Prima facie nexus required for reassessment; third-party fund diversion alone could not justify escaped-income allegations against assessee.

Reassessment under sections 148A(b), 148A(d) and 148 was unsustainable because the recorded material did not disclose a prima facie nexus between the alleged diversion of funds by a third party and any escaped income in the assessee's hands. The Court held that, even on a provisional view, the allegations could at most bear on the deductibility of interest in the borrowing entity's hands and did not justify attributing taxable income to the assessee. The reassessment notice and consequential order were quashed for absence of a discernible basis linking the material to escaped income.

---

---

Issues: Whether the reassessment proceedings under sections 148A(b), 148A(d) and 148 of the Income-tax Act, 1961 could be sustained when the only allegation was diversion of funds by a third party and the notice did not disclose any prima facie nexus between the alleged escaped income and the assessee.

Analysis: The notice and the consequential order proceeded on allegations that bank facilities and credit lines of a third party had been diverted to various entities, including the assessee and predecessor companies that had later amalgamated. The recorded material did not explain how such allegations could translate into income escaping assessment in the hands of the assessee. Even on a prima facie view, the alleged diversion of funds could at best affect the deductibility of interest claims in the hands of the borrowing entity, but it did not furnish a basis to attribute escaped income to the assessee. The Court also noted that, although the assessee had become the successor-in-interest after amalgamation, the notice itself did not proceed on that footing; however, the matter was decided on the more fundamental defect that the reopening lacked a discernible basis linking the alleged transactions to taxable income in the assessee's hands.

Conclusion: The reassessment notice and the order were unsustainable for want of a prima facie basis showing escaped income in the assessee's hands.

Final Conclusion: The writ petitions were allowed and the reassessment order and consequential notice were quashed.

Ratio Decidendi: Reassessment proceedings cannot be sustained unless the recorded reasons disclose a prima facie nexus between the material relied upon and the assessee's alleged escaped income.

---