Teamview Developers LLP Vs Assessment Unit (Karnataka High Court)
Addition Under Section 69A Cannot Come as a Surprise in Final Assessment: Karnataka High Court Quashes Faceless Order and Penalty Notices
The Karnataka High Court has quashed a faceless assessment order in which an amount of ₹2,38,89,870 was treated as unexplained money under Section 69A, although no such proposal had been included in the show-cause notice issued to the assessee. The Court held that when an entirely new addition is made without putting the assessee on notice, interference is unavoidable because the assessee is denied an effective opportunity to explain the transaction.
M/s Teamview Developers LLP challenged the assessment order dated 18 March 2026 passed under Section 143(3) read with Section 144B of the Income-tax Act for Assessment Year 2024-25. It also challenged the consequential penalty show-cause notices issued under Sections 271AAC(1) and 272A(1)(d).
The assessee was issued a show-cause notice dated 27 February 2026 during the faceless assessment proceedings. The notice proposed variations relating to Section 69C and an addition as business income. The assessee filed its response to both proposed variations and furnished explanations supporting its returned income.
Significantly, the Assessing Officer accepted the assessee’s explanation concerning the variations actually proposed in the show-cause notice. However, while completing the assessment, the officer introduced an entirely different basis of addition and treated ₹2,38,89,870 as unexplained money under Section 69A.
The assessee contended that the final addition was never proposed in the show-cause notice. It had not been informed that receipts from its customers were proposed to be treated as unexplained money, nor was it called upon to reconcile or explain those receipts. Consequently, the assessee had no opportunity to place the relevant facts and documents before the Assessing Officer.
The grievance was therefore not confined to the correctness of the addition. It concerned a more fundamental procedural failure: the assessee was assessed on a ground which it had never been called upon to meet.
Information Collected from Customers Apparently Led to the New Addition
The assessee submitted that it could only infer that the Section 69A addition had been made based on information independently obtained by the Department from its customers. According to the assessee, the receipts from those customers had already been included in the income disclosed in its return after excluding the GST component.
Had the assessee been specifically informed that the customer receipts were proposed to be treated as unexplained money, it could have produced a reconciliation between the gross receipts, GST component, books of account, customer confirmations and income reported in the return. If the officer required further clarification, that too could have been furnished during the assessment proceedings.
The grievance was therefore not confined to the correctness of the addition. It concerned a more fundamental procedural failure: the assessee was assessed on a ground which it had never been called upon to meet.
Final Assessment Cannot Travel Beyond the Show-Cause Notice Without Fresh Opportunity
The Revenue’s senior standing counsel fairly did not dispute that the show-cause notice had not contained any proposal to make an addition under Section 69A. Once this factual position was admitted, the Court held that interference with the assessment order became necessary.
The purpose of a show-cause notice under the faceless assessment procedure is not merely to inform the assessee that some variation may be made. It must communicate the specific factual and legal basis of the proposed variation so that the assessee can submit an effective response.
An addition under Section 69C for unexplained expenditure and an addition under Section 69A for unexplained money operate in different factual and legal fields. An assessee responding to a proposed addition under one provision cannot be expected to anticipate that the final order will invoke an altogether different deeming provision based on a different set of facts.
Even if the Assessing Officer receives new information after issuing the original show-cause notice, the officer is not prohibited from examining it. However, before relying on that material and making a fresh addition, a supplementary show-cause notice or other meaningful opportunity must be given to the assessee. The final assessment order cannot become the first document through which the assessee learns of the new allegation.
Assessment and Consequential Penalty Notices Quashed
In view of the admitted absence of a show-cause notice proposing the Section 69A addition, the High Court allowed the writ petition and quashed the assessment order dated 18 March 2026.
The consequential penalty show-cause notices issued on the same date under Section 271AAC(1) and Section 272A(1)(d) were also quashed. Once the underlying assessment order was set aside, the penalty proceedings founded upon that order could not independently survive in their existing form.
The Revenue requested the Court to clarify that quashing of the assessment should not prevent it from initiating fresh proceedings and claiming the benefit of the extended limitation available under Section 153(6). Accepting this submission, the Court quashed the assessment and penalty notices without prejudice to the Revenue’s right to take fresh proceedings in accordance with law.
The order therefore does not grant final relief on the taxability of ₹2,38,89,870. It restores procedural fairness while leaving the Department free to examine the issue afresh after giving the assessee a proper opportunity.
Author’s Comments
The ruling reinforces an important discipline in faceless assessments: the final order must ordinarily remain within the boundaries of the proposed variations communicated to the assessee. A show-cause notice cannot propose one addition, accept the assessee’s explanation on that issue and then make an entirely different addition under another deeming provision without notice.
The distinction between Sections 69A and 69C is substantive. Section 69A concerns unexplained ownership of money or other valuable articles, whereas Section 69C concerns unexplained expenditure. Each provision requires the assessee to answer a different allegation and produce different evidence. Substitution of one provision for another at the final-order stage is therefore not a harmless technical defect.
At the same time, the judgment is a procedural remand rather than a decision on merits. Since liberty has been reserved to the Revenue, the assessee should keep ready a complete reconciliation of customer-wise receipts, GST collected, turnover disclosed in the books, bank credits, Form 26AS/AIS figures and returned income. Nevertheless, the core principle remains valuable: no tax addition—particularly under a deeming provision—can be sustained when the taxpayer first learns of it from the final assessment order itself.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The petitioner has called in question the scrutiny assessment order dated 18.03.2026 under Section 143 (3) read with Section 144B of the Income Tax Act, 1961 [for short, ‘the Act’] while calling in question the penalty notices. The details of the impugned orders and penalty notices are as follows:
| Sl. No. | Notices/Orders | Date | Provisions of Income Tax Act, 1961 | Annexures |
|---|---|---|---|---|
| 1 | Order | 18.03.2026 | 143 (3) r/w. 144B | A |
| 2 | Penalty notice | 18.03.2026 | 271AAC(1) | A1 |
| 3 | Penalty notice | 18.03.2026 | 271AAC(1) | A2 |
[a] The petitioner was issued with show cause notice dated 27.02.2026 [Annexure-K] proposing variations under Section 69C of the Act and addition as business income under Section 44AB of the Act.
[b] The petitioner has filed response against these two variations. The petitioner’s response on these two proposed variations is accepted but the assessment is concluded treating a sum of Rs.2,38,89,870/- as unexplained money under Section 69A of the Act.
[c] The petitioner was not issued with notice of this proposition and therefore did not have an opportunity.
3. Sri Hemanth V. Pai submits that the petitioner can only infer that this addition is made after calling for information from the petitioner’s customers without noticing that the petitioner had in fact returned the receipts from these customers as income excluding the GST rate and the learned counsel submits that if the petitioner was put on notice, the petitioner could have offered an explanation and if any further clarification is necessary, the same could also have been offered.
4. Sri. Y.V. Raviraj cannot dispute that the show cause notice did not include the proposal for addition as unexplained money under Section 69A of the Act; in which event there must be interference. The learned senior standing counsel points out that this Court may observe that this disposal shall not prejudice the revenue from initiating fresh proceedings as the revenue can claim the benefit of extended limitation under Section 153(6) of the Act In the light of the afore, the following:
ORDER
The petition is allowed quashing the impugned order dated 18.03.2026 [Annexure-A] and the penalty notices dated 18.03.2026 [Annexures-A1 and A2] but without prejudice to the revenue as aforesaid.
