the Adjudication Order under Section 148A(3) of the IT Act is in the premise that the petitioner’s response is not accepted because it has not submitted any confirmation from the respective parties, and this is despite the petitioner offering to furnish the further details and the documents if needed.

[D] The show cause notice under Section 148A(1) of the IT Act issued on 29.03.2026 and the order under Section 148A(3) of the IT Act dated 19.06.2026 as is simultaneous notice under Section 148 of the IT Act, but the prior approval, which should be after the assessment of the fitness of the case, is even prior to the date of the notice.

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 30.10.2026 and the petitioner 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.

Note:

1 This petition is disposed of on 09.19.2026