SH. NIRBHAY TREHAN,JAMMU vs. DY. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE, JAMMU

ORDER Per:Anikesh Banerjee, JM:

Batch of three appeals of the two assessees were filed against the order of the ld. Commissioner of Income Tax (Appeals)-5, Ludhiana,[in brevity the ‘CIT (A)’] order passed u/s 250 (6) of the Income Tax Act 1961, [in brevity the Act].

I.T.A. Nos. 182/Asr/2019 2 & 184/Asr/2019 The impugned order was emanated from the order of the ld. ACIT, Central Circle, Jammu. (in brevity the AO) order passed u/s 147 r.w.s. 143(3) of the Act.Only in the order passed u/s 144 of the Act. All three appeals are identical in nature under common factual backdropand alsoboth the assesses are in relation husband and wife. For the sake of convenience, we pass a common order for all three appeals. ITA No. 182/Asr/2019 is taken as a lead case.

1. In the facts and circumstances of the case the Ld. AO has erred in opening of the assessment by recording false reasons under section 148 (1) of the Income Tax Act.

2. The Ld. AO has erred in recording reasons on the basis of surmises and conjectures, ignoring the fact on record.

3. The Ld. AO, while recording reasons, has erred in treating cash deposits in bank a/c and payment against credit

I.T.A. Nos. 182/Asr/2019 3 & 184/Asr/2019 card as income of the assessee, which is wholly outside the purview of meaning of Income defined u/s 2 (24) of the Act.

5. The AO has erred in opening the assessment for the purpose of making a roving and fishing inquiry to verify as to whether any income has in fact escaped assessment.

6. The Ld. AO has erred in issuing notice u/s 148 without appreciating that there was no omission or failure on the part of the assessee to make a return of his income or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration.

7. In the facts and circumstances of the case the AO has erred in proceeding to assess income of the assessee by rejecting the objection without application of mind.

8. The Ld. AO has erred in passing impugned assessment order without jurisdiction on the basis of illegal and invalid date 29/03/2017. Therefore, the impugned assessment order is illegal, invalid void ab initio.

I.T.A. Nos. 182/Asr/2019 4 & 184/Asr/2019

9. The Ld. AO erred in both facts & laws by making addition of Rs. 5739154.00 as income from unexplained cash deposits, when the same represent business payments of M/s Kash Ind Roller Mills Jammu, where assessee was full time partner.

at the time of hearing.”

4. The assessee had filed return on dated 31/03/2011 u/s 139 of the Act &was also the partner of M/s Kash Ind Roller Flour Mills and was fully associated with the firm. The entire addition is related to cash deposit amount of Rs.13,82,500/- in HDFC Saving Bank a/c, cash deposit amount of Rs.30,12,654/- in ICICI Saving Bank a/c and Rs.13,44,000/- is also deposit cash in ICICI Saving Bank a/c. The assessee offered explanation that the cash is related to cash of the firm. The assessee also challenged the jurisdiction of the ld. AO for reopening u/s 148 of the Act. The assessee claimed that the recorded reason is itself erroneous. The reopening was challenged before both the lower authorities. But the addition was confirmed by the ld. AO. The assessment order was challenged before the CIT(A) and the assessee remained unsuccessful. Being aggrieved the assessee filed appeal before us.

I.T.A. Nos. 182/Asr/2019 5 & 184/Asr/2019

I.T.A. Nos. 182/Asr/2019 6 & 184/Asr/2019

“3. During the course of appellate proceedings, the submission has been sent through e-mail and also by post which is reproduced below:- “Subject: Written Submission in support of Grounds of Appeal against the assessment order dated 27.12.2017 passed u/s 143(3) read with section 148 of the Income Tax Act 1961. Brief Facts of the Case;-

1. The assessee has filed her ITR voluntary on 31.03.011 vide acknowledgment No 8611008992 for the assessment year under consideration declaring income at Rs 450000/- with taxes duly paid on the income declared and net income of Rs. 3.50 Lacs. The assessee was partner of M/s Kash Ind Roller Flour Mills during the period under consideration and was fully associated with the running of the said firm.

2. The AO reopened the assessment vide notice dated 29.03.2017 issued u/s 148 of the IT Act after recording reasons under provisions of para (a) of Explanation 2 to Sec 147 of the Income Tax Act. He has completed the assessment vide order dated 27.12.2017 passed u/s 143(3) read with section 148 of the Act at Rs 61,89,154.00/-against declared income of Rs 450,000/-by making following additions: i. Addition of Rs 13,82,500/- on a/c of cash deposits in saving Bank a/c with HDFC Bank on various dates, wrongly holding that assessee has not explained source of cash deposits.

I.T.A. Nos. 182/Asr/2019 7 & 184/Asr/2019 ii. Addition of Rs 30,12,654/- on a/c of cash deposits in saving Bank a/c with ICICI Bank on various dates, wrongly holding that assessee has not explained source of cash deposits. iii. Addition of Rs 13,44,000/- on a/c of cash deposits in saving Bank a/c with HDFC Bank on various dates, wrongly holding that assessee has not explained source of cash deposits.

3. The additions are merely based on presumptions, The assessee has filed appeal u/s 246A of the Income Tax Act 1961 and following submissions are made in support of grounds of appeal. SUBMISSIONS IN SUPPORT OF GROUNDS OF APPEAL. Ground 1 “In the facts and circumstances of the case the Ld AO has erred in opening of the assessment by recording false reasons under section 148 (1) of the Income Tax Act”. i. It is submitted that the Assessing Officer has recorded “reasons to believe that income chargeable to tax has escaped assessment”, relying on provisions of para (a) of Explanation 2 to Sec 147 of the Income Tax Act reproduced as under: Explanation 2.—For the purposes of the section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:— (a) where no return of income has been furnished by the assessee although her total income or the total income of any other person in respect of which he is assessable under I.T.A. Nos. 182/Asr/2019 8 & 184/Asr/2019

the Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; ii. While recording reasons u/s 148(2) of the Act, the AO has stated that: “it has been verified and found that the assessee has failed to file her return of income for the financial year 2009-10 relevant to assessment year 2010-11, therefore I have reason to believe that an income of Rs 48,35,500/- has escaped assessment in terms of provisions of section 147 of the Income Tax Act 1961. Accordingly I am satisfied that such income and any other income chargeable to tax, which has escaped assessment and which may come to my notice subsequently during the course of assessment proceedings under the section is to be charged to tax. In view of the above stated fact, I am satisfied that the income of the assessee for the assessment year 2010-11 has escaped assessment and it is a fit case for issuance of notice under section 148 of the Income Tax Act 1961". iii. Perusal of the reasons recorded revealed that the same are false. The Ld. AO has wrongly stated that, “the assessee has failed to file her return of income for the financial year 2009-10 relevant to assessment year 2010-11". Surprisingly, the Ld CIT has also granted sanction for issue of impugned notice in a mechanical manner. iv. It is submitted that the assessee has filed return of Income for AY 2010-11 declaring income of Rs 4.50 Lakh vide acknowledgment No I.T.A. Nos. 182/Asr/2019 9 & 184/Asr/2019

8611008992 dated 31.03.2011. Therefore, the provisions of para (a) of Explanation 2 to Sec 147 of the Income Tax Act were not applicable to her case. As such the assessing officer has reopened the assessment by recording false reasons under section 148 (1) of the Income Tax Act, which were not borne out from records. Accordingly, notice dated 29.03.2017 u/s 148 of the IT Act issued by recording ‘false reasons was invalid. Consequently all subsequent proceedings and the impugned assessment order are without jurisdiction and void ab initio. Ground 2 The Ld. AO has erred in recording reasons on the basis of surmises and conjectures, ignoring the facts on record. i. The Ld. AO has recorded reasons on the basis of surmises, conjectures and suspicion and therefore, the same are without jurisdiction. There is no nexus between the prima facie inference arrived in the reasons recorded and the AIR information, which was restricted to cash deposits in bank account. But there was no material, much less tangible, credible, cogent and relevant material to form a reason to believe that cash deposits in assessee’ bank a/c or the payments of credit card bills represented income of the assessee. ii. The reasons recorded are highly vague, far-fetched and cannot by any stretch of imagination lead to conclusion of escapement of income and there are merely presumptions in nature. It is a case of mechanical action on the part of the Ld. AO as there is non-

I.T.A. Nos. 182/Asr/2019 10 & 184/Asr/2019 application of mind much less independent application of mind so as to show that he formed an opinion based on any material that the cash deposits and payments of credit card bills represented income. The Ld AO, while recording reasons, has erred in treating cash deposits in bank a/c as income of the assessee, which is wholly outside the purview of meaning of Income defined u/s 2 (24) of the Act. i. The Assessing Officer has reopened the assessment wrongly presuming that cash deposited in Bank a/c amounting to Rs.48,35,500.00/- has escaped assessment. AO proceeded on fallacious assumption that bank deposits constituted undisclosed income. The reassessment proceedings could not be resorted to unless there was reason to believe, rather than suspect, that income had escaped assessment. ii. The AO has overlooked the fact that the sources of deposit or payment need not necessarily be income of the assessee. Though, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escapement assessment. The material before the AO must indicate income escaping assessment rather than desirability of further probe in the matter which may or may not lead to income escaping the assessment. The Hon’ble ITAT, DELHI in case of ‘Bir Bahadur Singh Sijwali’ ( IT APPEAL NO. 3814 (DELHI) OF 2011)observed that “The mere fact

I.T.A. Nos. 182/Asr/2019 11 & 184/Asr/2019 that the deposits had been made in the bank account does not indicate that these deposits constitute income which has escaped assessment”. iii. The AO proceeded on the fallacious assumption that the bank deposits constituted undisclosed income, over-looking the fact that the source of the deposits and payment against credit card bill need not necessarily be the income of the assessee. That being so, in keeping with 'Bir Bahadur Singh Shiwaii' (supra), the reasons recorded to initiate assessment proceedings under section 147 of the Act and all proceedings pursuant thereto, culminating in the impugned order, are bad in law and deserves to be quashed. The AO has erred in opening of the assessment by recording arbitrary and irrational reasons, not based on relevant material facts, without appreciating the settled law that any and every material, howsoever vague and indefinite, cannot be basis for formation of the belief relating to escapement of the income from the assessment. i. It is submitted that the AO does not have any material, other than the AIR Information, on the basis of which a reasonable man would come to the conclusion that any income chargeable to tax has escaped assessment. ii. The AO has reopened the assessment by recording arbitrary, false and irrational reasons, not based on relevant material facts. The reasons recorded must point out to an income escaping assessment and the reasons cannot be arbitrary or irrational. Ground No 5

I.T.A. Nos. 182/Asr/2019 12 & 184/Asr/2019

The AO has erred in opening the assessment for the purpose of making a roving and fishing inquiry to verify as to whether any income has in facts escaped assessment. i. The AO has reopened the assessment on the basis of AIR information for the purpose of making a roving and fishing inquiry to verify as to whether any income has in fact escaped assessment on a/c of cash deposits in bank and payment of credit card bills as per the AIR information. The cash deposits in bank and payment of credit card bills do not necessarily constitute income. Thus, it was a mere suspicion of the AO that prompted him to initiate assessment proceedings under section 147 for the purpose of making a roving and fishing inquiry, which is neither countenanced, nor sustainable in law ii. It is submitted that the AO cannot reopen the assessment for making a roving and fishing inquiry. To reopen the assessment, it is necessary that there must be something which indicates, even if it does not establish, the escapement of income from assessment. That it is only on that basis that the AO can form a prima-facie belief that an income has escaped assessment. Merely because some investigations if made, could have led to detection of an income escaping assessment, cannot be reason enough to hold the view that the income has escaped assessment. There has to be some kind of cause and effect of relationship between the reasons recorded and the income escaping assessment.

I.T.A. Nos. 182/Asr/2019 13 & 184/Asr/2019 iii. It is apparent that on the basis of AIR Information, the AO has reason to suspect and not reason to believe that income chargeable to tax has escaped assessment, which is not a valid ground for invoking the provisions of section 147 of the Act. The reason to believe that income chargeable to tax has escaped assessment must be based upon material on record, which is not there. In the circumstances, the basic requirements of section 147 of the Act not being satisfied, the assumption of jurisdiction by the AO under section 148 of the Act is invalid and as such, the impugned assessment in pursuant to notice issued u/s 148 without jurisdiction cannot be sustained. iv. The reasons recorded further reveals that the AO has relied on the AIR information, according to which the assessee is said to have deposited cash in her bank a/c totaling to Rs 148,35,500/-. The AO has treated the whole amount as income of the assessee without application of mind. The amount given in the AIR information can arouse suspicion that income has escaped assessment, but the same cannot be a reason to believe that income mentioned therein has escaped assessment. In Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1, the Apex Court has stated that the words and the phrase used, "has reason to believe", and in the first part of Section 147 of the Act were stronger than the word "satisfied". The belief entertained by the assessing authority must not be arbitrary or irrational. It must be reasonable,

I.T.A. Nos. 182/Asr/2019 14 & 184/Asr/2019 or, in other words, it must be based on reasons which are relevant and material. In the instant case the AO does not have any material, other than the AIR Information of cash deposits, on the basis of which a reasonable man would come to the conclusion, that any income chargeable to tax has escaped assessment. Ground No 6 The Ld AO has erred in issuing notice u/s 148 without appreciating that there was no omission or failure on the part of the assessee to make a return of her income or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for her assessment for the assessment year under consideration. i. The assessee has filed her return of income for the assessment year under consideration on 31.03.2011 vide acknowledgment No 8611008992 wherein all material facts necessary for her assessment were disclosed fully and truly, the Ld. AO has falsely stated that the assessee has not filed return for the assessment year under consideration. ii. It is well settled that the reasons recorded for reopening the assessment have to speak for themselves. They have to spell out that (i) there was a failure of the Assessee to disclose fully and truly all the material facts necessary for the assessment and (ii) the reasons must provide a live link to the formation of the belief that income had escaped assessment.

I.T.A. Nos. 182/Asr/2019 15 & 184/Asr/2019

Ground No 7 In the facts and circumstances of the case, the Ld. AO has erred in proceeding to assess income of the assessee by rejecting the objection without application of mind. i. The assessee has filed “objections to reasons recorded” as per Apex Court ruling in the case of Gkn Driveshafts (India) Ltd vs. Income Tax Officer and Ors. But the assessing officer did not dispose of the same on merit as per law. On the other hand the Ld. AO proceeded to assess income of the assessee by rejecting the objection without application of mind and holding the “false reasons” recorded as “correct reasons” ii.lt is well settled that the reasons recorded for reopening the assessment have to speak for themselves. They have to spell out that (i) there was a failure of the Assessee to disclose fully and truly all the material facts necessary for the assessment and (ii) the reasons must provide a live link to the formation of the belief that income had escaped assessment. iii. The assessing officer, while disposing the assessee’ “objections to reasons recorded” has relied on NMS letter No NMS/AAIPT2526L/1307825 issued vide No 211 dated 10.08.2016 to the assessee. The reasons recorded cannot be supplied subsequent to the recording of such reasons in the form of an order rejecting the objections (Northern Exim (P) Ltd. v. DCIT [2013] 357 ITR 586 (Del) referred)

I.T.A. Nos. 182/Asr/2019 16 & 184/Asr/2019 iv. It is submitted that Non-Filers Monitoring System (in short “NMS”), is a monitoring system of IT Department that identifies the people who are liable to file taxes (i.e. with annual income more than Rs 250,000/-), but have not filed the return. Surprisingly the NMS letter has been sent to the assessee despite he has filed her return of income on 31.03.2011 vide acknowledgment No 8611008992. Accordingly the NMS letter No NMS/AAIPT2526L/1307825 issued vide No 211 dated 10.08.2016 to the assessee was illegal, being unauthorized by law. It is submitted that objections to reasons recorded may be read as part and parcel of the submission. Ground No 8 The Ld. AO has erred in passing impugned assessment order without jurisdiction on the basis of illegal and invalid notice dated 29/03/2017. Therefore, the impugned assessment order is illegal, invalid void ab initio. i. The AO has acted without jurisdiction, while reopening the assessment by recording false, irrelevant and arbitrary reasons and further supplying them while replying toassessee’ “objection to reasons recorded". ii.ln Chhuqamal Rajpal vs. S.P. Chaliha. 79 ITR 603 (SC), the Hon'ble Supreme Court held that the ITO had no material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147 and that therefore, he could not have issued a notice under section 148. The provision of section 147 of the IT Act has been I.T.A. Nos. 182/Asr/2019 17 & 184/Asr/2019 explained in detail by the Hon’ble Punjab and Haryana High court in the case of Duilichand Singhania Vs ACIT 269 ITR 192 (P&H). Similar view was taken by Hon'ble Delhi High Court In Case of Suren International Pvt. Ltd 357 ITR 24. iii. That a precondition for reopening the assessment is that there must be income chargeable to tax and which should have escaped assessment. As per reasons recorded, the Ld. AO has treated the cash deposit in bank a/c as income of the assessee. But the deposit of cash in bank a/c itself is not income within meaning of “income” as per provisions of section 2 (24) of the Act. Therefore, assessment reopened without application of mind is invalid ab initio as per settled position of law.

The Hon’ble Supreme Court In ITO v. LakhmaniMewal Das [1976] 103 ITR 437has held that “it is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time,, it is to be borne in mind that it is not any and every material, howsoever vague and indefinite or distant, remote or far-fetched, which would warrant the formation of the belief relating to escapement of the income from the assessment". v. It is submitted that there is no direct nexus or live link between reasons recorded and the AO’s formation of her belief that there has I.T.A. Nos. 182/Asr/2019 18 & 184/Asr/2019 been escapement of the income on a/c of cash deposits in assessee saving bank accounts. The reasons to believe was wholly based on her fallacious presumption that the assessee has not filed return of income. vi. According to the reasons recorded, there was AIR information, according to which the assessee has deposited cash in her bank a/c. The Annexure A’ to the reasons recorded bears the following headings: “Reasons recorded under section 148 Read with para (a) of Explanation 2 to sec 147 of the Income Tax Act 1961” After having noted the AIR information, the AO recorded, “That it has been verified and found that the assessee has failed to file her return of income for the financial year 2009-10 relevant to the assessment year 2010-11. Therefore I have reasons to believe that an income of Rs 48, 35,500/- has escaped assessment in terms of provisions of section 147 of Income Tax Act. Accordingly I am satisfied that such income and any other income also chargeable to tax has escaped assessment. vii. It is apparent from the above that the reasons recorded are false as the assessee has filed her return of Income voluntary on 31.03.2011 vide acknowledgment No 8611008992. And that there is no direct nexus or live link between the material coming to the notice of the ITO (i.e. AIR Information) and the formation of their belief that there has been escapement of the income of the assessee from I.T.A. Nos. 182/Asr/2019 19 & 184/Asr/2019 assessment because of assessee’s failure to disclose fully and truly all material facts. The Hon'ble Supreme Court in the case of 'ITO vs. Lakhmani Mewal Das', 103 ITR 437 (SC), has observed that: "The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of their belief that there has been escapement of the income of the assessee from assessment in the particular year because of her failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."

9. Related to factual ground, the assessee was unable to bringtrue fact before the revenue authorities. In the written submission the assessee has mentioned that the assessee filed the return voluntarily on 31st March 2011 with acknowledgment no. 8611008992 and declaring total income at Rs.4,50,000/- and paid due tax. The assessee was also the partner of M/s Kash Ind Roller Flour Mills and was fully

I.T.A. Nos. 182/Asr/2019 20 & 184/Asr/2019 associated with the firm. The entire addition of cash deposit amount of Rs.13,82,500/- in HDFC Saving Bank a/c, cash deposited amount of Rs.30,12,654/- in ICICI Saving Bank a/c and Rs.13,44,000/- is also deposit cash in ICICI Saving Bank a/c was added back with total income. The assessee claimed that mere deposit of cash cannot be taken as income of the assessee. In the assessment order was passed u/s 144 of the Act. The assessee has raised two legal points related to jurisdiction of the ld. AO for issuance of notice u/s 148. First, the mistake was done in the recorded reason as the assessee was treated as non filler of ITR, whereas the assessee had filed the income tax return during his assessment year. Further, the assessee had filed objection against the recorded reason before the ld. AO which was not disposed off during the assessment proceeding. Both objections are duly clarified by the ld. CIT(A) in the appeal order. But the assessee was wrongly treated as non-filer of return for impugned assessment year which is not correct observation. Further, there is no such proper adjudication in the order of the ld. CIT(A) related to the assessee’s claim in the factual grounds. The observation of the ld. CIT(A) was not duly rebutted by the assessee in his submission. All the issues, legal & factual should be disposed offin proper manner by the ld. AO by allowing the assessee a reasonable opportunity of hearing.

I.T.A. Nos. 182/Asr/2019 21 & 184/Asr/2019 9.1 We find that the entire issue should be set aside to the ld. AO for further adjudication de novo. Assessee is also directed to cooperate with the revenue authorities in procceding. Needless to say, the assessee should get a reasonable opportunity of hearing in set aside proceeding. 8.2 Considering this is mutatis mutandis applicable to ITA No. 184/Asr/2019 & be followed accordingly.

Order pronounced in the open court on 20.03.2023