2014 (4) TMI 902 - AT - Income Tax

Validity of notice issued u/s 148 of the Act Proceedings initiated after four years - Addition made as unexplained cash credits Held that - The AO have not applied his mind at all, which is evident from the several observations made by him in his order and in the notice issued u/s 148 of the Act AO assumed that the assessee intended to convert the unexplained cash through the route of capital gains, even after several years the assessee did not sell the shares, as stated by the assessee - the shares were demated and available in the name of the assessee but no mention was made at any stage of the proceedings on this aspect though the shares were purchased at a particular price and service tax, commission, etc. have been paid based on the rate for which it was purchased. The assessee had declared the investments in the books of account and even if the AO is of the opinion that the assessee has invested more than what is recorded in the books the differential amount can at best be treated as unexplained investment u/s 69B of the Act - the AO could not have assumed jurisdiction to reopen the assessment proceedings, that too beyond a period of four years, unless it is with the sole intention of bringing the case under the purview of section 149(b) of the Act, it is not permissible in law - what cannot be done directly cannot be done indirectly - AO having initiated the reassessment proceedings after a lapse of four years from the end of the relevant assessment year thus, the reassessment proceedings are bad in law also, the addition and assessment made on the strength of proceedings set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Validity of notice issued under section 148 of the Income Tax Act.
2. Addition made by the Assessing Officer (AO) as unexplained cash credits.

Detailed Analysis:

1. Validity of Notice Issued Under Section 148:

The assessee challenged the validity of the notice issued under section 148, arguing that the reopening of the assessment was beyond the permissible period of four years. The assessee contended that the income that allegedly escaped assessment was less than Rs. 1,00,000, which does not justify reopening beyond four years as per section 149 of the Act. The AO issued the notice based on information received from the CCIT (Central)-1 regarding havala transactions involving the assessee, but the assessee argued that the shares were purchased through a legitimate broker and were duly accounted for in the books.

The CIT(A) upheld the reopening, stating that the AO sought to make an addition of Rs. 1,23,200, which exceeds Rs. 1,00,000, thus justifying reopening within six years under section 149(b). However, the Tribunal found that the AO did not apply his mind properly, as the maximum addition that could be justified was Rs. 80,636, not exceeding Rs. 1,00,000. The Tribunal concluded that reopening beyond four years was not permissible, rendering the notice under section 148 invalid.

2. Addition as Unexplained Cash Credits:

The AO added Rs. 1,23,200 as unexplained cash credits, assuming that the assessee purchased shares at Rs. 7.70 per share instead of the declared price of Rs. 2.45 to Rs. 2.75 per share. The AO treated the difference as unexplained cash credits under section 68. The assessee argued that the shares were purchased through a broker, duly accounted for, and reflected in the Demat account.

The CIT(A) partially agreed with the assessee, restricting the addition to Rs. 80,636, the difference between the purchase price declared by the assessee and the AO's assumed price. The Tribunal, however, noted that the AO's assumption lacked evidence and was based on a flawed understanding of the facts. The Tribunal emphasized that the correct provision to apply was section 69B for unexplained investments, not section 68 for cash credits. The Tribunal found that the AO's approach was incorrect and that the reassessment proceedings were invalid.

Conclusion:

The Tribunal quashed the reassessment proceedings, holding them to be bad in law due to the improper application of mind by the AO and the invalidity of the notice under section 148. The resultant addition and assessment were also quashed. The appeal filed by the assessee was allowed.