Karnataka HC Quashes Tax Assessment as Assessee Was Not Heard & Unfreezes Account

Primary Agriculture Co-Operative Society Vs CIT (Appeals) (Karnataka High Court)

The Karnataka High Court partly allowed the writ petition filed by a Primary Agricultural Co-operative Society challenging the assessment order dated 13.01.2026 for Assessment Year 2018-19, the consequential demand notice, and the bank attachment order. The assessment was completed under Section 144 of the Income Tax Act after the petitioner did not file its return or respond to the notice issued under Section 148A(b), resulting in an order under Section 148A(d) and a notice under Section 148.

The petitioner contended that it functions as an intermediary institution facilitating agricultural credit to its members using funds sourced from the Hassan District Co-operative Central Bank and does not conduct business with non-members. It submitted that its income would be eligible for deduction under Section 80P and that it had not filed its return because its income was only Rs. 4,18,496. Although an appeal had already been filed before the Commissioner of Income Tax (Appeals), the petitioner approached the High Court due to the assessment proceedings and the freezing of its bank account. It also relied on an earlier High Court decision involving similar facts.

The High Court observed that the Revenue did not contend that the earlier decision had been challenged or that the petitioner’s case was distinguishable. It further noted that if the petitioner established that it functioned only as an intermediary institution providing credit to its members, it could claim deduction under Section 80P. The Court also found that the orders under Section 148A(d) and the assessment order had been passed without the petitioner’s participation, while the petitioner had offered a bona fide explanation for its non-participation.

Accordingly, the Court quashed the assessment order, demand notice, and attachment order, restored the proceedings to the stage of the notice under Section 148A(b), permitted the petitioner to file its response and appear before the authority on the specified date, and held that the pending appeal before the Commissioner of Income Tax (Appeals) had become infructuous.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner is a Primary Agricultural Co- operative Society and it is aggrieved by the Assessment Order dated 13.01.2026 [Annexure-M] and the subsequent Demand Notice and the Bank Attachment Order. The Demand Notice is dated 13.01.2026 and the Attachment Order is dated 17.04.2026. These are produced as Annexure – N and Annexure-S. The Assessment Order relates to the assessment year 2018-19, and the petitioner has not filed its returns for this assessment year.

2. The petitioner is issued with Notice under Section 148A(b) of the Income Tax Act, 1961 [for short, ‘the Act’] on 04.08.2024 suggesting that there is escapement of income which remains unexplained. The petitioner has not responded to this Notice and this has resulted in an Order under Section 148A(d) of the Act followed by the Notice under 148 of the Act which is dated 27.08.2024 [Annexure-D]. The assessment under the impugned Assessment Order is under Section 144 of the Act observing that the petitioner has received cash deposits into its accounts, with withdrawals as well, maintained with the Hassan District Co-operative Central Bank Limited [HDCC Bank].

3. Sri Girish V Bhat, the learned counsel for the petitioner, submits that the petitioner, as a Primary Agricultural Co-operative Bank, acts as an Intermediary Institution facilitating agricultural credit to farmers with the funds sourced from HDCC Bank and that the petitioner does not do any business with non-members. The learned counsel emphasizes that in the circumstances the petitioner’s income would be eligible for deduction under Section 80P of the Act and that the petitioner has not filed its returns for the assessment year because of its nominal income of Rs.4,18,496/-.

4. Sri Girish V. Bhat submits that the petitioner has filed an appeal with the CIT Appeals on 08.04.2026, but is constrained to invoke this Court’s jurisdiction under Article 226 of the Constitution of India because of the circumstances in which the proceedings under Section 148A of the Act are closed resulting in the impugned Assessment Order and the coercive measures to freeze the bank accounts. The learned counsel submits that in very similar circumstances this Court in W.P.12474/2026 has disposed of the writ petition quashing the Notice under Section 148 of the Act and all other subsequent proceedings with liberty to the concerned to file reply to the Notice under Section 148A(b) of the Act and appear for personal hearing on a date fixed without further notice. The learned counsel also emphasizes that this Court has observed that communication to the Bank stands rescinded forthwith.

5. Sri M.Thirumalesh, a learned standing counsel for the respondents, is heard for disposal of the petition in the light of these circumstances. This Court must observe that it is not stated before this Court that the orders of this Court in W.P.No.12474/2026 has been called in question or that the petitioner’s circumstances are dissimilar to the circumstances in which the petition in W.P.No.12474/2026 is decided. This Court must further observe that it is not in dispute that if the petitioner can really bring forth the essential circumstances such as that it functions as an Intermediary Institution lending credit facility only to its members, it would be open to the petitioner to claim deduction under Section 80P of the Act. If these circumstances present the first set of reasons for interference, the next reason is that the Orders under Section 148A(d) of the Act as also the Assessment Order are without the petitioner’s participation. The petitioner pleads bona fides in offering cause for non-participation in these proceedings. Hence, the following:

ORDER

[A] The petition is allowed-in-part and the impugned Assessment Order dated 13.01.2026 [Annexure-M] is quashed as is the subsequent Demand Notice dated 13.01.2026 and the Attachment Order dated 17.04.2026 [Annexures-N and S].

[B] The proceedings are restored to the stage of Notice under Section 148 A(b) of the Act with liberty to the petitioner to file its response and appear before the respondent on 07.2026.

[C] The petitioner’s appeal with the first respondent is rendered infructuous with this Order.