2026 (2) TMI 94 - HC - Income Tax

Reopening of assessment for alleged escapement of income challenged where reliance on unrelated third-party statement failed to establish escaped income; notices quashed.

Reopening of assessment under Section 147 was challenged on grounds that the only material was a third-party statement which did not refer to the deceased ... Reopening of assessment - escapement of income of the deceased assessee - reliance on statement of Shri Ram Lal Nath - HELD THAT:- On careful perusal of the said statement, it is evident that there is no reference whatsoever to the deceased assessee, or to his investment in debentures of Kalpataru Fincap Ltd. Though the statement may refer to the present petitioner holding a different PAN, the proceedings in question specifically pertain to the alleged escapement of income of the deceased assessee. The statement of Shri Ram Lal Nath, therefore, does not constitute tangible material against the deceased assessee. It is not in dispute that the petitioner furnished complete documentary evidence explaining the source of investment, including bank statements, ledger accounts, debenture certificates, and financial statements. However, the impugned order under Section 148A(3) of the Act, does not reflect any consideration of these materials and is solely premised upon the statement of Shri Ram Lal Nath. Significantly, the source of investment has not been doubted by the respondent. The reopening is sought only by doubting the nature of investment, without establishing how such investment constitutes income that has escaped assessment. An investment made out of explained funds cannot, by itself, be treated as income. In absence of any finding of income chargeable to tax having escaped assessment, the jurisdictional precondition under Section 147 of the Act is not satisfied. We find that in the Assessment Order and also in the show cause notice there is no whisper about any doubt on the source of fund which the petitioner has explained and also recorded in the impugned Assessment Order that the funds have been borrowed from family and friends for payment on interest basis and it is not in dispute that the said funds are invested in debentures of the Kalptaru Fincap Ltd. Thus, we are of the considered opinion that the impugned notice issued under Section 148 of the Act and the order passed under Section 148A(3) of the Act are unsustainable in law. Issues: Whether the notice issued under Section 148 and the order passed under Section 148A(3) of the Income-tax Act, 1961 for reopening assessment for Assessment Year 2019-20 are legally sustainable.Analysis: The Court examined whether tangible material existed to form a belief that income had escaped assessment as required by Section 147. The reopening rested on a statement which did not refer to the deceased assessee or to his investment; the Assessing Officer did not doubt the source of the investment which was supported by documentary evidence (bank statements, debenture certificates, ledger entries); the impugned order under Section 148A(3) did not reflect consideration of these materials and relied solely on the statement. An investment made out of explained funds, without any finding of income chargeable to tax having escaped assessment, does not meet the jurisdictional threshold for invoking Section 147.Conclusion: The notice under Section 148 and the order under Section 148A(3) are unsustainable and are quashed. The decision is in favour of the assessee.