Karnataka HC Reopens Appeal u/s 250 Amid Cancer, Preserves Assessment u/s 143(3) r.w.s. 147

S T Prasad Vs CIT (Appeals) (Karnataka High Court)

Cash Deposits, Cancer & a Closed Appeal Reopened: Karnataka HC Restores Proceedings U/s 250 Without Disturbing Assessment u/s 143(3) r.w.s. 147

Summary: In S.T. Prasad v. Commissioner of Income Tax (Appeals) & Another, the Karnataka High Court examined a challenge to an assessment order dated 29.12.2017 & an appellate order dated 30.03.2026 concerning AY 2011-12. The petitioner, aged 68, was the former proprietor of Penguin Security Services Enterprises. The assessment resulted in a demand of ₹25,03,000 towards tax & interest.

The AO completed assessment u/s 143(3) r.w.s. 147 on the basis that cash receipts deposited in a bank account had not been offered to tax. The Commissioner of Income Tax (Appeals) disposed of the ensuing appeal ex parte u/s 250, recording failure to respond to repeated notices.

The appellate record showed six notices dated 15.01.2021, 06.04.2023, 10.03.2025, 24.04.2025, 02.05.2025 & 20.06.2025, but no compliance. The appellate order was pronounced on 30.03.2026. The petitioner invoked Articles 226 & 227 of the Constitution, seeking quashing of both orders.

The essential issue was whether the High Court should interfere with the ex parte appellate order, despite the petitioner’s failure to participate in several hearings, when he claimed that serious illness had prevented compliance & that the disputed bank account did not belong to him. A related issue was whether the Court should quash the reassessment or merely restore the appeal for investigation of the bank account’s ownership.

The petitioner contended that the assessment rested upon an incorrect factual assumption. Although cash deposits were found in a particular account, he asserted that the account did not relate to him. He maintained that, if afforded an effective opportunity, he could demonstrate this through relevant banking records. Counsel submitted that the petitioner had been diagnosed with cancer & was undergoing treatment during the relevant period.

The High Court drew an important distinction between the assessment order & the order-in-appeal. It declined to interfere directly with the assessment order dated 29.12.2017. Instead, it recognised that the Commissioner (Appeals) constitutes an independent fact-finding forum capable of examining every factual aspect of the controversy.

The Court observed that the appellate authority could obtain & verify details from the concerned bank to determine whether the account receiving the cash deposits genuinely belonged to the petitioner. The Court also noticed the considerable time gaps between the notices and the explanation that the petitioner remained under treatment after diagnosis of a terminal illness.

Accordingly, it set aside the appellate order dated 30.03.2026 & restored the appeal for fresh consideration. The assessment order was left untouched, meaning that its correctness must now be adjudicated by the Commissioner (Appeals). The Court did not accept the petitioner’s claim regarding ownership of the account as established; it merely held that the claim required objective verification from bank records.

Relevant Facts

In S.T. Prasad v. Commissioner of Income Tax (Appeals) & Another, the Karnataka High Court examined a challenge to an assessment order dated 29.12.2017 & an appellate order dated 30.03.2026 concerning AY 2011-12. The petitioner, aged 68, was the former proprietor of Penguin Security Services Enterprises. The assessment resulted in a demand of ₹25,03,000 towards tax & interest.

The AO completed assessment u/s 143(3) r.w.s. 147 on the basis that cash receipts deposited in a bank account had not been offered to tax. The Commissioner of Income Tax (Appeals) disposed of the ensuing appeal ex parte u/s 250, recording failure to respond to repeated notices.

The appellate record showed six notices dated 15.01.2021, 06.04.2023, 10.03.2025, 24.04.2025, 02.05.2025 & 20.06.2025, but no compliance. The appellate order was pronounced on 30.03.2026. The petitioner invoked Articles 226 & 227 of the Constitution, seeking quashing of both orders.

Issue Before the Court

The essential issue was whether the High Court should interfere with the ex parte appellate order, despite the petitioner’s failure to participate in several hearings, when he claimed that serious illness had prevented compliance & that the disputed bank account did not belong to him.

A related issue was whether the Court should quash the reassessment or merely restore the appeal for investigation of the bank account’s ownership.

Petitioner’s Contentions

The petitioner contended that the assessment rested upon an incorrect factual assumption. Although cash deposits were found in a particular account, he asserted that the account did not relate to him. He maintained that, if afforded an effective opportunity, he could demonstrate this through relevant banking records.

Counsel submitted that the petitioner had been diagnosed with cancer & was undergoing treatment during the relevant period. Non-response was attributed to grave medical circumstances rather than deliberate disregard. Since the crucial bank-account issue remained unexamined, he sought an opportunity to contest the addition on merits.

Revenue’s Position

The Revenue’s Senior Standing Counsel was heard on interference with either order. The judgment records no detailed objection, though the Court considered the repeated notices & continued non-compliance while deciding whether another opportunity was warranted.

Court’s Findings

The High Court drew an important distinction between the assessment order & the order-in-appeal. It declined to interfere directly with the assessment order dated 29.12.2017. Instead, it recognised that the Commissioner (Appeals) constitutes an independent fact-finding forum capable of examining every factual aspect of the controversy.

The Court observed that the appellate authority could obtain & verify details from the concerned bank to determine whether the account receiving the cash deposits genuinely belonged to the petitioner. This factual exercise was better undertaken by the statutory appellate authority than by the High Court in writ jurisdiction.

The first notice was issued in 2021, the next in 2023, while the remaining notices came during March to June 2025. The appellate order followed on 30.03.2026. The Court noticed the considerable time gaps & the explanation that the petitioner remained under treatment after diagnosis of a terminal illness.

These circumstances persuaded the Court that procedural default should not foreclose a genuine factual defence carrying substantial tax consequences. Accordingly, it set aside the appellate order dated 30.03.2026 & restored the appeal for fresh consideration. The assessment order was left untouched, meaning that its correctness must now be adjudicated by the Commissioner (Appeals).

Legal Reasoning

The decision reflects the principle that an appellate proceeding involving disputed facts should ordinarily be decided after providing an effective opportunity of hearing. Though repeated non-compliance normally weighs against an assessee, the Court treated the petitioner’s serious medical condition, the prolonged appellate timeline & the verifiable nature of the defence as sufficient grounds for one further opportunity.

The Court did not accept the petitioner’s claim regarding ownership of the account as established. It merely held that the claim required objective verification from bank records. Thus, the relief was procedural rather than substantive: no addition was deleted & no conclusion was reached regarding taxability of the cash deposits.

Practical Implications

The ruling demonstrates that an ex parte order may be set aside where non-participation is supported by compelling medical circumstances & the assessee raises a specific, verifiable defence. However, illness does not automatically erase the assessment; it only justifies restoration where fairness requires factual adjudication.

On remand, the petitioner must promptly furnish medical evidence, bank confirmations, KYC documents, account-opening records & transaction details. The Commissioner (Appeals) must independently determine account ownership rather than simply reproduce the assessment findings. The decision ultimately balances procedural discipline with substantive justice while preserving the Revenue’s right to examine the evidence: a missed hearing need not become a missed defence when the disputed fact can still be conclusively verified.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has called in question the Assessment Order dated 29.12.2017 and the Order-in-Appeal dated 30.03.2026. The petitioner with these two orders prevailing will have to answer the demand for tax and interest in a sum of Rs.25,03,000/- as of the date of the scrutiny assessment order. Smt. Aruna Bhat, the learned counsel for the petitioner, submits that:

[a] the scrutiny assessment is completed on the ground that the petitioner has received certain cash receipts into his account, but he has not offered the same for taxes,

[b] the petitioner can demonstrate that the account into which cash receipts are received does not relate to him, and

[c] the Order-in-Appeal is an ex parte order.

2. The appellate authority has tabulated the date of the notices sent to the petitioner while observing that the petitioner [appellant therein] has not responded to any of these notices. The tabulation is as under:

Smt. Aruna Bhat submits that the petitioner, during the relevant time, was diagnosed as suffering from Cancer and was under treatment and as such could not participate in the proceedings.

3. Sri M. Thirumalesh, a learned Senior Standing Counsel who accepts notice for the respondents, is heard on the question of this Court’s interference either with the Scrutiny Assessment Order Dated 29.12.2017 or the Order-in-Appeal dated 30.03.2026. This Court must opine that the appellate authority is another fact-finding forum and every aspect could be gone into by this authority. The appellate authority can verify the details available with the concerned bank to ascertain whether the subject account relates to the petitioner or not.

4. This Court must observe that if the first notice is in the year 2021, the next notice is in the year 2023 and the last of the notices is either in March or April or May, 2025, and the Order-in-Appeal is passed on 30.03.2026. There is a time-lag, and the petitioner’s case is that, after being diagnosed with terminal illness, he was under treatment. These circumstances persuade this Court to interfere not with the Scrutiny Assessment Order but with the Order-in-Appeal to restore the proceedings for due consideration observing that such consideration must be after collating all the necessary details from the bank to verify into whose account the cash deposits are received. Hence the following.

ORDER

The petition is allowed. The Order-in-Appeal dated 30.03.2026 [Annexure-A] is set aside restoring the appeal for due consideration by the first respondent in the light of this Court’s order.