2008 (2) TMI 944 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of additions made under Section 68 of the Income-tax Act, 1961.
2. Legitimacy of the initiation of proceedings under Section 147/148 of the Income-tax Act.
3. Admission of additional documentary evidence by the Commissioner of Income-tax (Appeals) in violation of Rule 46A.

Issue-Wise Detailed Analysis:

1. Deletion of Additions Made Under Section 68 of the Income-tax Act, 1961:

The Department challenged the deletion of Rs. 59,41,593 added by the Assessing Officer (AO) as unexplained income under Section 68. The AO had added this amount based on peak credits in various doubtful accounts where the identity of account holders was not verified. The Commissioner of Income-tax (Appeals) (CIT(A)) deleted the addition, observing that the bank was governed by the Banking Regulations Act and RBI guidelines, which required maintaining customer confidentiality and did not obligate the bank to verify the source of deposits. The CIT(A) noted that the accounts were introduced by bank staff or existing customers, and the credits were mainly transfers from other branches, thus not taxable in the current year. The Tribunal upheld the CIT(A)'s decision, stating that Section 68 was not applicable to banking companies for customer deposits, as these deposits were part of the bank's stock-in-trade and the bank had complied with RBI guidelines.

2. Legitimacy of the Initiation of Proceedings Under Section 147/148 of the Income-tax Act:

The assessee contended that the initiation of proceedings under Section 147/148 was invalid as the AO did not independently verify the reasons for reassessment and merely followed the directions of the Deputy Director of Income-tax (Investigation). The CIT(A) upheld the initiation, stating that the AO had sufficient cause to believe income had escaped assessment based on material from the Investigation Wing. The Tribunal agreed, referencing the Supreme Court's decision in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that "reason to believe" did not require conclusive evidence at the notice stage but only a cause or justification. The Tribunal found no merit in the assessee's grievance and upheld the initiation of proceedings.

3. Admission of Additional Documentary Evidence by the Commissioner of Income-tax (Appeals) in Violation of Rule 46A:

The Department argued that the CIT(A) wrongly admitted additional evidence in violation of Rule 46A, as the assessee had previously refused to produce account holders, citing adverse effects on banking business. The CIT(A) admitted the evidence, noting that it related to the additions made and was not produced earlier due to lack of opportunity. The Tribunal found no error in the CIT(A)'s decision, as the documents were directly related to the additions and the assessee's belief in not being obliged to file such documents was bona fide. The Tribunal rejected the Department's grievance on this issue.

Separate Judgment for Assessment Year 1998-99:

For the assessment year 1998-99, the assessee argued that the CIT(A) erred in sustaining the AO's jurisdiction to issue notice under Section 148 without recording reasons or serving notice. The Tribunal noted that the CIT(A) had not addressed this specific assertion and remitted the matter to the CIT(A) for fresh decision on the preliminary issue of recording and communication of reasons for reassessment and issuance and service of notice under Section 148. The Tribunal directed the CIT(A) to provide adequate opportunity to the assessee and decide the merits of the case accordingly.

Conclusion:

The Tribunal dismissed the Department's appeal for the assessment year 1999-2000, upholding the CIT(A)'s deletion of additions and admission of additional evidence. For the assessment year 1998-99, the Tribunal allowed the appeal for statistical purposes, remitting the matter to the CIT(A) for fresh consideration on the preliminary issue of reassessment proceedings.