Reassessment cannot rest on mere suspicion absent material showing bogus or accommodation transactions.

The petitioner, a partnership firm engaged in development and construction, challenged proceedings initiated under Section 148A of the Income-tax Act, 1961 (“the Act”) for reopening its assessment for Assessment Year 2021–22.

The proceedings were based on a Suspicious Transaction Report indicating substantial credits and debits in the petitioner’s bank accounts, including transactions allegedly involving routing of funds and high-value non-cash withdrawals.

The reported credits aggregated approximately Rs.89.86 crore and debits approximately Rs.89.77 crore.

A show-cause notice under Section 148A(1) was issued on 13 March 2025.

The petitioner responded on 29 March and 9 April 2025, furnishing audited financial statements, partners’ capital accounts, tax audit reports and details of transactions with partners and other entities.

The petitioner explained that the transactions involved its partners, including Venus Infrastructure Development Private Limited (“VIDPL”), and that its investments and advances were funded through partners’ capital and unsecured loans.

It also contended that no income chargeable to tax had escaped assessment.

Despite these explanations, the Assessing Officer passed an order under Section 148A(3), concluding that income chargeable to tax amounting to Rs.61,83,23,518 had escaped assessment.

The order relied substantially on the suspicious nature of the transactions, the petitioner’s lack of a loan-providing business, and the alleged absence of any requirement for such funds.

The petitioner therefore challenged the show-cause notice, the order under Section 148A(3), and the consequential notice under Section 148 of the Act.

1. Whether the Assessing Officer was justified in initiating reassessment proceedings under Sections 148 and 148A of the Act solely on the basis of suspicious banking transactions reported through an STR, without material demonstrating escapement of taxable income?

2. Whether the Assessing Officer adequately considered the petitioner’s replies and documentary evidence explaining the transactions with its partners and other entities before passing the order under Section 148A(3)?

3. Whether the fact that the petitioner was not engaged in the business of lending, or allegedly had no requirement for the funds, could by itself constitute sufficient justification for reopening the assessment?

The Court applied Sections 147 and 148 of the Income-tax Act, which permit reassessment where the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment, and Section 148A, which requires consideration of the assessee’s response before deciding whether notice under Section 148 should be issued.

The Court recognised that an STR may constitute information enabling the Revenue to examine possible escapement of income, but held that mere suspicion arising from banking patterns is insufficient unless supported by tangible material connecting the transactions with bogus entries, accommodation entries, or actual escapement of taxable income.

The authority passing an order under Section 148A(3) must meaningfully consider the assessee’s explanation and supporting documents; a cursory rejection or reproduction of bank statements does not satisfy that requirement.

The Court found that the petitioner had furnished a detailed explanation of the credits, debits, unsecured loans, partners’ capital contributions, interest payments and interest-free advances, supported by documentary evidence.

However, the Assessing Officer did not substantively deal with those explanations and instead relied on the general circumstance that the petitioner was not in the lending business and had no apparent requirement for the funds.

The Court held that transactions between the petitioner and its partners, without more, did not establish escapement of income.

The Revenue had not identified any material, information or third-party statement showing that the transactions were bogus or constituted accommodation entries resulting in taxable income escaping assessment.

Although the Court did not doubt the Revenue’s power to examine information originating from an STR, it held that suspicion unsupported by material could not sustain reassessment proceedings.

The petitioner’s business profile or lack of lending activity could not, by itself, justify reopening under Sections 147 and 148.

It held that the Revenue had failed to justify the reopening of the petitioner’s assessment because the alleged suspicious transactions were not supported by material demonstrating escapement of taxable income, and the petitioner’s replies and documents had not been properly considered.

Accordingly, the impugned proceedings, including the show-cause notice and the order under Section 148A(3) dated 25 June 2025, along with the consequential reassessment notice under Section 148, were quashed and set aside.