1. Petitioner challenges initiation of income tax reassessment proceedings based on a report from an investigation wing, alleging absence of valid information suggesting escapement of income for the assessment year. (Para 4 , 6 , 7 , 8 , 9 , 11 )
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2026 Supreme(Telangana) 595
IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD
P.Sam Koshy, Narsing Rao Nandikonda, JJ.
M/s. Naandi Foundation. - Petitioner
Versus
The Assistant Commissioner of Income Tax (ACIT), Exemption Circle – 1(1) and others - Respondents
Writ Petition Nos.30560, 30573 and 30574 of 2025
Decided On : 07-09-2026
Important Points
Reassessment under Section 147 and 148A of the Income Tax Act requires tangible information suggesting income escapement and a 'reason to believe,' not a 'reason to suspect.' Initiating proceedings merely for 'further in-depth scrutiny' or roving inquiries without considering the assessee's evidence is jurisdictionally flawed.
Subject
Tax Law - Income Tax Reassessment
Act Referred
Headnote
(A) Income Tax Act, 1961 - Sections 147, 148, 148A and 131(1A) - Initiation of reassessment proceedings - Requirement of tangible information suggesting escapement of income - Show cause notice under Section 148A(1) must be accompanied by relevant material - Order under Section 148A(3) must be a speaking order based on actual consideration of the assessee's reply. (Paras 29, 40)
(B) Reassessment - Scope and Threshold - The power to reopen assessment is not plenary; it requires “reason to believe” and not “reason to suspect” - There must be a rational connection or live link between the material and the formation of the belief that income has escaped assessment - A conclusion that transactions require “further in-depth scrutiny” is a conclusion in favour of inquiry and not a finding that income has escaped assessment. (Paras 34, 35, 39)
Facts of the case:
A charitable trust registered under Section 12A filed a return of income claiming exemption, which was accepted. Later, an investigation was conducted under Section 131(1A) resulting in a report alleging that certain expenses were undisclosed income. Based on this, a show cause notice under Section 148A(1) was issued. The trust submitted audited financial statements and bank records to explain the utilization of funds. However, the Assessing Officer passed an order under Section 148A(3) determining it as a fit case for reassessment, stating that the transactions were voluminous and required further in-depth scrutiny.
Findings of Court:
The order under Section 148A(3) was unsustainable as it did not deal with the material furnished by the trust and relied on mere suspicion. The initiation of proceedings was based on a roving inquiry rather than tangible information suggesting escapement of income.
Issues: Whether a reassessment notice is sustainable based only on a verification report under Section 131(1A) without tangible material, and whether citing "voluminous transactions" requiring "further in-depth scrutiny" satisfies the jurisdictional threshold under Section 147 read with Section 148A. (Para 27)
Ratio Decidendi: The law requires “information which suggests” escapement, a higher standard than mere suspicion. A decision to verify the books of an assessee does not equate to a finding that income has escaped assessment. The Assessing Officer must meaningfully consider the assessee's reply and pass a speaking order; failure to do so renders the reassessment process arbitrary and without jurisdiction. (Paras 35, 39, 40)
Result: Impugned order dated 27.06.2025 passed under Section 148A(3) of the Act and the consequential notice issued under Section 148 of the Act for the assessment year 2019-20 are held to be unsustainable and are accordingly set aside. Writ Petition allowed.
(B) Reassessment - Scope and Threshold - The power to reopen assessment is not plenary; it requires “reason to believe” and not “reason to suspect” - There must be a rational connection or live link between the material and the formation of the belief that income has escaped assessment - A conclusion that transactions require “further in-depth scrutiny” is a conclusion in favour of inquiry and not a finding that income has escaped assessment. (Paras 34, 35, 39)
Facts of the case:
A charitable trust registered under Section 12A filed a return of income claiming exemption, which was accepted. Later, an investigation was conducted under Section 131(1A) resulting in a report alleging that certain expenses were undisclosed income. Based on this, a show cause notice under Section 148A(1) was issued. The trust submitted audited financial statements and bank records to explain the utilization of funds. However, the Assessing Officer passed an order under Section 148A(3) determining it as a fit case for reassessment, stating that the transactions were voluminous and required further in-depth scrutiny.
Findings of Court:
The order under Section 148A(3) was unsustainable as it did not deal with the material furnished by the trust and relied on mere suspicion. The initiation of proceedings was based on a roving inquiry rather than tangible information suggesting escapement of income.
Issues: Whether a reassessment notice is sustainable based only on a verification report under Section 131(1A) without tangible material, and whether citing "voluminous transactions" requiring "further in-depth scrutiny" satisfies the jurisdictional threshold under Section 147 read with Section 148A. (Para 27)
Ratio Decidendi: The law requires “information which suggests” escapement, a higher standard than mere suspicion. A decision to verify the books of an assessee does not equate to a finding that income has escaped assessment. The Assessing Officer must meaningfully consider the assessee's reply and pass a speaking order; failure to do so renders the reassessment process arbitrary and without jurisdiction. (Paras 35, 39, 40)
Result: Impugned order dated 27.06.2025 passed under Section 148A(3) of the Act and the consequential notice issued under Section 148 of the Act for the assessment year 2019-20 are held to be unsustainable and are accordingly set aside. Writ Petition allowed.
Legal Category Hierarchy
Table of Contents
2. Petitioner contends the reassessment is a roving inquiry based on suspicion, while, effectively, the respondent argues the verification was standard procedure necessitated by unauditable expenditure claims. (Para 10 , 16 , 17 , 18 , 19 , 20 , 23 , 24 , 25 , 26 )
3. The court observed that the revenue failed to demonstrate a live link between material provided and income escapement, treating legitimate verification as a substitute for mandatory reason-to-believe criteria. (Para 37 , 38 , 39 , 40 , 41 )
4. For valid reassessment, the Assessing Officer must possess tangible material supporting a reasonable belief of income escapement; suspicion or a mere desire for further scrutiny is legally insufficient. (Para 35 , 41 )
5. The petition is allowed, and the impugned reassessment order and notice under the relevant section of the Act are set aside as unsustainable in law. (Para 42 , 43 )
6. What is the threshold for the Assessing Officer to initiate reassessment proceedings under Section 148A of the Income Tax Act?
The Assessing Officer must have tangible material or information that suggests income chargeable to tax has definitively escaped assessment. Mere suspicion, or a desire to conduct a roving inquiry or further verification of books and activities, does not satisfy the statutory requirement of having a reason to believe in income escapement. (Para 29 , 35 , 41 )
7. Does the failure to produce documents during a preliminary information gathering stage (Section 131(1A)) automatically justify reopening an assessment?
No. The inability to fully satisfy an investigating officer during preliminary inquiry does not serve as a automatic substitute for the mandatory foundational requirement of having a specific reason to believe income has escaped assessment for the relevant year. (Para 37 , 39 , 41 )
8. What constitutes a valid speaking order under Section 148A(3) of the Income Tax Act?
A valid speaking order must demonstrate application of mind to the specific explanations and materials furnished by the assessee in response to the show-cause notice. Bare acknowledgement of a reply without considering the evidence provided—such as bank statements or audited accounts—renders the order legally deficient. (Para 40 , 41 )
ORDER:
P.Sam Koshy, J.
Heard Mr. V. Sridharan, learned Senior Counsel appearing for Mr. Chanda Sumanth, learned counsel for the petitioner; Mr. Vijhay K. Punna, learned Senior Standing Counsel for Income Tax Department appearing for respondent Nos.1 and 2, and Mr. Srinarayan Toshniwal, learned counsel appearing on behalf of Mr. N. Praveen Reddy, learned Senior Standing Counsel for Income Tax Department for respondent Nos.3 and 4.
2. Since the issue involved in the instant Writ Petitions and the parties also being the same and the arguments advanced on either side also being the same, we proceed to decide them by this Common Order.
3. For convenience, the facts in Writ Petition No.30560 of 2025 are discussed hereunder.
4. The Writ Petition under Article 226 of the Constitution of India has been filed by the petitioner assailing the order dated 27.06.2025, passed by respondent No.1 with the approval of respondent No.2 under Section 148A(3) of the Income Tax Act, 1961 (for short the ‘Act’) initiating reassessment proceedings on the petitioner for the assessment year 2019-20 and the report compiled by respondent No.3 based on proceedings conducted under Section 131(1A) of the Act which was approved by respondent No.4.
5. Vide the impugned order dated 27.06.2025, respondent No.1 initiated assessment proceedings against the petitioner under Section 148A(3) of the Act for the assessment year 2019-20.
6. The facts of the case are that the petitioner was an autonomous public charitable trust, registered in the year 1998 and registered under the Indian Trusts Act, 1882 with its primary object directed towards the economic development of the marginalised, underserved, and underprivileged communities, and its activities principally carried on in the fields of education, healthcare, improving livelihoods, and provision of safe drinking water. The petitioner, as a charitable institution, stood registered under Section 12A of the Act, vide order of the Commissioner of Income Tax, Hyderabad-II, bearing reference H.Qrs.II/12A-80G/112/98-99, dated 31.05.1999, which remained operative for the assessment year 2019-20.
7. For the period pertaining to the assessment year 2019-20, the petitioner filed its return of income on 26.10.2019 computing NIL total income after claiming exemption under Sections 11 and 12 of the Act, and claiming a refund of Rs.6,37,010/-, which came to be processed by the Centralized Processing Centre (for short ‘CPC’) resulting in an intimation dated 28.04.2020 under Section 143(1) of the Act, bearing DIN: CPC/1920/A7/1970843763, accepting the returned income of the petitioner for the said assessment year.
8. On 05.07.2024, respondent No.3 issued summons under Section 131(1A) of the Act bearing DIN and Notice No. ITBA/INV/S/131/2024-25/1066460264(1), requiring petitioner to furnish data pertaining to the financial years 2017-18, 2018-19, 2019- 20 and 2020-21, relevant to the assessment years 2018-19, 2019-20, 2020-21 and 2021-22 respectively. By the said summons, respondent No.3 called for, inter alia, a detailed note on the activities carried out by the petitioner during the financial year 2020-21; audited financial statements for the financial years 2017-18 to 2020-21, details of credits received from KC Mahindra Educational Trust (for short “KC MET”) during financial year 2020-21, a detailed note on the utilisation of such funds and their treatment in the financials, copies of all bank account statements for the financial year 2020-21 pertaining to the petitioner, and the latest communication address, e-mail ID and phone number of all members / trustees of the petitioner.
9. Based on the information so furnished, the petitioner came to understand that respondent No.3 vide the Impugned Report dated 04.01.2025 submitted to respondent No.4, recorded inter alia that the petitioner had received funds in the form of grants, donations, etc. from various domestic and foreign parties, including KC MET. That the petitioner had not furnished
