Facts of the Case

The petitioner filed an income tax return for AY 2010–11 declaring income of ₹5,94,850. Subsequently, notices under Section 133(6) were issued seeking information, followed by a notice under Section 148 dated 28.03.2017 for reopening the assessment.

The petitioner had advanced substantial funds (approximately ₹1.5 crores) to his son without charging interest. These funds were allegedly sourced from an overdraft (OD/CC) account on which interest was being paid and claimed as expenditure.

The petitioner contended that the funds were sourced from interest-free capital and contributions, including funds from his mother, and therefore no disallowance of interest was justified.

Issues Involved

  1. Whether the notice issued under Section 148 for reopening assessment was valid in law.
  2. Whether there existed sufficient “reason to believe” that income had escaped assessment.
  3. Whether writ jurisdiction can be invoked against reassessment proceedings when alternative remedies exist.
  4. Whether interest-free loans to a related party from mixed funds justify disallowance of interest.

Petitioner’s Arguments

  • The reopening notice was issued without proper application of mind.
  • Complete material and opportunity were not provided before disposing of objections.
  • Funds advanced to the son were from interest-free sources, including family funds.
  • Since own capital was substantially higher than the loan amount, no disallowance of interest should arise (relying on Hero Cycles Pvt. Ltd. vs CIT).
  • It is settled law that one cannot make profit from oneself (relying on Sir Kikabhai Premchand vs CIT).
  • In a mixed funds scenario (OD account), interest cannot be disallowed if sufficient interest-free funds are available.

Respondent’s Arguments

  • A Tax Evasion Petition (TEP) triggered investigation revealing that large sums were transferred to the petitioner’s son without charging interest.
  • The funds were sourced from an OD/CC account on which substantial interest was paid and claimed as deduction.
  • No evidence was provided to substantiate that the funds belonged to the petitioner’s mother.
  • The transaction lacked commercial justification and was not at arm’s length.
  • The petitioner used colourable devices to claim false interest expenses and reduce taxable income.
  • At the stage of reopening, only prima facie material is required (relying on Raymond Woollen Mills Ltd. vs ITO and CIT vs Chhabil Dass Agarwal).

Court Findings / Order

  • The Court held that sufficient prima facie material existed to justify reopening of assessment.
  • The reassessment process followed due procedure, including supply of reasons and opportunity to file objections.
  • At the stage of issuing notice under Section 148, the sufficiency or correctness of material is not to be examined.
  • The Court emphasized that writ jurisdiction should not be exercised when an effective alternative statutory remedy exists.
  • No violation of principles of natural justice was found.

Final Order:

  • The writ petition was dismissed, allowing reassessment proceedings to continue.

Important Clarifications by the Court

  • At the reopening stage, only prima facie satisfaction is required, not conclusive proof.
  • Courts should not interfere under writ jurisdiction when statutory remedies are available.
  • The adequacy of reasons or correctness of evidence is to be examined during assessment, not at the notice stage.
  • Reassessment validity depends on existence of material, not its final adjudication.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1616-DB/DIS25042022CW108722017_160111.pdf


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