Telangana High Court Quashes Naandi Foundation Reassessment, Says 'Further In-Depth Scrutiny' Not Enough

The Telangana High Court on 7 September allowed a batch of petitions filed by Naandi Foundation challenging reassessment proceedings under the Income Tax Act, 1961 for the assessment year 2019-20 and set aside the order passed under Section 148A(3) and the consequential notice issued under Section 148.

A Division Bench of Justices P. Sam Koshy and Narsing Rao Nandikonda held that the mere need for “further in-depth scrutiny” of transactions cannot constitute information suggesting escapement of income. The judges observed:

“It records no finding that the explanation offered is false or that any specific sum remains unaccounted. It proceeds solely on the premise that the transactions are voluminous and require further in-depth scrutiny.”

Naandi Foundation, a public charitable trust established in 1998 and registered under Section 12A, filed its return for AY 2019-20 declaring nil income and claiming exemption under Sections 11 and 12. The return was accepted under Section 143(1).

The Investigation Wing subsequently issued summons seeking details of the Foundation's activities and utilisation of funds, particularly amounts received from KC Mahindra Educational Trust (KC MET). Based on its report, the Assessing Officer initiated reassessment proceedings alleging unexplained transactions and non-utilisation of funds for charitable purposes.

Naandi Foundation disputed the allegations and furnished its audited financial statements, bank statements and ledgers, explaining the transfer and utilisation of funds through separate bank accounts. It also pointed out that similar accounting treatment had been accepted for an earlier assessment year and furnished supporting documents, including sample vouchers, bills and payment records.

Despite these submissions, the Assessing Officer passed an order under Section 148A(3), stating that the transactions were substantial in nature and required “further in-depth scrutiny,” and thereafter issued a consequential notice under Section 148.

The High Court examined whether the material relied upon by the Assessing Officer constituted information suggesting that income had escaped assessment. It referred to the Supreme Court's decisions in Union of India v. Ashish Agarwal, Union of India v. Rajeev Bansal, Chhugamal Rajpal v. S.P. Chaliha and ITO v. Lakhmani Mewal Das and observed that the reassessment framework requires relevant material having a rational connection with the alleged escapement of income.

The Bench noted that “information suggesting escapement of income” cannot be equated with mere suspicion or a desire to verify the affairs of a taxpayer. It also noted that the summons issued under Section 131(1A) primarily concerned the utilisation of funds received from KC MET during FY 2020-21. However, the investigation report subsequently extended adverse conclusions to the Foundation's expenditure across multiple financial years, including FY 2018-19.

It found that no corresponding independent verification of the entire expenditure had been carried out before such conclusions were drawn. Further, the judges observed that the Foundation had placed substantial material before the Assessing Officer, including audited financial statements, bank ledgers, bank statements and details of credits and debits. The judges explained the rationale for maintaining separate receipt and utilisation accounts. However, the impugned order did not deal with these explanations or identify any specific amount that remained unexplained or unaccounted for.

Referring to the Supreme Court's decision in Chhugamal Rajpal, the Bench held that merely stating that further investigation was necessary cannot substitute the requirement of having reasons for reopening. It emphasised that Section 148A(3) requires the Assessing Officer to consider the reply and material furnished by the taxpayer before deciding whether the case is fit for issuance of a notice under Section 148.

It also observed that reassessment proceedings cannot be used to undertake a roving or fishing inquiry into the affairs of a taxpayer on the basis of unsupported inferences. It held:

“Reassessment proceedings, being an exception to the finality of an assessment already accepted under Section 143(1), cannot be initiated to enable a roving or fishing inquiry into an assessee's affairs on the strength of an inference that was itself unsupported by the material gathered…”

Accordingly, the High Court held that the order dated 27 June 2025 passed under Section 148A(3) and the consequential notice under Section 148 for AY 2019-20 could not be sustained and set aside both. It also allowed the connected writ petitions concerning the other assessment years. It made no order as to costs.

For Petitioner: V. Sridharan Senior Counsel appearing for Chanda Sumanth, Advocate

For Respondent: Vijhay K. Punna, Senior Standing Counsel