Case Law Details
R.D. Diamond Vs ITO (Gujarat High Court)
Reopening u/s 147 held invalid where based solely on third-party information and portal data without independent material showing escapement of income—amounting to mere suspicion and fishing inquiry
The Special Leave Petition in Income Tax Officer Ward 2(3)(4) Surat vs M/s R.D. Diamond (SLP (C) No. 15400/2026) was dismissed by the Supreme Court on 27 April 2026.
Core Issue: The core issue before the Gujarat High Court, later affirmed by the Supreme Court of India, was whether reassessment proceedings under Sections 147/148 can be validly initiated merely on the basis of third-party information and portal data, without any independent material establishing escapement of income in the hands of the assessee, and whether such reopening amounts to a fishing and roving inquiry based on suspicion rather than a legally sustainable “reason to believe”.
Facts: The assessee, a partnership firm engaged in diamond trading, filed its return for AY 2019–20 declaring turnover of ₹16.28 crore with duly audited books. The reopening was initiated on the basis of information alleging bogus transactions of ₹5.66 crore linked to dealings with certain third parties, namely Vasudev Babubhai Kapadia and Janakbhai Vasudev Kapadia. A notice under Section 148A(1) was issued, and the assessee furnished a detailed reply along with reconciliation, clarifying that all transactions were genuine, recorded in books, and duly offered to tax. Despite this, the Assessing Officer proceeded to pass an order under Section 148A(3) and issued notice under Section 148.
Assessing Officer’s Findings: The Assessing Officer formed a prima facie belief of escapement of income primarily on the basis of information available on the portal and investigation findings relating to third parties who allegedly carried out bogus transactions and failed to cooperate. The AO relied on such third-party non-cooperation and treated the transactions of the assessee as suspicious, without bringing any independent material on record to demonstrate escapement of income in the assessee’s case. The order indicated that certain aspects would be examined during assessment proceedings, reflecting lack of a definitive belief at the stage of reopening.
High Court’s Findings: The Hon’ble High Court held that the statutory requirement of “reason to believe” under Section 147 was not satisfied. It was observed that the assessee had made full and true disclosure of all material facts, including audited accounts and transaction details. The reopening was based solely on third-party non-cooperation and portal information, without any tangible material linking the assessee to escapement of income. The Court held that such action amounted to a fishing and roving inquiry and reflected non-application of mind. The Assessing Officer failed to record any cogent material justifying reopening. Accordingly, the notice under Section 148 and order under Section 148A(3) were quashed.
Supreme Court (SLP) Order: The Supreme Court of India, in SLP (C) No. 15400/2026, titled Income Tax Officer Ward 2(3)(4) Surat vs M/s R.D. Diamond, dismissed the Special Leave Petition filed by the Revenue observing that it was not inclined to interfere with the judgment of the High Court. However, it clarified that the question of law, if any, was kept open. Thus, the High Court’s ruling attained finality on facts.
Cases Relied: The High Court relied upon the decision in Apex Remedies Pvt Ltd vs Income Tax Officer (2023 (7) TMI 380), reiterating that reassessment cannot be initiated on borrowed satisfaction or vague information without independent application of mind and tangible material demonstrating escapement of income.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. The present writ petition has been filed seeking following reliefs:
“7(a) quash and set aside the impugned Notice dated 29/06/2025 issued under Section 148 of the Act and the Order dated 29/06/2025 passed under Section 148A(3) of the Act for Assessment Year 2019-20 at ANNEXURE “A (Colly.)” to this petition;
(b) pending the admission, hearing and final disposal of this petition, stay the implementation and operation of the impugned Notice dated 29/06/2025 issued under Section 148 of the Act and the Order dated 29/06/2025 passed under Section 148A(3) of the Act for Assessment Year 2019-20 at ANNEXURE “A (Colly.)” to this petition and stay further proceedings for Assessment Year 2019-20;”
FACTS
2. The petitioner is a partnership firm and has been engaged in the business of trading of rough diamonds as well as cut and polished diamonds. It has been regularly filing Income Tax Returns (ITR) since its incorporation. The petitioner had recorded a total turnover of Rs. 16,28,25,185/- and was subjected to tax audit as per the provisions of the Income Tax Act, 1961 (for short “the Act”) and filed its ITR on 18.10.2019. Pursuant to the information received by the respondent, it is alleged that the petitioner has entered into bogus transactions of Rs. 5,66,44,146/- and escaped assessment for the said amount, and a Show-Cause Notice dated 29.03.2025 under Section 148A(1) of the Act was issued to that extent. The petitioner replied vide its letter dated 10.04.2025, wherein it denied all the allegations and furnished a detailed explanation that the transactions pertain to sales made by it were duly offered to tax.
3. The respondents thereafter passed the impugned interim order dated 29.06.2025 under Section 148A of the Act, holding that income chargeable to tax has escaped assessment for the AY 2019–20 worth Rs. 5,66,44,146/- under Section 147 read with Section 148 of the Act.
SUBMISSIONS ON BEHALF OF THE PETITIONERS
4. Learned Senior Advocate Mr. Hemani, appearing for the petitioner, while referring to the provisions of Section 147 of the Act, has submitted that the same shall be invoked only if any income chargeable to tax has escaped assessment, whereas in the present case, it cannot be said that there is any escapement, as the petitioner had already disclosed all the transactions in its returns, which are also reflected in the profit and loss account. It is further submitted that there is no material available to support the information leading to the alleged escapement of income. He has also referred to the provisions of Section 148A of the Act and has submitted that the Assessing Officer (AO) has concluded that the income, as mentioned hereinabove, has escaped assessment only on the basis of information provided on the portal, and that the impugned notice for reopening is nothing but a fishing and roving inquiry on the basis of such information. In support of his submissions, he has placed reliance on the judgment of the Coordinate Bench of this Court in the case of Apex Remedies (P.) Ltd. vs. Income-tax Officer, [2023] 152 taxmann.com170(Gujarat). Thus, it is urged that the writ petition may be allowed.
SUBMISSIONS ON BEHALF OF RESPONDENT
5. Opposing the aforesaid submissions, learned Senior Standing Counsel Mr. Sanghani, appearing for the respondent authority, has submitted that after the investigation was undertaken by the respondent authority and as per the Risk Management Strategy formulated by the Central Board of Direct Taxes (CBDT) on the portal, it was found that there were suspicious transactions reported in the case of one Shree Vasudev Babubhai Kapadia, who had carried out huge transactions in the form of purchase and sales through an undisclosed bank account. It is submitted that it was found that the undisclosed bank account does not commensurate with the ITR for the concerned AY 2019–20 filed by the said person, viz. Shree Vasudev Babubhai Kapadia. It is submitted that on further verification, it was found that the said person had filed GSTR-1, and as per the same, he had made purchases of Rs. 23,98,17,548/- and total sales of Rs. 23,15,57,996/-, and did not furnish documentary evidence to prove the genuineness of sales and purchases during the course of inquiry proceedings. He has submitted that the Investigating Officer had treated the unaccounted purchase of Rs. 23,98,17,548/- as unaccounted income of AY 2019–20. It is submitted that the investigation further revealed that the petitioner had made financial transactions in the form of bogus purchases and sales aggregating to Rs. 5,66,44,146/-, as mentioned in the notice issued under Section 148A(1) of the Act.
6. Learned Senior Standing Counsel has submitted that at this stage, while examining the assessment of income under Section 148(1) of the Act, the prima facie opinion required to be formed is that the income has escaped assessment, and accordingly, the petitioner was called upon to furnish the details, as mentioned in the said notice. While placing reliance on the provisions of Section 148 of the Act, it is submitted that Shree Vasudev Babubhai Kapadia did not cooperate with the investigation and did not furnish details which had direct nexus with the petitioner, and hence, the proceedings under Section 148 of the Act were undertaken. Thus, it is urged that at this stage, no interference is required in the proceedings under Section 148 of the Act and the petitioner can always satisfy the AO by providing the relevant material.
ANALYSIS
7. We have heard the learned advocates appearing for the respective parties at length and also perused the documents as pointed out by them.
8. The facts which are established from the record and are not denied are that the petitioner had filed its ITR for the AY 2019–20. The petitioner had recorded a total turnover of Rs. 16,28,25,185/-, which was subjected to tax audit under the provisions of the Act, and accordingly, it filed its ITR on 18.10.2019 declaring its net income and paid the tax thereon. It is also not in dispute that the petitioner maintains regular books of account and gets them audited every year within time and uploads them on the IT portal. All the transactions were disclosed by the petitioner, including those with Shree Vasudev Babubhai Kapadia, and the same are duly reflected in the profit and loss account as income, attached with its reply dated 10.04.2025.
9. We have perused the details of the transactions and the reply forwarded by the petitioner to the respondents. The petitioner has dealt with the information supplied to it by the respondent threadbare and has meticulously satisfied the data by comparing it with the books of account, and upon such comparison, it has categorically replied that, so far as the amount of Rs. 73,31,671/- is concerned, the same does not figure in the books of account, whereas the amount of Rs. 1,73,89,827/- pertains to sales of rough diamonds to Vaibhav Enterprise, proprietor Janakbhai Vasudev Kapadia, during AY 2018–19, for which all the details were offered. Upon receipt of such reply, the respondents held that the same would be looked into in detail during the assessment proceedings. Thus, so far as the amount of Rs. 73,31,671/- is concerned, the petitioner had categorically explained that it does not find place in the books of account; the Assessing Officer has cursorily and perfunctorily responded that the same would be looked into during the assessment proceedings.
10. A perusal of the order passed under Section 148 of the Act shows that the entire allegations of bogus purchases are confined to Vasudev Babubhai Kapadia. The petitioner, in its reply and in filing the assessment and ITR, has clarified the transactions with Vasudev Babubhai Kapadia to the tune of Rs. 1,92,29,925/-.
11. At this stage, we may refer to the provisions of Section 147 of the Act, which are as under:
“147. Income escaping assessment.—If the [Assessing Officer] [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.”
12. Thus, the provisions of Section 147 of the Act are self-explanatory and do not need further elaboration. They can be invoked only if any income chargeable to tax has escaped assessment for any AY. It is a settled legal precedent that what is required for an assessee in the course of assessment proceedings is a full and true disclosure of all material facts necessary for making the assessment for that year, which the petitioner has done in the instant case. All the requirements stipulated by Section 147 must be given due and equal weight. In the present case, we find that the petitioner has categorically declared all its income, including profit and loss account, and the transactions with Vasudev Babubhai Kapadia, which were subject to further assessment. The present proceedings are invoked only because Vasudev Babubhai Kapadia did not cooperate with the respondent authority in explaining his alleged bogus purchases. The respondent authority, on the pretext that Vasudev Babubhai Kapadia and one Janakbhai Vasudev Kapadia have made alleged bogus purchases and not offered their explanation, has roped the petitioner into proceedings under Section 148 of the Act. Thus, there is nothing recorded in the order which would satisfy that the Assessing Officer has reason to believe that the petitioner’s income chargeable to tax has escaped assessment.
13. Thus, looking to the facts of the case and the approach of the respondent authority, we are of the opinion that the proceedings under Section 148 of the Act were uncalled for, as we find that the respondents have misdirected themselves while assessing the transactions of Vasudev Babubhai Kapadia and Janakbhai Vasudev Kapadia, despite the petitioner having disclosed all its transactions to the respondents by filing its ITR. As mentioned hereinabove, the explanation regarding the amount of Rs. 73,31,671/-, which does not find place in the books of account of the petitioner, is vaguely dealt with by the Assessing Officer.
14. The present writ petition stands allowed. The impugned notice dated 29.06.2025 issued under Section 148 of the Act and the order dated 29.06.2025 passed under Section 148A(3) of the Act for AY 2019–20 are hereby quashed and set aside. Rule is made absolute.
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