Kunjalu Venkatesh Kini Vs ACIT (Karnataka High Court)
Bank Credits Are Not Automatically Turnover: Karnataka High Court Checks a Roving Reopening
The controversy
A difference between bank credits and disclosed turnover may require an explanation. But can the Department treat the entire difference as undisclosed turnover without supplying its computation? Can it then justify reopening through allegations that were never included in the show-cause notice?
The Karnataka High Court held that the taxpayer must receive the computation, underlying information and an opportunity to answer the allegations before a decision is taken under Section 148A(3).
The Court quashed the impugned order, prior approval and Section 148 notice, while restoring the proceedings for fresh consideration. It found that, without these safeguards, reassessment would become a roving inquiry rather than an inquiry into definite aspects.
₹3.34 crore alleged to be undisclosed turnover
The petitioner, based in Byndoor, was a partner with his spouse in multiple firms engaged in different business activities.
The Department issued a notice dated 30 March 2026 under Section 148A(1), alleging that business turnover of ₹3,34,51,846 had not been disclosed in the return.
The notice sought the computation of income, financial statements, a description of business activities and supporting evidence. The Court recorded that the notice was issued a day before expiry of the limitation period referred to in the order.
The petitioner responded on 22 April 2026, disputing the characterisation of the amount as turnover.
Every bank credit does not represent a business sale
The petitioner explained that the disputed figure arose from the difference between bank credits and reported turnover.
He maintained that every bank credit could not be treated as turnover because the accounts contained different categories of entries that did not constitute business turnover.
He submitted supporting documents and offered to provide further clarification. Significantly, he sought to know how the Department had computed ₹3,34,51,846, so that he could address the figure meaningfully.
The Court noted that there had been no response to this request. If additional particulars were necessary to determine whether reopening was warranted, the Assessing Officer could have called for them.
The final order introduced additional allegations
The petitioner’s further grievance was that the Section 148A(3) order travelled beyond the allegation in the notice.
The order referred to his participation in multiple firms and suggested that those firms were used to park funds, rotate profits and channel unsecured loans and advances.
It also raised concerns about substantial expenses, interest arrangements and accounting practices.
The petitioner argued that neither these propositions nor the material supporting them had been put to him during the preliminary proceedings. He therefore had no opportunity to explain them before they became part of the reopening decision.
The High Court agreed that the identified propositions concerning fund parking, profit rotation, expenses and unsecured loans were outside the show-cause notice.
New grounds require a fresh opportunity to respond
The Court held that, if these matters were to support adjudication under Section 148A(3) leading to reassessment under Section 147, the petitioner had to be put on notice of them.
The Assessing Officer should have supplied the details substantiating those propositions and allowed the petitioner to respond.
The problem was therefore not merely that the taxpayer disagreed with the Department’s conclusions. The taxpayer had not received the computation supporting the original allegation or an opportunity to answer the additional allegations subsequently relied upon.
Without that information, the proposed reassessment lacked the definite factual foundation necessary for a meaningful response.
Approval required examination of all material
The Court also noticed an inconsistency concerning the approval date.
Although the Section 148A(3) order referred to approval dated 12 June 2026, the approval document itself bore 28 March 2026, preceding even the show-cause notice dated 30 March 2026.
The Court noted something amiss in the approval process, but accepted the Revenue’s submission that the proceedings could be restored for proper consideration instead of being terminated altogether.
It expressly directed that, when a report was submitted for approval under Section 151, the approving authority must examine all materials before granting approval.
Reopening quashed, fresh consideration permitted
The petition was allowed in part. The Court quashed the Section 148A(3) order, prior approval and Section 148 notice, restoring the proceedings to the Assessing Officer.
The petitioner was permitted to submit a certified copy of the judgment to both respondents by 15 October 2026.
On receiving it, the Assessing Officer was directed to furnish the computation of ₹3,34,51,846 and the information supporting that computation. The petitioner must then receive a reasonable opportunity to respond, including to the observations made in the earlier order.
All contentions were left open. The Court neither accepted the reconciliation finally nor ruled that no income had escaped assessment.
Author’s comments
A bank-credit mismatch is a starting point for examination, not a substitute for identifying taxable income. The taxpayer must know which entries are disputed and why they are being characterised as turnover.
The judgment also prevents the preliminary notice from becoming a narrow invitation followed by a substantially broader adverse order. Allegations relied upon must first be disclosed and answered.
For practitioners, a clear reconciliation remains essential. Equally, the Department must supply the computation that the reconciliation is expected to explain.
The relief is procedural but significant: reopening must proceed on disclosed, definite grounds after a meaningful hearing—not on unexplained totals and untested allegations.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner is a partner in multiple firms engaged in various business activities along with his spouse. The petitioner’s grievance is with the Order under Section 148A(3) of the Income Tax Act, 1961 [for short, ‘the IT Act’]. The proceedings are for the assessment year 2021. The details of the impugned order/approval and notice are as follows.
| Sl.Nos. | Order/Notice | Section of the Income Tax Act | Annexure |
|---|---|---|---|
| 1. | Order | 148A(3) | C |
| 2. | Prior Approval Order | 148A(3) | C1 |
| 3. | Notice | 148 | D |
2. The proceedings under Section 148A of the IT Act are commenced with the issuance of the notice dated 30.03.2026 [Annexure – A]. Admittedly, this notice is issued a day prior to the expiry of the limitation that is contemplated under Section 149(1)(b) of the IT Act]. The petitioner is put on notice to show cause against business turnover of Rs.3,34,51,846/- not being disclosed in the return of income. The petitioner is called upon to furnish, amongst others, the computation of income along with the financial statements and a description of the business activities with supporting evidence.
3. The petitioner has responded to this notice on 22.04.2026 stating [a] that the notice mentions a sum of Rs.3,34,51,846/- as business turnover is not disclosed in the return of income, [b] that this amount is based on the difference in bank credits and the turnover and [c] that all bank credits cannot be considered turnover as it includes different entries which are not to be treated as turnover. The petitioner, enclosing certain documents, has also stated that if any further clarification is required, he would furnish the same. The first respondent has granted approval as is envisaged under Section 151 of the IT Act on 12.06.2026, and the second respondent has passed the impugned Order on 16.06.2026. This Court must at this stage mention that though the first respondent’s approval, in terms of the Order dated 16.06.2026 reads ‘is dated 12.06.2026’, the approval itself [Annexure – C1] is dated 28.03.2026 [which is even prior to the notice dated 30.03.2026 under Section 148A(1) of the IT Act] as the date.
4. Mr. S. S. Naganand, the learned Senior counsel for the petitioner, submits that this Court must interfere because:
- the order under Section 148A(3) of the IT Act dated 16.06.2026 is on the propositions which are not put to the petitioner as part of notice under Section 148A(1) dated 30.03.2026,
- the petitioner has specifically responded saying that every bank credit cannot be treated turnover categorically stating, while producing voluminous documents as part of the reply, that if further information is required the same would be furnished but this has not even been alluded to.
5. In elaboration, Mr. S. S. Naganand submits that the second respondent has observed in the order under Section 148A of the IT Act that the petitioner is a partner of eight to nine Firms with his wife but this may not be relevant in itself for the purposes of commencing the proceedings for reassessment under Section 147 of the IT Act and that the petitioner, given the circumstances, is engaged in different businesses, including Real Estate and is receiving salary and interest on capital from his own Firms with rate of interest being minimum but there are unsecured loans across Firms. The learned Senior counsel next submits that the second respondent has observed that these Firms are used to park funds in the form of unsecured loans and advances given to others for diversion of profits and rotation of funds, but without an opportunity to the petitioner to show cause against the same as part of enquiry under Section 148A of the IT Act.
6. Mr. S. S. Naganand canvasses that the petitioner has not been put on notice of any material which justifies an allegation of these and the other allegations mentioned in the order under Section 148A of the IT Act, and that the second respondent has observed that the petitioner has claimed huge expense in profit and loss account apart from certain business expenses without any documentary evidence, but the petitioner has not been put on notice of the information that constitutes the basis for this assertion. The learned Senior counsel also canvasses that the second respondent has made certain adverse observations about the accounting practice and again the petitioner is not informed about the same and that if the petitioner was put on notice of these, he could have explained that he is not a contractor who has to adopt that practice.
7. Mr. M. Thirumalesh, the learned Senior Standing counsel for the respondents and who is assisted by the Mr. Nirmal Mathew, a learned Standing counsel for the respondents, are heard with Mr. S. S. Naganand emphasising the afore for interference with the entire proceedings. The learned Senior Standing counsel submits that because the proceedings are begun in time as contemplated under Section 149 of the IT Act and if the petitioner complains about not being furnished with all information or lack of due opportunity, this Court could pass just orders without jettisoning the entire proceedings.
8. This Court finds reason to accept the submissions on behalf of the Revenue, and notwithstanding a certain amiss in granting prior approval under Section 151 of the IT Act, as this Court is persuaded to opine that the fitness of a case for reassessment must be examined in the peculiarities of this case with all due opportunity to the petitioner. The proceedings are begun with the petitioner being put on notice that a business turnover of Rs.3,34,51,846/- is not disclosed in the Return of Income. The petitioner has filed a detailed response stating that the amount is computed based on a difference in the turnover and the bank credits and that every credit cannot be treated a turnover. Significantly, the petitioner has also stated that if further details are required on this aspect, he would produce the details if made known how the amount of Rs.3,34,51,846/- is computed in the Notice under 148A(1) of the IT Act. There is no response in this regard, and it cannot be gainsaid that if further details were required to ascertain fitness of the case for re-assessment, it was open to the second respondent to call for such details to justify the further proceedings.
9. This Court also finds that the propositions in the order, such as [a] that the petitioner is a partner of multiple Firms which are used to park funds and rotate profits, [b] that there are huge expenses claimed and [c] that the petitioner receives unsecured loans but minimal rate of interest are all outside the show cause notice, If there is to be any adjudication under 148A(3) of the IT Act leading to an reassessment proceedings under 147 of the IT Act, it must be with notice thereof to the petitioner.
10. Hence, this Court is of the considered opinion that the second respondent ought to have put the petitioner on notice of these propositions with all the details to substantiate such propositions. In the absence of the computation being made available for the sum of Rs.3,34,51,846/- and the details based on which the observations/propositions are put out in the impugned Order under 148A(3) of the IT Act, this Court opines that there would be more a roving enquiry in the reassessment than an enquiry on definite aspects. As such, this Court passes the following.
ORDER
[A] The petition is allowed-in-part and the following are quashed restoring the proceedings to the second respondent for due consideration.
| Order/Notice | Section of the Income Tax Act | Annexure |
|---|---|---|
| Order | 148A(3) | C |
| Prior Approval Order | 148A(3) | C1 |
| Notice | 148 | D |
[B] The petitioner shall be at liberty to file a certified copy of this order with both the first and second respondents by 15.10.2026.
[C] The second respondent, when served with a copy of this order, shall furnish the computation of Rs.3,34,51,846/- and the information which forms the basis for such computation.
[D] The second respondent shall allow the petitioner a reasonable opportunity to respond in the light of such information and the observation in the order under Section 148A of the IT Act.
[E] Further, this Court observes that the first respondent, when a report is filed for prior approval under Section 151 of the IT Act, shall examine all materials and then grant approval.
[F] It is needless to observe that all contentions are left open.
