Section 148 Notice Cannot Rest on Unexamined Taxpayer Explanation

Kodachadri Associates Vs ACIT (Karnataka High Court)

Loan or Turnover? AO Must Examine the Reply Before Reopening

The controversy

Information suggesting undisclosed business turnover may justify a preliminary inquiry. But when the taxpayer explains that the amount represents loans and produces supporting records, can the Assessing Officer proceed with reopening merely because the matter requires a thorough investigation?

The Karnataka High Court held that the Assessing Officer must first examine the documents and record cogent reasons explaining why the case is fit for issuance of a notice under Section 148.

Finding that this exercise had not been undertaken, the Court quashed the impugned order, approval and reopening notice, and restored the proceedings for reconsideration.

The Court did not finally hold that the disputed amount was a genuine loan. It required the Department to examine that explanation meaningfully before deciding whether reopening was warranted.

₹28.40 lakh treated as undisclosed turnover

Kodachadri Associates, a partnership firm based in Byndoor, received a show-cause notice dated 27 March 2026 under Section 148A(1) concerning AY 2022–23.

The notice alleged that business turnover of ₹28,40,000 had not been disclosed in the return.

The firm disputed this basic characterisation. Its explanation was that the amount represented loans from known entities, including entities in which a partner of the petitioner firm was also a partner.

In support, the petitioner relied on its ledger, the lenders’ ledgers and bank records. Its response was therefore directed at the foundation of the allegation: the amount was claimed to be a borrowing, not a business receipt.

The Department proposed further investigation

The Assessing Officer nevertheless passed an order under Section 148A(3) and issued the consequential notice under Section 148 on 16 June 2026.

According to the petitioner, the order proceeded on the footing that the creditor’s bank statement had not been furnished and that the matter required a thorough investigation.

The petitioner challenged the order, the prior approval dated 12 June 2026, and the reopening notice before the High Court.

Its grievance was that the Department had not properly considered the explanation and supporting material already submitted before deciding to reopen the assessment.

A reply must influence the decision

The petitioner argued that Section 148A(3) required the Assessing Officer to take its response into account and then determine whether the case was fit for reassessment.

The opportunity to reply could not be reduced to a preliminary formality followed by reopening for further investigation regardless of the explanation.

Counsel submitted that, without examining the response and reaching a reasoned conclusion, the proceedings would become a roving or fishing inquiry.

This was particularly relevant because the explanation directly challenged the description of the amount as turnover. Before investigating allegedly undisclosed turnover through reassessment, the Department had to examine whether the available records supported that description at all.

Examine the documents, then record cogent reasons

The High Court noted that the proceedings began with information concerning business turnover. The petitioner had specifically responded that the amount represented loans and had enclosed documents supporting its explanation.

The Court held that, before concluding that a Section 148 notice should issue, the Assessing Officer should have examined those documents to ascertain whether the amount could indeed be classified as business turnover.

Thereafter, the officer was required to record an opinion supported by cogent reasons identifying the circumstances that justified reopening.

The failure to undertake this examination warranted interference. A statement that the matter required investigation did not replace consideration of the material submitted in response to the show-cause notice.

Approval also required consideration of the material

The Court further observed that the approval exercise under Section 151 should have involved consideration of these circumstances.

It also recorded counsel’s point concerning an indication of approval predating the reply, describing this as showing predisposition.

The order contains differing date references in this discussion. The central principle, however, is clear: the approval process must consider the relevant explanation and documents, rather than proceed on a predetermined view that reopening should follow.

The judgment therefore scrutinised both the Assessing Officer’s decision and the approval supporting it.

Reopening quashed, proceedings restored

The petition was allowed in part. The Court quashed the Section 148A(3) order dated 16 June 2026, the impugned approval/order dated 12 June 2026, and the Section 148 notice dated 16 June 2026.

The proceedings were restored to the jurisdictional Income Tax Officer for reconsideration.

The petitioner was directed to appear before the ITO, Ward 1 and TPS, Udupi, on 16 October 2026, without further notice. It could furnish any further clarification sought by the officer, who was required to consider the explanation in light of the Court’s observations.

Author’s comments

A receipt cannot be treated as turnover merely because information initially describes it that way. When the taxpayer produces records supporting a different characterisation, the reopening decision must address those records.

This judgment gives practical substance to the opportunity provided under Section 148A. The response must be examined and answered through reasons.

At the same time, the relief is a remand for reconsideration. It neither establishes the genuineness of the loans nor permanently prevents a fresh reopening decision supported by proper examination.

The AO may investigate, but must first explain why the taxpayer’s documents do not resolve the allegation.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has called in question the Order under Section 148A(3) of the Income Tax Act, 1961 [for short, the IT Act’] and the Notice under Section 148 of the IT Act. The details of these impugned orders and notices are as follows.

2. Mr. S. S. Naganand, the learned Senior counsel for the petitioner, submits that the petitioner is issued with Show Cause Notice under Section 148A(1) of the IT Act on 27.03.2026 for the assessment year 2022-23 informing that a business turnover of Rs.28,40,000/- is not disclosed in the Returns and that the petitioner, in response, has filed a detailed reply stating that the sum of Rs.28,40,000/- is not a business turnover but a loan availed by certain Firms producing not only the petitioner’s ledger but also the lender’s ledger along with the bank statements, but the second respondent, without considering the same, has passed an Order under Section 148A of the IT Act and has caused the impugned notice opining that the petitioner has not provided the Creditor’s Bank statement and that the matter requires a thorough investigation.

3. Mr. S. S. Naganand also canvasses that the second respondent, as required under Section 148A(3) of the IT Act, is obliged to take into account the petitioner’s response and pass an order about the case being fit for reassessment and for notice under Section 148 of the IT Act and unless the second respondent considers the response and opines that it is a fit case, the notice under Section 148 of the IT Act and further proceedings would be a rowing or a fishing expedition which cannot be in law.

4. Mr. M. Thirumalesh, a learned Senior Standing Counsel who accepts notice for the respondents and who is assisted by Mr. Nirmal Mathew, a learned Standing counsel, are heard for the disposal of the petition in the light of these circumstances. The proceedings are begun with notice under Section 148A(1) of the IT Act based on certain information on business turnover, and the petitioner has responded specifically stating, and enclosing certain documents [as could be seen from the reply dated 22.04.2026 Annexure – B] that the amount is not a business turnover but loans availed from known entities in which he is also a partner. The petitioner also has referred to his own bank statements.

5. This Court is of the opinion that if the second respondent could conclude that there must be proceedings with issuance of notice under Section 148 of the IT Act, should have first examined these documents to ascertain whether the amounts declared indeed be classified as business turnover as alleged and then record an opinion by cogent reasons on the circumstances that justify the case being fit for issuance of notice under Section 148 of the IT Act. This failure is a reason for this Court to interfere with the impugned order/approval and notice and restore the proceedings to the second respondent for reconsideration. Further, this Court must also observe that the second respondent, while granting approval under Section 151 of the IT Act, should have looked into all these and then granted approval, and the learned Senior Counsel rightly points out that the prior approval could be dated 27.03.2026 [much before the petitioner’s reply which is dated 12.04.2026] showing a predisposition. Hence, the following.

ORDER

A. The petition is allowed-in-part.

B. The following are quashed.

C. The petitioner, without further notice, shall appear before the Income Tax Officer, Ward 1 and TPS, Udupi [the second respondent] on 16.10.2026 and the petitioner will be at liberty to file any further clarification that the second respondent may seek but the second respondent must consider the explanation offered in the light of this Court’s observation as afore.