The Gujarat High Court has ruled that Section 68 of the Income Tax Act, 1961, is not applicable if the bank statements provided in an assessment case do not contain unexplained amounts. The decision came in the case Amee Mahasukhlal Parekh as Legal Representative of Late Mahasukhlal Navnidhlal Parekh v. Income Tax Officer (R/Special Civil Application No. 18254 of 2022). The division bench, comprising Justice Bhargav D. Karia and Justice Mauna M. Bhatt, quashed a reassessment notice issued under Section 148, finding no grounds for income escapement.
Background of the Case
The petitioner, Amee Mahasukhlal Parekh, approached the court as the legal heir of her late father, Mahasukhlal Navnidhlal Parekh, challenging a reassessment notice issued on July 30, 2022, for the Assessment Year 2015-16. The notice, originally issued in June 2021 under the old Section 148 regime, alleged income escapement based on an undisclosed amount of Rs. 3.25 crore. The Income Tax Department claimed that Mahasukhlal Parekh advanced a loan during 2014-15, but the source of this loan remained unexplained.
However, the petitioner countered that all transactions were properly documented and supported by the bank statements, which showed that the amount was received from one Mr. Hardik Parekh on September 4, 2014, and transferred to Ms. Darshana Doshi on the same day via NEFT. The petitioner also demonstrated that the loan was repaid in September 2015.
The legal issue at hand was whether the reopening of the assessment was valid under Section 68 of the Income Tax Act, which applies when unexplained credits appear in a taxpayer’s books of account.
Legal Issues Involved
The primary legal question was whether Section 68 of the Income Tax Act could be invoked in this case, where the transactions related to the alleged loan were clearly reflected in the bank statements. The petitioner, represented by advocate Mr. S. N. Divatia, argued that there was no unexplained income or transaction since the bank records documented the receipt and repayment of the amount in question.
The respondent, represented by Senior Standing Counsel Mr. Karan Sanghani, argued that the petitioner had failed to adequately explain the source of the Rs. 3.25 crore loan, justifying the reopening of the assessment. The Income Tax Department had issued the reassessment notice following a Supreme Court ruling on reassessment procedures, Union of India v. Ashish Agarwal.
Court’s Decision
After examining the bank statements and hearing the arguments, the Gujarat High Court ruled in favor of the petitioner, quashing the reassessment notice. The court emphasized that the mere issuance of a reassessment notice does not override the need for clear evidence of income escapement, which was absent in this case. Justice Bhargav D. Karia, delivering the oral judgment, stated:
“There is no escapement of income since the amount was received by the late father of the petitioner and repaid within the stipulated period. The reason given by the Assessing Officer for alleged escapement of Rs. 3.25 crore is therefore not sustainable.”
The court further ruled that the ingredients of Section 68 of the Income Tax Act were not attracted, as there was no unexplained cash credit. The documented transactions proved that the amount in question was part of a legitimate loan transaction, received and repaid within the financial year under consideration.
The court also observed that the reassessment notice, initially issued in the name of the deceased, could not be rectified posthumously to implicate the legal heir without substantial grounds. The court noted:
“The bank statements on record clearly show that the amount was advanced and repaid, with no unexplained sums. Therefore, the requirements of Section 68 do not apply, and reopening the assessment is unjustified.”
Key Observations by the Court
Several important legal principles emerged from the court’s judgment:
– “Section 68 of the Income Tax Act cannot be invoked when the bank statement reflects no unexplained amounts or cash credits.”
– “Reopening of assessments under Section 148 requires substantial grounds, and mere assumptions of income escapement without evidence cannot justify reassessment.”
– “A reassessment notice issued in the name of a deceased individual cannot be rectified unless valid reasons for reopening are established.”
