SC Declines Reassessment Revival as Income & Transactions Were Fully Disclosed in ITR

ITO Vs R D Diamond (Supreme Court of India)

The Supreme Court dismissed the Special Leave Petition filed by the Income Tax Department against the Gujarat High Court judgment that had quashed reassessment proceedings initiated under Sections 147 and 148 of the Income Tax Act for Assessment Year 2019-20. While declining interference, the Supreme Court kept the question of law open.

Before the Gujarat High Court, the petitioner partnership firm engaged in trading of rough and polished diamonds challenged the notice dated 29.06.2025 issued under Section 148 and the order passed under Section 148A(3). The Revenue alleged that the petitioner had entered into bogus transactions amounting to Rs. 5.66 crore based on information received during investigation into transactions involving one Vasudev Babubhai Kapadia.

The petitioner contended that all transactions, including those with Vasudev Babubhai Kapadia, had already been disclosed in the Income Tax Return, audited books of account, and profit and loss account. It submitted that there was no material to show escapement of income and that the reopening proceedings were initiated merely on the basis of portal information and amounted to a fishing and roving inquiry.

The Revenue argued that investigations revealed suspicious transactions and bogus purchases linked to undisclosed bank accounts of Vasudev Babubhai Kapadia. It was submitted that the petitioner had financial transactions aggregating to Rs. 5.66 crore with such entities and therefore proceedings under Section 148 were justified.

The High Court observed that the petitioner had regularly maintained audited books of account, filed returns, and disclosed all relevant transactions in its profit and loss account. The Court noted that the petitioner had provided detailed explanations reconciling the transactions and clarified that certain amounts did not appear in its books. However, the Assessing Officer had vaguely stated that these issues would be examined during assessment proceedings.

Referring to Section 147, the High Court held that reassessment proceedings can be invoked only where income chargeable to tax has escaped assessment. It observed that the petitioner had made full and true disclosure of all material facts necessary for assessment and that the reopening was triggered only because another person allegedly failed to explain his transactions before the department.

The Court held that there was nothing on record to establish a valid “reason to believe” that the petitioner’s income had escaped assessment. It found that the Revenue had misdirected itself while examining the transactions of third parties despite full disclosure by the petitioner. Consequently, the Gujarat High Court quashed the Section 148 notice and the order under Section 148A(3).

The Supreme Court subsequently declined to interfere with the Gujarat High Court judgment and dismissed the Special Leave Petition, while keeping the question of law open.

Read HC Judgment: R.D. Diamond Vs ITO (Gujarat High Court)

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

1. Delay condoned.

2. We are not inclined to interfere with the impugned judgment and order of the High Court; hence, the special leave petition is dismissed.

3. However, question of law, if any, is kept open.

4. Pending application(s), if any, shall stand disposed of.