2025 (1) TMI 805 - AT - Income Tax

Validity of reopening of assessment u/s 147 - based on the information that assessee has made deposit during the current assessment year - Since there was no response from the assessee the AO completed the assessment u/s 144 - Addition made u/s 69A by adopting peak credit method - assessee submitted that the assessee has made cash deposits which is nothing but cash withdrawal made by the assessee during the year. HELD THAT - As assessee has already demonstrated that assessee has withdrawn Rs. 20 lakhs in the month of October and the same cash withdrawals were with the assessee to make the deposits from 28.10.2010 to 15.03.2011. Therefore, the assessee has established the source of cash with him. Accordingly, we are inclined to allow the grounds raised by the assessee.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment revolves around the following core legal questions:

Whether the reopening of the assessment under section 147 of the Income-tax Act, 1961, was validly initiated.
Whether the notice under section 148 was properly served to the assessee.
Whether the addition of Rs. 17,82,000/- as income under section 69A of the Act was justified.
Whether the assessee's explanation regarding cash deposits being sourced from prior cash withdrawals was acceptable.
Whether the method of adopting peak credit by the CIT(A) was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening under Section 147

Relevant legal framework and precedents: Section 147 of the Income-tax Act allows for the reopening of an assessment if the Assessing Officer (AO) has reason to believe that any income chargeable to tax has escaped assessment.
Court's interpretation and reasoning: The Tribunal noted that the reopening was based on information regarding cash deposits of Rs. 17.82 lakhs, which constituted a valid reason for the AO to believe there was escaped income.
Key evidence and findings: The AO had issued a notice under section 148 after obtaining approval from the Principal Commissioner of Income Tax.
Application of law to facts: The Tribunal found that the procedural requirements for reopening were met.
Treatment of competing arguments: The assessee argued non-service of notice, but the Tribunal focused on the substantive grounds for reopening.
Conclusions: The reopening under section 147 was deemed valid.

Issue 2: Service of Notice under Section 148

Relevant legal framework and precedents: Proper service of notice is a procedural requirement for the initiation of reassessment proceedings.
Court's interpretation and reasoning: The Tribunal noted the notice was returned due to an incomplete address, but subsequent notices were issued under section 142(1).
Key evidence and findings: The Tribunal did not focus extensively on this procedural aspect, given the substantive compliance with section 147.
Application of law to facts: The Tribunal did not find sufficient grounds to invalidate the proceedings based on notice service issues.
Treatment of competing arguments: The assessee's argument of non-receipt was noted but not decisive.
Conclusions: The issue of notice service did not affect the validity of the proceedings.

Issue 3: Addition under Section 69A

Relevant legal framework and precedents: Section 69A pertains to unexplained money, requiring the assessee to satisfactorily explain the source of any money found.
Court's interpretation and reasoning: The Tribunal assessed whether the cash deposits were unexplained or if they could be linked to prior withdrawals.
Key evidence and findings: The assessee provided bank statements showing cash withdrawals of Rs. 20 lakhs, arguing these were the source of the deposits.
Application of law to facts: The Tribunal found the explanation plausible, supported by precedents like ACIT vs. Baldev Raj Charla.
Treatment of competing arguments: The Revenue's reliance on peak credit was countered by the assessee's detailed withdrawal-deposit timeline.
Conclusions: The Tribunal accepted the assessee's explanation and found the addition under section 69A unjustified.

Issue 4: Method of Adopting Peak Credit

Relevant legal framework and precedents: The peak credit method is used to determine the highest unexplained credit balance in an account.
Court's interpretation and reasoning: The Tribunal questioned the CIT(A)'s application of peak credit without considering the context of withdrawals.
Key evidence and findings: The Tribunal noted the assessee's consistent pattern of withdrawals and deposits.
Application of law to facts: The Tribunal found the CIT(A)'s approach overly simplistic, given the evidence of cash flow.
Treatment of competing arguments: The Tribunal favored the assessee's detailed explanation over the Revenue's peak credit reliance.
Conclusions: The Tribunal rejected the peak credit method as applied by the CIT(A).

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The explanation that the cash deposited is out of the cash withdrawn from the bank on earlier occasions cannot be brushed aside."
"The assessee has already demonstrated that the cash withdrawals were with him to make the deposits."

Core principles established:

Reopening of assessments requires a substantive reason to believe income has escaped assessment.
Proper documentation and explanation of cash flow can substantiate claims against unexplained income additions.
The peak credit method must be applied with consideration of the full context of financial transactions.

Final determinations on each issue:

The reopening under section 147 was upheld as valid.
The service of notice under section 148 was not a decisive factor in invalidating proceedings.
The addition under section 69A was deleted, accepting the explanation of cash deposits being sourced from cash withdrawals.
The application of the peak credit method by the CIT(A) was rejected.

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