High-Value Bank Transactions Alone Cannot Justify Reassessment: Gujarat High Court

The Gujarat High Court recently held that high-value transactions reflected in bank accounts, without any material showing that income had escaped assessment, cannot by themselves justify reopening an assessment. The court consequently quashed reassessment proceedings initiated against O3 Developers Pvt. Ltd.

A division bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati set aside reassessment notices and consequential orders issued against the company for AY 2019-20 and AY 2021-22.

“Merely, because there are high value transactions in the bank accounts of the petitioner, the same would not ipso facto mean that there is escapement of income chargeable to tax without there being any iota of evidence.”

The Income Tax Department sought to reopen the assessments after examining bank statements showing substantial debit and credit transactions, including unsecured loan movements.

It alleged that the transactions were not in coherence with the company's business activity and also raised issues relating to the absence of an NBFC licence, non-charging of interest on certain loans, mark-to-market losses and bullion transactions.

The company contended that all transactions were reflected in its books of accounts and audited financial statements and had already been considered while processing its returns. It also pointed out that the entities involved in the transactions regularly filed income-tax returns.

The bench noted that the Assessing Officer had himself recorded that the entities involved regularly filed returns of income and that the transactions were reflected in the company's books of accounts.

“the re-opening on a presumption and assumption that the bank transactions are not in coherence with the business activity of the petitioner, is impermissible.”

The court rejected the department's reliance on the absence of an NBFC licence and non-charging of interest on certain loans, holding that neither circumstance could lead to an inference that income chargeable to tax had escaped assessment.

It also noted that the company had not been asked to explain the mark-to-market losses before the final order was passed, while the allegation relating to bullion transactions was unsupported by any material.

The court consequently quashed the reassessment notices and orders and allowed both petitions.