2015 (10) TMI 2383 - HC - Income Tax

Reopening of assessment - AO received information from the Enforcement Directorate (ED) that in the books of the Assessee there were huge cash deposits - Held that - The nature of the information provided by the governmental agency in that case did not itself refer to any amounts or entries in the books of accounts of the Assessee. In the present case, however, the information received from the ED makes a reference to what was found in the books of accounts of the Assessee. The next question that had to be examined by the AO was whether what was disclosed in the books of accounts was also disclosed in the returns filed by the Assessees. If it was not disclosed, then possibly the AO could have reasons to believe that the cash deposits reflected in the books of accounts may have escaped assessment. However, no effort appears to have been made by the AO to examine the returns filed by the Assessee in either of these cases. As far as RL Travels is concerned, the further information concerning payments made to third parties, which were unable to be verified by the ED, also required to be assessed by the AO by examining the returns filed to discern whether the said transaction was duly disclosed by the Assessee. It is the treatment of the entries in the books of accounts in the returns filed by the Assessee that would be determinative of whether in fact there was any concealment of relevant information or whether any income had in fact escaped assessment. With the AO in either of these cases not having adopted that approach, it could not be said that the jurisdictional requirement of the AO having to form reasons to believe on the basis of some tangible material that income had escaped assessment was fulfilled.Consequently, the Court finds no error having been committed by the ITAT in the impugned orders in coming to the conclusion that the reopening of the assessments was bad in law. - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment under Section 148 of the Income Tax Act, 1961.
2. Validity of reasons to believe under Section 147 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148 of the Income Tax Act, 1961:

The primary issue was whether the reopening of the assessment under Section 148 was valid. The Revenue argued that the reopening was justified based on information from the Enforcement Directorate (ED) regarding undisclosed cash deposits in the books of the Assessees, Indo Arab Air Services and RL Travels. The Assessees contended that the reopening was based on mere suspicion without a proper examination of their returns and records.

For Indo Arab, the AO received information from the ED about cash deposits amounting to Rs. 3.23 crore during FY 2001-02, which were not disclosed in the books of accounts. Similarly, for RL Travels, the AO received information about cash deposits of Rs. 90.50 lakh and other cash transactions that were not satisfactorily explained. Notices under Section 148 were issued to both Assessees, and their original returns were treated as returns under Section 148.

The AO rejected the explanations provided by the Assessees and added the cash deposits back to their incomes as unexplained income. The Commissioner of Income Tax (Appeals) [CIT (A)] partly allowed the appeal by Indo Arab and affirmed the addition made by the AO for RL Travels.

2. Validity of Reasons to Believe under Section 147 of the Income Tax Act, 1961:

The court examined whether the reasons to believe formed by the AO were in accordance with Section 147. The settled legal position requires that the reasons to believe must be based on tangible material and not merely on suspicion. The Supreme Court in ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 outlined that the reasons to believe must have a rational connection with the formation of the belief regarding the escapement of income.

In the case of Indo Arab, the ITAT noted that the information from the ED was factually incorrect as Indo Arab was regularly assessed to income tax, and the cash transactions were recorded in the books of accounts. The AO failed to verify this information from the available records, which was essential to form a reason to believe that income had escaped assessment.

For RL Travels, the ITAT relied on the order in the case of Indo Arab and found that the reopening of the assessment was also bad in law. The additional information regarding cash transactions with unidentified parties did not provide a sufficient basis for the AO to form a belief that income had escaped assessment without examining the returns filed by the Assessee.

The court emphasized that the AO must form a prima facie opinion based on tangible material providing a nexus or link to the belief that income had escaped assessment. The AO's failure to examine the returns filed by the Assessees and the contradictory statements in the reasons recorded indicated that the jurisdictional requirement under Section 147 was not fulfilled.

Conclusion:

The court found no error in the ITAT's conclusion that the reopening of the assessments was bad in law. The appeals were dismissed as no substantial question of law arose, consistent with the settled legal position.

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