Admit Bogus Transactions, Face Reassessment – Gauhati HC Ruling

Notice Under Section 148A(b): Gauhati High Court Upholds Validity in Case of Bogus Transactions

The Gauhati High Court recently addressed the validity of notices issued under Section 148A(b) of the Income Tax Act, 1961, in a case involving alleged bogus transactions. The petitioners challenged the notices and subsequent orders under Section 148A(d), primarily arguing that procedural inconsistencies rendered the proceedings invalid. However, the court dismissed their petitions, holding that minor inconsistencies in describing the transactions (sales vs. purchases) did not undermine the legitimacy of the notice when the transactions were admitted as bogus by the petitioners

Background: Section 148A and Its Purpose

Section 148A was introduced by the Finance Act, 2021, to bring transparency and fairness to reassessment proceedings. It outlines a mandatory process that tax authorities must follow before issuing reassessment notices under Section 148. The steps include:

1. Conducting an Enquiry: Assessing officers must investigate information suggesting income escapement.
2. Providing Show-Cause Notice: Taxpayers must be informed of the material findings and be given 7–30 days to respond.
3. Considering Replies: The officer must assess the taxpayer’s response.
4. Passing an Order: A specific order under Section 148A(d) determines if a reassessment notice under Section 148 is warranted.

This procedure ensures that taxpayers have an opportunity to present their side before facing reassessment, maintaining a balance between enforcement and fairness.

The Case in Focus: Allegations of Bogus Transactions

In this case, the Income Tax Department flagged the petitioners (referred to as X and Y) for alleged bogus transactions. The information, gathered through the Department’s Insight Portal, suggested that X and Y engaged in questionable dealings with M/s Swastik Traders and M/s Kalki Trading Company. Show-cause notices (SCNs) were issued to X and Y under Section 148A(b), alleging bogus purchases.

Petitioners’ Defense

X and Y responded to the SCNs, admitting that the transactions occurred but contended that these were sales, not purchases. They argued that the mischaracterization of transactions in the SCNs rendered the proceedings invalid. They also claimed that no specific notice regarding bogus sales was issued, violating procedural requirements.

Income Tax Department’s Stand

The Department argued that procedural compliance under Section 148A was followed, and the SCNs provided sufficient details of the alleged transactions. It further contended that the petitioners admitted to the flagged transactions and failed to refute the claim that they were bogus. The Department maintained that the distinction between sales and purchases was immaterial, as the underlying issue concerned escapement of income due to bogus entries.

Court’s Observations and Ruling

The Gauhati High Court dismissed the petitioners’ claims, delivering a detailed judgment on the matter. Key aspects of the ruling include:

1. Admission of Transactions
   • Justice Devashis Baruah noted that both X and Y admitted to the flagged transactions in their replies. By providing supporting documents such as ledger copies, bank statements, invoices, and stock registers, they acknowledged their involvement with M/s Swastik Traders and M/s Kalki Trading Company. This admission weakened their argument, as it confirmed the existence of the transactions flagged as bogus.
2. Irrelevance of Sales vs. Purchases
   • The court held that the classification of transactions as sales or purchases was secondary when the core issue was whether the transactions were genuine. Since both petitioners admitted to engaging in bogus transactions, their argument that the SCNs should have explicitly mentioned sales instead of purchases was deemed inconsequential.
3. Procedural Compliance
   • The court found no violation of Section 148A(b). It observed that the SCNs provided adequate information regarding the alleged transactions, allowing the petitioners an opportunity to respond. The Assistant Commissioner followed due process by considering the replies and issuing orders under Section 148A(d).
4. Opportunity for Reassessment
   • The court emphasized that reassessment proceedings under Section 148 are not invalidated by procedural technicalities if the taxpayer is provided sufficient opportunity to present their case. It upheld the Department’s argument that procedural adherence was maintained throughout.

Read More- Indirect Fund Transfers Not ‘Unexplained Money,’ Rules High Court

Income tax Return Filing in Dwarka

GST Registration in Dwarka