Mere Routing of Funds Doesn't Prove Money Laundering Without Detailed Analysis: Calcutta HC Quashes Income Tax Reassessment Notice [Read Order]

The CalcuttaHigh Court has quashed the re-assessment notice issued under Section 148 of the Income Tax Act for Assessment Year 2020-21 noting that the starting order was beset with legal infirmity and perverse conclusions. The bench observed that an Assessing Officer cannot sustain an order under Section 148A(3) of the IncomeTax Act, on the ground of circular routing of funds, without examining the commercial rationale and without taking into consideration the detailed replies filed by the assessee.

The petitioners, Ojaswini Retailers Private Limited and another, had challenged the June 2025 order passed under Section 148A(3) alleging that income had escaped assessment on account of accommodation entries routed through M/s. Fantastic Hirise Private Ltd. and M/s. Foremost Enterprise Private Ltd.

The Income Tax Department defended the action, saying the investigative wing had connected the transacting businesses to a suspected shell company Highland Transport Pvt. Ltd. and persons classified as dummy directors in the departmental database. The Department contended that the petitioners only produced partial bank statements and that the simple act of passing unaccounted money through regular banking channels does not make a transaction real or exempt from inspection.

However, Justice Smita Das De noted that a reading of the impugned ruling showed that the Assessing Officer (AO) had totally failed to take into consideration the two specific answers produced by the petitioners in response to the show cause notice. The Court observed that the AO recorded the submission of incomplete bank statements, but the ruling completely ignored the fact that the assessee had given explanations in respect of the commercial content of the share sale transactions.

The Court has categorically held that mere mention of circular transactions without proper examination of commercial rationale or documents on record cannot lead to creation of belief under Section 148A(3). The Court held that the ruling was vitiated by not considering the answers of the assessee.

The Court set aside the Section 148A(3) ruling and the accompanying Section 148 notice. The Court in the process remanded back the matter to the AO for new examination and directed the authority to pass a reasoned order after giving proper chance of hearing. The Court also asked the petitioners to file their complete banking statements to show that the fund movements were genuine in nature so as to facilitate a just assessment. The whole exercise was required to be finished peremptorily by 15 July 2026.

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