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Income Tax Appellate Tribunal, DELHI ‘SMC’ BENCH,
Before: SHRI B.P. JAIN
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘SMC’ BENCH, NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER [A.Y. 2007-08] Shri Mahavir Parsad Vs. The I.T.O S/o Shri Sheo Nath Rewari VPO Garhi Uthal Distt, Narnaul PAN : BJYPM 7851 D [Appellant] [Respondent] Date of Hearing : 03.10.2017 Date of Pronouncement : 09.10.2017 Assessee by : Shri Kapil Goel, Adv Revenue by : Shri T. Vasanthan Sr. DR ORDER This appeal of the assessee arises from the order of the ld. CIT(A), Rohtak vide order dated 27.11.2014 for assessment year 2007- 08.
Revised grounds of appeal were filed by the assessee, which are placed on record. Amongst various grounds of appeal taken by the assessee, main grievance and issue raised by the assessee-appellant before this Tribunal relates to validity of the proceedings under section 148 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. Revised ground Nos. 1 and 1.1 were raised in the course of the hearing. Case law compilation running into 56 pages was also pressed during the course of hearing.
Facts, in brief, as narrated in impugned order are that on the basis of AIR information notice under section 148 of the act was issued by income tax officer Ward-2, Rewari on 16/03/2012 for the assessment year 2007-2008. The reasons recorded for reopening the case as reproduced on the very beginning of the order are again described below:
As per AIR information for FY 2006-07 received in this office the assessee has made cash deposits of Rs. 10,80,000/- in his bank account with Punjab national bank circular road Rewari. A query notice was issued to the assessee on 24th of January 2012, but no response has been received from the assessee. I therefore have reason to believe that assessee has deposited cash in his bank account out of his income from unexplained sources. Accordingly income to the extent of Rs. 10,80,000/- and any other income which subsequently comes to the notice of the undersigned has escaped assessment within the meaning of section 147 of the income tax act. Issue notice under section 148 of the income tax act 1961 for assessment year 2007-2008
After reopening the case under section 148 of the Act, the Assessing Officer, in the impugned order has made three additions as below: a) addition on account of cash deposits Rs. 10,80,000/-; b) addition on account of disallowance of deduction under section 54B of Rs. 17,96,500/-; and c) addition on account of interest Rs. 54,851/-
On basis of aforesaid three additions, total income was at Rs. 29,31,350/- against returned income at Nil. Aggrieved by this action of the assessing officer, assessee filed an appeal before the ld. CIT(A), Rohtak. The appeal was dismissed by the ld. CIT(A) where ground Nos. 1 to. 6 relating to jurisdiction were dismissed. Other grounds relating to merits of the case from Ground No. 7 to 15 were also dismissed. No relief was given by ld. CIT(A). Aggrieved, the assessee has come in appeal before the Tribunal.
I have very attentively heard the arguments of both the sides on the issue of validity of assumption of jurisdiction under section 148 of the income tax act, 1961.
On careful consideration of rival contentions, I proceed to record my findings on legal grounds as follows:
7.1 That basis of reasons recorded under section 148 is AIR (annually information return) information stating cash deposits of rupees 10,80,000 as income from unexplained sources coupled with the fact that no response was given by assessee to query put.
7.2 That mere information from annual information return is made as the basis in the reasons without describing the contents of the information, when was the same received, bank account details, and most importantly the copy of the bank account which is made as basis of reopening was never gone through by the assessing officer while recording the purported reasons to believe. Without going to the contents of the entries in the bank account concerned merely deposits cannot be treated as income escaping assessment within the meaning of section 147/148 of the income tax act, 1961.
7.3 That reasons recorded in present case at best can be treated to be reason to suspect which is not sufficient for reopening the case under section 148 of the income tax act, 1961. While recording the reasons to believe merely relying upon financial information cannot be treated as good enough to reopen the case. There can be number of sources of cash deposits by the assessee in the bank account. Unless and until it is brought out in the reasons to believe as to how the cash deposits represent income from undisclosed sources same cannot give justification to reopen the case under section 147/148 of income tax act. The requirement of application of mind is missing in the present case on the face of it in the reasons recorded. It is cardinal principle of taxation that all receipts are not income and all income are not taxable income applies squarely to present facts.
7.4 That all the decisions relied by the assessee/appellant in the case law compilation are on identical facts. To support my above conclusion, I reproduce the extract from the same :
8. First decision where also reopening under section 148 of the Act was made by the same assessing officer, that is, income tax officer Ward 2 Rewari is relied by me in support of my above decision, which is on identically worded reasons which is reproduced hereinbelow: [Assessment Year: 2007-08] Munni Devi Date of order : 15-09-2016
We have heard both the parties and perused the relevant records available with us, especially the orders of the revenue authorities and the case laws cited by the assessee’s counsel on the issue in dispute. In our view, it is very much necessary to reproduce the reasons recorded by the AO before issue of notice u/s. 148 for reopening of assessment which reads as under:-
“As per AIR information for FY 2006-07 received in this office, the assessee has made cash deposits of Rs. 49,42,000/- in bank account with Canara Bank, Pulhawas, Rewari. A query notice was issued to the assessee on 24.1.2012. But no response has been received from the assessee.
I, therefore have reason to believe that the assessee has deposited cash in his bank account out of his income from unexplained sources. Accordingly, income to the extent of Rs. 49,42,000/- and any other income which subsequently comes to the notice of the undersigned has escaped assessment within the meaning of section 147 of the I.T. Act, 1961. Issue notice u/s. 148 of the I.T. Act, 1961 for the assessment year 2007-08. Sd/- (O.P. Poonia) Income Tax Officer, Ward-2, Rewari”
9. After going through the reasons recorded by the ITO, Ward-2, Rewari, I am of the view that there is no nexus between the prima facie inference arrived in the reasons recorded and information; the information 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 represented income of the assessee; that even the communication dated 24.1.2012 could not be made a basis to assume jurisdiction in view of the fact that such an enquiry letter is an illegal enquiry letter and thus cannot be relied upon; that the proceedings initiated are based on surmises, conjectures and suspicion and therefore, the same are without jurisdiction; that 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 presumption in nature; that it is a case of mechanical action on the part of the AO as there is non-application of mind much less independent application of mind so as to show that he formed an opinion based on any material that such deposits represented income. Keeping in view the facts and circumstances of the present case and the case law applicable in the case of the assessee, I am of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed.
10. This decision has been followed by Delhi tribunal in the case of Harmeet Singh in for assessment year 2008- 2009, order dated 10/2/2017 enclosed at case law compilation in pages 1 to 28. Apart from aforesaid decision, the Delhi bench of ITAT decision in case of Bir Bahadur Singh reported at 68 SOT page 197 has considered the controversy in its entirety. The relevant discussion is reproduced below:
“3. This assessment was reopened, as noted in the reasons recorded for reopening the assessment- furnished to the assessee vide Assessing Officer’s letter dated 25th April 2012, on the following ground:
During the financial year 2007-08, the assessee has made transaction of Rs 10,24,100 (deposits in cash) in his saving bank account but no return of income was filed by the assessee. As such, it has reason to believe that there is an escapement of income at Rs 10,24,100 on the “3. This assessment was reopened, as noted in the reasons recorded for reopening the assessment- furnished to the assessee vide Assessing Officer’s letter dated 25th April 2012, on the following ground:
“During the financial year 2007-08, the assessee has made transaction of Rs 10,24,100 (deposits in cash) in his saving bank account but no return of income was filed by the assessee. As such, it was reason to believe that there is an escapement of income at Rs 10,24,100 on the link between conclusion and the evidence….". Therefore, the reasons are to be examined only on the basis of the reasons as recorded. The next important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment, all that is necessary is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. While dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hon’ble Supreme Court in the case of ITO Vs Lakhmani Mewal Das [(1976) 103 ITR 437], “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 this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his 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.
Let us, in the light of this legal position, revert to the facts of the case before us. All that the reasons recorded for reopening indicate is that cash deposits aggregating to Rs 10,24,100 have been made in the bank account of the assessee, but the mere fact that these deposits have been made in a bank account does not indicate that these deposits constitute an income which has escaped assessment. The reasons recorded for reopening the assessment do not make out a case that the assessee was engaged in some business and the income from such a business has not been returned by the assessee. As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether the assessee could be said to be engaged in any business; all that is to be examined is whether the fact of the deposits, per se, in the bank account of the assessee could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs 10,24,100/- has escaped assessment of income because the assessee has Rs 10,24,100 in his bank account but then such an opinion proceeds on the fallacious assumption that the bank deposits constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. Of course, 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 escaped assessment.
Learned Departmental Representative has referred to a number of judicial precedents in support of her stand that even deposits in the bank account, as having come to the notice of the Assessing Officer through AIR, can be reason enough for holding the belief that income has escaped assessment. She has relied upon the decisions in the cases of CIT Vs Nova Promoters & Finlease Pvt Ltd [(2012)342 ITR 169] but then none of the questions before Hon’ble High Court had anything to do with reopening of assessment and this decision can not, therefore, be taken as an authority on the legal issue which did not even come up for specific adjudication before Their Lordships. As for her reliance on Hon’ble Supreme Court’s judgment in the case of Phool Chand Bajrang Lal Vs ITO [(1993) 203 ITR 456], that was case in which Their Lordships concluded that the AO “rightly initiated the reassessment proceedings on the basis of subsequent information, which was specific relevant and reliable, and after recording the reasons for formation of his own belief that in the original assessment proceedings, the assessee had not disclosed the material facts truly and fully and, therefore, income chargeable to tax had escaped assessment” and we are unable to see anything on the facts of the present case which are materially similar to the facts of the said case. As regards her reliance on the decision of a coordinate bench in the case of Mithila Credit Services Limited Vs ITO (ITA No. 1078/Del/2013; order dated 23.5.2014), it is important to bear in mind the fact that it was a case in which the Assessing Officer had reopened the assessment on the basis of receipt of information from Directorate of Investigation, and, as noted by the Assessing Officer in the reasons recorded for reopening the assessment, “the name of the assessee figures as one of the beneficiaries of these alleged bogus transactions” in the information given by the directorate. If the assessee was a beneficiary of such a scam, the income was indeed to have been taxed in its hands but then in the case before us the only reason for reassessment proceedings was the fact of deposit of bank account which by itself does not lead to income being taxed in the hands of the assessee. Learned Departmental Representative has referred to several other judicial precedents in support of the proposition that at the stage of initiation of reassessment proceedings, all that is to be seen as existence, rather than adequacy, of the material to come to the conclusion that income has escaped assessment. To us, there cannot be any, and there is no, doubt on the correctness of this proposition but then, as we have elaborately explained earlier in this order, the material 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. On the basis of reasons as recorded in this case, such an inference about income escaping assessment, in our humble understanding, cannot be drawn.
In view of the reasons set out above, as also bearing in mind entirety of the case, we are of the considered view that the reasons recorded by the Assessing Officer, as set out earlier, were not sufficient reasons for reopening the assessment proceedings. We, therefore, quash the reassessment proceedings. As the reassessment itself is quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous.”
11. Above decision is sufficient to close the controversy and decide the main legal issue in favour of assessee/appellant. Following this decision, whatever doubts have remained are cleared by the decision of this Delhi bench of tribunal in the case of Parveen Kumar Jain enclosed in case compilation at pages 29 to 38 the relevant extract of which is reproduced below:
“....Further, the recourse of reopening u/s 148/147 is not to first issue the notice and then to proceed to investigate and find out if there was income assessable to tax which has escaped assessment rather it is pre requisite for issuing the notice u/s 148 that the AO on the basis of tangible material and information has legitimate reason to believe that income assessable to tax has escaped assessment. The belief must be based on a material which has direct nexus to the income assessable has escaped assessment and should not be guess work and to ascertain the same through the process of investigation. The provision of section 148/147 cannot be used such investigation to ascertain where income assessable to tax has escaped assessment. It is apparent that the reason for reopening was only on information of deposit of cash of Rs.6 lac in the bank account. Therefore, the reason for reopening was for further investigation to find out the source of the cash deposit by the assessee as the AO has not recorded anything that this deposit of cash is from particular source which is not disclosed by the assessee in the books of account or in the return of income. The deposit of cash in the bank account of the assessee does not establish any live nexus between the information and formation of the believe that there was escapement of the income by the assessee. There may be end number of reasons and sources of deposit of cash in the bank which may not constitute the same as income of the assessee and therefore merely deposit of cash in bank itself would not lead to the conclusion or believe that the said amount is assessable income of the assessee and escapement of assessment. In the case in hand there are number of withdrawals and deposits in the bank account of the assessee in question. It is clear from the details of the bank account that prior to the deposit of this amount of Rs.6 lac there was withdrawals of about Rs.14 lac from the said bank account, therefore in the absence of any other information or material to indicate the source of this deposit other than withdrawals from the bank account the AO was not having any tangible material to believe that this deposit of Rs.6 lac constitute the income of the assessee for which the source has not been disclosed by the assessee or the assessee is not in a position to disclose the source. Accordingly the reopening is nothing but to investigate the matter to ascertain whether this deposit would constitute the income of the assessee which has escaped the assessment or not. In the case of the C.M. Mahadeva Vs. CIT, Hon’ble Karnataka High Court while dealing with identical facts of reopening has observed in Para 16 to 19 has under:-
“16. The facts of the aforesaid case are quite similar to the one on hand. In the present case also the reason for reopening is for further investigation to find out the source of investment for the purchase of the property, which is not permissible in law.
Further in the case of Income Tax Officer Vs. Lakhmani Mewal Das reported in (1976) 103 ITR 439, the Apex Court has held that “the reasons for the formation of the belief must have a 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 Income Tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts.”
In the present case, what we find is that there is no nexus or live link between the material which had come to the notice of the Assessing officer, and the formation of his belief that there was escapement of income by the assessee which may be assessable to tax. Merely by mentioning the income of the assessee in the assessment year, and the investment made by him for the purchase of residential property, it cannot be concluded that the difference would automatically be the income which had escaped assessment.
The submission of learned counsel for the respondent- Revenue, that reading of the first paragraph of the reason records along with the third paragraph, would amount to the Assessing Officer concluding that the difference between the purchase price of the property and income of the assessee in that year was the reason for which reassessment notice was given, is not worthy of acceptance. Definite and specific reason have to be recorded by the Assessing Officer before the issuance of notice under section 148 of the Act, as reply has to be given by the assessee to such reason which are recorded in the notice. Nothing can be left for the party to conjecture and then presume that such could be a reason for the Assessing officer to believe that there has been escapement of income from assessment to tax.” 10. Thus, it is clear that the Hon’ble High Court has made a clear distinction between the definite/specific reasons and mere mentioning the income of the assessee without having a direct nexus or live link between the material which has come to the notice of the AO and form a believe that there was escapement of the income by the assessee.
Thus it is clear that the basic requirement for reopening of assessment that the AO must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment was found to be missing when the AO proceed to reopen the assessment which is in nature of a post mortem exercise after the event of reopening of the assessment. Therefore the reopening of the assessment was found to be invalid as it does not satisfy the requirement of law that prior to the reopening of the assessment the AO has to apply his mind to the material and conclude that he has reason to believe that income of the assessee has escaped assessment. Applying the above proposition of law it leaves no doubt in the mind that in the case on hand the AO has reopened the assessment mechanically without application of mind to conclude that the said amount of Rs.6 lac deposit in the bank account of the assessee constitutes the income of the assessee and the same has escaped assessment. The decision relied upon by the ld DR is not applicable in the facts of the present case because in the said case not only the accommodation entry were found by the investigation wing but the modus operandi was also detected and therefore it was found that the AO was having the sufficient material and information to form the believe that the income assessable to tax has escaped assessment. In view of the facts and circumstances as well as the decisions relied upon by the AR, the reopening is in the case of the assessee is not valid and the same is quashed. Since the reopening of the assessment held to be invalid therefore other grounds of the appeal become infractuous. 13. In the result the appeal of the assessee is allowed.”
Apart from the above, the reliance placed by Ld. counsel for the assessee Sh. Goel on the decision of Hon’ble jurisdictional Delhi High Court in case of Meenakshi Overseas reported at 395 ITR 677 is also supportive to the proposition that reasons recorded without independent application of mind, without tangible material, where link between the tangible material and formation of belief is missing, cannot be sustained. Following all these decisions to maintain consistency I have no hesitation in questioning the action of reopening under section 148 on basis of invalid reasons to believe. Accordingly, the legal ground raised is accepted and allowed. Other grounds are not dealt with which have become infructuous.
13. Before parting with this case, I draw the attention of the revenue authorities to the latest decision of Jurisdictional Delhi High Court in case of Sabh Infrastructure Ltd dated 25/09/2017 in W.P.(C) 1357/2016 wherein following guidelines are given in matter of reopening under section 148:
“19. Before parting with the case, the Court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under Sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the Court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments:
(i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the Assessing Officer to the Assessee is to be avoided; (ii) the reasons to believe ought to spell out all the reasons and grounds available with the AO for re-opening the assessment - especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO on the same and if so, the conclusions thereof; (iii) where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons; (iv) the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.”
14. It may be desirable that aforesaid guidelines which are based on well settled judicial rulings are followed in letter and spirit.
In the result, the appeal of the assessee is allowed. The order is pronounced in the open court on 09.10.2017.