2017 (9) TMI 1658 - AT - Income Tax

Validity of initiation of proceedings u/s 148 - validity of reasons to believe - deposits in savings bank account - Held that - It was a mere suspicion of the AO, that prompted him to initiate assessment proceedings u/s 147, which is neither countenanced, nor sustainable in law - AO proceeded on the fallacious assumption that the bank deposits constituted undisclosed income, over-looking the fact that the source of the deposits need not necessarily be the income of the assessee - thus following the judgement in case of BIR BAHADUR SINGH SIJWALI VERSUS INCOME TAX OFFICER WARD 1, HALDWANI 2015 (2) TMI 60 - ITAT DELHI the reasons recorded are cancelled - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of initiation of proceedings under section 148 of the Income Tax Act.
2. Validity of reasons assigned by the Assessing Officer (AO) for reopening the assessment.
3. Legal precedents cited by the assessee to challenge the reopening.
4. Validity of additions made by the AO under sections 68/69.
5. Confirmation of addition towards alleged commission income by the CIT (Appeals).
6. Assessment of books of accounts submitted by the assessee.
7. Allegation that the books of accounts were prepared post issuance of notice under section 148.
8. General legality and fairness of the order passed by the CIT (Appeals).

Detailed Analysis:

1. Validity of Initiation of Proceedings under Section 148:
The assessee challenged the initiation of proceedings under section 148 of the Income Tax Act, arguing that the CIT (Appeals) erred in upholding the validity of these proceedings. The CIT (Appeals) justified the initiation based on the information that the assessee had deposited ?17,60,000 in his savings account and had not filed a return of income. The Tribunal found that this information alone could not form a valid basis for the initiation of assessment proceedings, as it did not necessarily indicate that the deposits constituted income that had escaped assessment.

2. Validity of Reasons Assigned by the AO:
The assessee argued that the reasons recorded by the AO were based on conjectures and surmises and were not valid. The CIT (Appeals) held that the AO had specific information about the cash deposits and the non-filing of returns, which justified the belief that income had escaped assessment. However, the Tribunal found that mere cash deposits in a bank account do not constitute sufficient reason to believe that income has escaped assessment, as per the precedent set in "Bir Bahadur Singh Sijwali vs. ITO."

3. Legal Precedents Cited by the Assessee:
The assessee cited several cases, including "Bir Bahadur Singh Sijwali vs. ITO," "Amrik Singh vs. ITO," and "Praveen Kumar Jain vs. ITO," to argue that the reopening of the assessment was unjustified. The Tribunal agreed with the assessee, stating that the cited precedents clearly indicated that mere deposits in a bank account could not be the basis for reopening an assessment.

4. Validity of Additions Made by the AO under Sections 68/69:
The assessee contended that no addition was made under sections 68/69 towards the deposits in the savings bank account, which was the sole reason for initiating proceedings under section 148. The Tribunal found that since the initiation of proceedings itself was invalid, any additions made by the AO could not be upheld.

5. Confirmation of Addition Towards Alleged Commission Income:
The CIT (Appeals) confirmed an addition of ?2,061,930 towards alleged commission income estimated by the AO. The assessee argued that this was erroneous as the income declared was duly supported by books of accounts, which were verified by the AO. The Tribunal did not specifically address this issue as it found the initiation of proceedings itself to be invalid.

6. Assessment of Books of Accounts Submitted by the Assessee:
The assessee argued that the books of accounts were duly produced and verified by the AO, and no defects or discrepancies were found. The Tribunal noted that the AO had not rejected the books of accounts, which supported the assessee's claim.

7. Allegation that the Books of Accounts Were Prepared Post Issuance of Notice:
The CIT (Appeals) alleged that the books of accounts were prepared after the issuance of the notice under section 148. The Tribunal did not find any substantial evidence to support this claim and focused on the invalidity of the initiation of proceedings.

8. General Legality and Fairness of the Order Passed by the CIT (Appeals):
The assessee argued that the order passed by the CIT (Appeals) was wrong, illegal, and against the principles of natural justice. The Tribunal agreed, finding that the initiation of proceedings under section 148 was based on insufficient grounds and thus invalidated the entire process.

Conclusion:
The Tribunal allowed the appeal, finding that the initiation of proceedings under section 148 was invalid as it was based on mere cash deposits in a bank account, which did not constitute sufficient reason to believe that income had escaped assessment. Consequently, all proceedings pursuant to the invalid initiation, including the additions made by the AO, were cancelled. The appeal was allowed in favor of the assessee.