Gujarat High Court Quashes Reassessment Notices, Holds Proviso to Section 68 Not Retrospective

A bench of Hon'ble Mr. Justice A.S. Supehia and Hon'ble Mr. Justice Pranav Trivedi heard a writ petition under Article 226 in which Laxmi Infra Developers Ltd. challenged a show cause notice issued under Section 148A(b) of the Income Tax Act, 1961 proposing reassessment under Section 148 for Assessment Year 2018–19, the order passed under Section 148A(d) and the subsequent notice under Section 148 dated 07.04.2022.

The High Court allowed the petition, quashed the impugned notices and the order and held that the proviso to Section 68 introduced by the Finance Act, 2022 (effective 01.04.2023) did not apply retrospectively to AY 2018–19. The court noted that the petitioner had disclosed the relevant transactions during scrutiny proceedings and had produced documentary evidence showing receipt of funds by banking channels and the ledger entries in respect of the unsecured loan from Rakesh Girdharlal Gajera. The Court, in its reasoning, observed: “Thus, on an overall examination of the facts, we are of the opinion that the petitioner has categorically and specifically disclosed all the relevant information in the scrutiny proceedings and accordingly, the assessment order was passed, hence, the respondent and the revenue, in such circumstances, after the scrutiny assessment cannot reopen the case, for the reason that the petitioner has not explained the source of funds of Rakesh Ghirdharlal Gajera, more particularly in light of the amendment, which does not apply retrospectively.” The court further quoted and relied on the view that the amendment “made it abundantly clear that Section 68 of the Act as was in force prior to 01.04.2023, did not require the assessee to explain the source of the source.”

Background

The dispute arose from a development agreement whereby the petitioner acquired development rights from M/s Gitanjali Infratech Ltd. for Rs. 29,90,00,000/-. For AY 2018–19 the petitioner filed its return on 30.10.2018 disclosing total income of Rs.1,94,98,840/- which included an unsecured loan of Rs.29,90,000/- shown as received from Rakesh Girdharlal Gajera. The return was selected for scrutiny; the Assessing Officer issued inquiries on 03.01.2020 and passed the assessment under Section 143(3) on 25.01.2021 after the petitioner furnished documents and replies. Thereafter the Revenue issued a show cause notice under Section 148A(b) on 24.03.2022, alleging that the transaction with Gitanjali Infratech Ltd. formed part of alleged bogus transfers and that income chargeable to tax to the tune of Rs.29,90,00,000/- had escaped assessment; the petitioner responded on 31.03.2022. The Assessing Officer, by order dated 07.04.2022 under Section 148A(d), concluded that the petitioner had failed to discharge the onus of proving the “source of the source” of the funds and issued a notice under Section 148 on the same date.

Counsel for the petitioner contended that the annexure to the Section 148A(b) notice did not disclose any information leading to an inference of escapement of income and that mere payment did not establish escapement; reliance was placed on the Delhi High Court decision in Sheela Overseas which held that the amendment imposing an obligation to explain the “source of the source” applied only prospectively. The Revenue relied on material showing large transfers from Gitanjali Infratech Ltd. to a beneficiary and on authorities including Biju Patnaik and Anshul Jain to contend that reassessment should not be stayed at the threshold.

The High Court analysed the record and concluded that the petitioner had disclosed the transaction and produced documentary evidence during scrutiny; the crucial proviso to Section 68 came into effect only from 01.04.2023 and therefore could not be applied to AY 2018–19. The court distinguished Biju Patnaik on facts and observed that the Supreme Court’s decision remitted issues for fact-finding where identity and flow of funds were unclear, whereas in the present case the petitioner had disclosed the source and mode of payment. The writ petition therefore succeeded; the impugned notice under Section 148A(b), the order under Section 148A(d) and the subsequent notice under Section 148 were quashed and set aside. No interim directions were recorded beyond quashing the impugned actions and the rule was made absolute.

Case Details:
Case No.: C/SCA/7664/2022
Case Title: LAXMI INFRA DEVELOPERS LIMITED Versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1), SURAT
Appearances:
For the Petitioner(s): Mr. B. S. Soparkar (Advocate)
For the Respondent(s): Mr. Karan G. Sanghani (Senior Standing Counsel)

Source: 2026 CaseBase(GUJ) 32