Calcutta HC Quashes Reassessment Notice for Ignoring Assessee’s Reply

Introduction & Executive Summary

In a significant judgment delivered on 11 June 2026, the Calcutta High Court, presided over by Justice Smita Das De, quashed an order passed under Section 148A(3) of the Income Tax Act, 1961, along with the consequential notice issued under Section 148 for the Assessment Year 2019-20. The Court found that the Assessing Officer (AO) had failed to properly consider the petitioners’ replies and had reached a perverse conclusion without analyzing the materials on record. This ruling reinforces the procedural safeguards embedded in the post-Finance Act 2021 reassessment regime, particularly the requirement for the AO to engage meaningfully with the assessee’s response before forming a belief that income has escaped assessment.

The case arose from transactions involving M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd., which the AO alleged were accommodation entries routed through shell entities. The petitioners argued that all transactions were conducted through legitimate banking channels and that the AO’s conclusion of circular movement of funds was arbitrary. The High Court, while setting aside the impugned order, directed the AO to conduct a fresh examination after affording a proper hearing, with a peremptory deadline of 15 July 2026. This decision serves as a timely reminder for tax practitioners that the mere routing of funds through bank accounts, even when accompanied by partial banking statements, cannot ipso facto justify a reopening without a detailed analysis of commercial rationale.

Factual Background of the Dispute

The petitioners, Ojaswini Retailers Private Limited and another entity, were served with a show-cause notice dated 19 March 2025 under Section 148A(1) of the Income Tax Act. The notice was based on information received from the office of the Additional Director of Income Tax (Investigation and Verification), Unit II (1), Kolkata, which suggested that the petitioners had engaged in transactions that lacked commercial substance. Specifically, the department alleged that funds had been received from M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd., both of which were described as paper or shell entities used for providing accommodation entries.

In response to the show-cause notice, the petitioners submitted two detailed replies—first on 11 April 2025 and then on 19 June 2025. These replies included partial bank statements of the petitioners’ account with Federal Bank Ltd., Bhowanipore Branch, Kolkata (account no. 13040200026947) for the periods 26 September 2018 to 11 October 2018, 3 December 2018 to 1 February 2019, and 19 March 2019 to 30 March 2019. Additionally, they submitted the bank statement of M/s. Foremost Enterprise Private Ltd. with IDBI Bank, Kankurgachi Branch, Kolkata (account no. 0263102000017462) for the period 28 February 2019 to 5 April 2019. Despite these submissions, the AO passed the impugned order on 30 June 2025, concluding that the pattern of transactions revealed a circulatory movement of funds with same-day or next-day credits and debits, leaving minimal balances. The AO held that the use of legitimate banking channels did not render the transactions genuine if they were part of a scheme to launder unaccounted money.

A critical procedural twist emerged when the department issued a summons under Section 131(1A) of the Act on 28 October 2025, seeking details about the nature of business and relationship with the other entities. This summons was returned undelivered by speed post with the endorsement “addressee cannot be located”, though it was subsequently served by email. The petitioners did not comply with this summons, and the department argued that the writ petition was therefore premature. The Court, however, focused on the substance of the reassessment order rather than the subsequent service issues.

The Petitioner’s Evidence & Witnesses

Although no witnesses were examined in the writ proceedings themselves, the petitioners placed significant documentary evidence before the Court to support their case. The key exhibits can be categorized as follows:

1. Bank Statements Showing Legitimate Fund Routing

The petitioners submitted partial bank statements covering selected periods. The statement from Federal Bank showed transactions involving substantial amounts credited and debited within short intervals. For example, during the period 26 September 2018 to 11 October 2018, multiple credits were recorded followed by near-immediate debits, leaving minimal balances. The bank statement of M/s. Foremost Enterprise Private Ltd. with IDBI Bank exhibited a similar pattern for the period 28 February 2019 to 5 April 2019, with funds flowing in and out on the same or following day. The petitioners argued that this pattern was consistent with genuine business activities such as trading or short-term financing arrangements, where liquidity management is standard practice.

2. Legitimate Banking Channel as Proof of Genuineness

The petitioners heavily relied on the fact that all transactions were carried out through recognized banking channels. They contended that mere routing of funds on the same day could not, by itself, lead to a conclusion of accommodation entry or money laundering. They emphasized that the department had not pointed to any specific evidence suggesting that the funds were unaccounted or that the entities were shell companies. The petitioners also noted that the AO had not conducted any independent verification of the financial standing of M/s. Dhansidhi Developers Private Ltd. or M/s. Foremost Enterprise Private Ltd. before branding them as “paper/shell entities.” This argument struck a chord with the Court, which found that the AO had not dealt with the explanation offered in the replies.

3. Absence of Any Adverse Findings by Investigation Wing

A significant omission in the department’s case was the lack of any specific findings from the investigation wing regarding the alleged accommodation entries. While the AO referred to information received from ADIT(I&V) Unit II (1), Kolkata, no concrete evidence such as statements of the alleged shell entity directors, seized documents, or any material linking the petitioners to a money-laundering scheme was produced. The Court noted that the order merely reproduced the investigation inputs without any independent application of mind, which contributed to the finding of perversity.

Discrepancies & Challenges Identified by the Tribunal

The Income Tax Department raised several points before the High Court to justify the reassessment notice. The key discrepancies and challenges identified can be summarized as follows:

1. Partial Bank Statements and Selective Disclosure

The department pointed out that the petitioners had submitted only partial bank statements for selected periods, rather than complete bank statements for the entire assessment year. The AO argued that this selective disclosure prevented a full examination of the financial transactions. In the impugned order, the AO specifically recorded that the perusal of these part bank statements revealed a pattern of substantial amounts being credited and debited on the same day or the following day, leaving minimal balances, which indicated a circulatory movement of funds rather than genuine business transactions.

2. Lack of Commercial Substance

The AO’s order asserted that the transactions with M/s. Foremost Enterprises Pvt. Ltd. and M/s. Dhansidhi Developers Pvt. Ltd. lacked commercial substance. The AO argued that no credible evidence was provided beyond banking channel routing. The department emphasized that the use of a legitimate banking channel does not make a transaction genuine if it forms part of a scheme to launder unaccounted money. Reliance was placed on the financial standing of these entities as revealed by ITR and Insight data, which, according to the AO, did not support their ability to undertake such transactions.

3. Failure to Comply with Summons

The department also highlighted that a summons under Section 131(1A) dated 28 October 2025 had been issued but was returned undelivered with the endorsement “addressee cannot be located.” Although the summons was later served by email, the assessee did not comply. The department argued that this non-compliance demonstrated a lack of cooperation and justified the reassessment. However, the Court did not give significant weight to this argument, as the summons was issued after the impugned order and notice were already passed on 30 June 2025, making it irrelevant to the validity of the reassessment proceeding.

High Court’s Legal Analysis & Reasoning

Justice Smita Das De delivered a crisp and focused judgment that meticulously dismantled the department’s case. The Court’s reasoning can be broken down into several key pillars:

1. Non-Consideration of the Assessee’s Reply

The Court found that it was “apparent from the impugned order” that the AO had not considered the replies dated 11 April 2025 and 19 June 2025 in their entirety. The order merely recorded the submission of partial bank statements but did not deal with the explanation offered by the petitioners. This failure was fatal to the validity of the order under Section 148A(3), as the statutory scheme requires the AO to properly consider the assessee’s response before forming a belief that income has escaped assessment. The Court emphasized:

“The mandate of Section 148A requires the Assessing Officer to consider the reply from the assessee and decide by passing an order whether it is a fit case to issue notice under Section 148. In the present case since the specific replies have been filed, non-consideration thereof, vitiates the order.”

This finding is crucial because it establishes that mere recitation of the fact that a reply was received is insufficient. The AO must engage with the substance of the reply and either accept or reject the explanations with reasons. A cursory reference to the reply without analyzing its contents amounts to a violation of natural justice and renders the order perverse.

2. Perversity of Findings

The Court categorically held that the findings arrived at by the AO were “perverse and without jurisdiction.” The order did not record a detailed finding with regard to the income alleged to have escaped assessment for Assessment Year 2019-20. The AO had merely referenced circular transactions without analyzing the commercial rationale or the materials furnished by the petitioners. The Court noted that:

“Mere reference to circular transactions, without analyzing the commercial rational or materials furnished cannot sustain the formation of the believe under Section 148A(3) of the said Act.”

This observation is significant because it sets a benchmark for the standard of reasoning expected in section 148A orders. The AO cannot rely on generalized allegations of “circular transactions” or “accommodation entries” without providing specific analysis of the transactions in question. The Court demanded a detailed, reasoned order that connects the dots between the alleged modus operandi and the income that has supposedly escaped assessment.

3. Fresh Examination Required

Rather than stopping at quashing the order, the Court directed the AO to conduct a fresh examination of the genuineness and creditworthiness of the transactions with M/s. Dhansidhi Developers Private Ltd. and M/s. Foremost Enterprise Private Ltd. The Court ordered that this fresh examination must be conducted after affording an opportunity of hearing to the petitioners and other beneficiaries. The petitioners were directed to produce all banking statements to demonstrate and prove that the circular movements of funds are genuine in nature. The entire exercise was to be completed peremptorily by 15 July 2026, with the decision communicated to the petitioner within a week thereafter.

This remedial direction balances the interests of both parties. While the department gets an opportunity to re-examine the issue properly, the petitioners are put on notice that they must now produce comprehensive evidence to establish the genuineness of the transactions, including full bank statements, business contracts, and proof of commercial rationale. The Court essentially invited the petitioners to “put their best foot forward” in the fresh proceedings.

4. No Order as to Costs

The Court concluded by disposing of the writ petition with no order as to costs, a standard practice in such matters. Additionally, since no affidavit had been called for, the allegations made in the writ petition were deemed not to have been admitted by the respondents.

Why It Matters: Cross-Application to Income Tax Matters

This judgment has profound implications for tax practitioners, particularly in the context of Section 68 of the Income Tax Act (dealing with unexplained cash credits) and Section 56(2)(x) (dealing with receipt of money or property without consideration). While the case itself was decided under the reassessment provisions (Sections 148A and 148), the principles enunciated by the Court directly inform the evidentiary standards applicable to these substantive provisions.

The Burden of Proof Under Section 9 of the Foreigners Act vs. Section 68/Section 56(2)(x)

A fascinating comparative analysis emerges when one examines the burden of proof under Section 9 of the Foreigners Act, 1946 versus the burden under Sections 68 and 56(2)(x) of the Income Tax Act. Under Section 9 of the Foreigners Act, the burden of proof is on the person who claims not to be a foreigner or who claims to have a right to remain in India. This is a reverse burden that places the onus squarely on the individual. In contrast, under Sections 68 and 56(2)(x) of the Income Tax Act, the initial burden is on the assessee to prove the identity, creditworthiness, and genuineness of the transaction. However, the standard of proof is different—the assessee must only establish these elements on a preponderance of probabilities, not beyond reasonable doubt.

The present case illustrates how the AO attempted to shift the burden back onto the assessee by alleging that the transactions lacked commercial substance. However, the Court held that the AO cannot simply ignore the evidence produced by the assessee (such as bank statements) and demand further proof without first engaging with the existing evidence. This principle is directly analogous to the operation of Section 68: if an assessee produces prima facie evidence of the identity and creditworthiness of the lender or investor, the AO must address that evidence before concluding that the cash credit is unexplained. A mere allegation that the funds are routed through shell entities, without any supporting investigation, does not discharge the department’s obligation to consider the assessee’s case.

Application to Section 56(2)(x)

Similarly, under Section 56(2)(x), which taxes receipt of money or property without consideration or for inadequate consideration, the assessee must establish that the receipt falls within the exceptions (such as from a relative or on the occasion of marriage). The judgment reinforces that the AO cannot mechanically apply the provision without analyzing the assessee’s explanation. In this case, the AO’s failure to consider the petitioners’ replies would, by analogy, vitiate any addition under Section 56(2)(x) if the assessee had provided evidence of the source of funds and the commercial rationale for the receipt.

The Doctrine of Legitimate Expectation and Natural Justice

Beyond the specific provisions, this case reaffirms the broader principle that natural justice is the bedrock of tax proceedings. Under the post-Finance Act 2021 regime, Section 148A was specifically introduced to ensure that the assessee is given an opportunity to be heard before a notice under Section 148 is issued. This was a parliamentary response to the Supreme Court’s concerns in GKN Driveshafts (India) Ltd. vs. ITO (2003) that the earlier regime lacked adequate procedural safeguards. The Calcutta High Court has now held that merely giving an opportunity is not enough; the opportunity must be meaningful, which requires the AO to actually consider and deal with the assessee’s submissions.

Checklist for CAs and Legal Practitioners

Based on the learnings from this judgment, practitioners should adopt the following practical checklist when dealing with Section 148A proceedings and, by extension, inquiries under Sections 68 and 56(2)(x):

• Submit a Comprehensive Reply: Never submit partial or selective documents. Provide full bank statements for the entire relevant period, along with supporting contracts, invoices, and proof of commercial rationale. The Court noted that partial bank statements can be used against the assessee to infer selective disclosure.
• Insist on Detailed Reasoning in the Section 148A Order: If the AO passes an order without analyzing your reply, immediately challenge it on the ground of non-consideration. The judgment clearly states that mere reference to the fact that a reply was received is insufficient. The order must demonstrate that the explanations were considered and rejected with reasons.
• Document the Commercial Substance of Transactions: In cases involving alleged circular transactions, proactively prepare a note explaining the business rationale for the pattern of fund movements. For example, if funds are routed through multiple entities for a specific project, provide the project documents, agreements, and correspondence. The AO’s argument that banking channel routing alone does not prove genuineness must be countered with evidence of commercial substance.
• Maintain Cooperation with Summons: Even if the initial summons is returned undelivered, ensure that you comply once it is served by email. Non-compliance can be used as an additional ground to justify reassessment. In this case, the summons was issued after the impugned order, so it was irrelevant, but in most cases, failure to comply can be fatal.
• Pre-Emptively Challenge Weak Investigation Inputs: If the AO relies on information from the investigation wing, ask for copies of the investigation report and the basis for the allegation that the lender is a shell entity. If the report lacks specific evidence, argue that the AO cannot mechanically rely on third-party inputs without independent verification.
• Seek Early Hearing Before the High Court: Given the tight deadlines (the Court directed completion by 15 July 2026 in this case), practitioners should seek early listing of writ petitions challenging Section 148A orders. A delay in judicial intervention could result in the reassessment proceeding continuing based on a flawed order.
• Leverage the Perversity Doctrine: Where the AO fails to analyze commercial rationale or materials furnished, argue that the finding is “perverse” within the meaning of administrative law. A perverse finding is one that no reasonable person could have arrived at on the given material. The Calcutta High Court has now explicitly applied this standard to Section 148A orders.
• Advise Clients to Preserve Complete Records: Emphasize the importance of maintaining complete banking records, board resolutions, contracts, and correspondence for at least six to eight years. In the fresh proceedings ordered by the Court, the petitioners have been directed to produce all banking statements to prove that the circular movements are genuine. This puts the onus squarely on the assessee to maintain robust documentation.
• Cross-Refer Section 68/56(2)(x) Principles: In any proceeding involving unexplained cash credits or receipts without consideration, apply the same standard of reasoning. Ensure that the AO’s order specifically deals with each limb of the assessee’s evidence—identity, creditworthiness, and genuineness. If the order merely repeats the statutory language without analysis, it is vulnerable to challenge.
• Consider Filing a Detailed Affidavit: In cases where the facts are disputed, practitioners should consider filing affidavits in the writ petition to place on record the full sequence of events and the evidence submitted. The Court noted that no affidavit was called for in this case, but in more complex matters, an affidavit can strengthen the petitioner’s case.

The Ojaswini Retailers Private Limited judgment is a timely reminder that procedural fairness is not a mere formality but a substantive right of every assessee. For tax practitioners, it underscores the importance of meticulous compliance with the notice-and-comment procedure under Section 148A and serves as a powerful tool to challenge reassessment notices that fail to engage with the assessee’s case. As the tax landscape continues to evolve, this decision will likely be cited extensively in proceedings before the Calcutta High Court and beyond.

For a deeper analysis of how this judgment interacts with the burden of proof under Section 9 of the Foreigners Act versus Section 68 of the Income Tax Act, or to discuss its application in a specific case, practitioners are encouraged to reach out to the Taxpundit editorial team for a detailed consultation.