2016 (3) TMI 90 - AT - Income Tax

Validity of reopening of assessment - undisclosed deposit in the bank account of the assessee - Held that - The basic requirement for reopening of assessment that the AO must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment was found to be missing when the AO proceed to reopen the assessment which is in nature of a post mortem exercise after the event of reopening of the assessment. Therefore the reopening of the assessment was found to be invalid as it does not satisfy the requirement of law that prior to the reopening of the assessment the AO has to apply his mind to the material and conclude that he has reason to believe that income of the assessee has escaped assessment. Applying the above proposition of law it leaves no doubt in the mind that in the case on hand the AO has reopened the assessment mechanically without application of mind to conclude that the said amount of ₹ 6 lac deposit in the bank account of the assessee constitutes the income of the assessee and the same has escaped assessment. The decision relied upon by the ld DR is not applicable in the facts of the present case because in the said case not only the accommodation entry were found by the investigation wing but the modus operandi was also detected and therefore it was found that the AO was having the sufficient material and information to form the believe that the income assessable to tax has escaped assessment. In view of the facts and circumstances as well as the decisions relied upon by the AR, the reopening is in the case of the assessee is not valid - Decided in favour of assessee

Summary

Issues Involved:

1. Validity of reopening proceedings under Section 148.
2. Addition of cash deposit of Rs. 6,00,000.
3. Addition beyond reasons: Low household withdrawals reduced to Rs. 55,000.

Issue-wise Detailed Analysis:

1. Validity of Reopening Proceedings under Section 148:

The primary contention raised by the assessee was the invalidity of the reopening action under Section 148. The assessee argued that the reopening was based on errors and omissions, particularly the mistaken belief that the assessee had not filed a return of income for the assessment year 2006-07. The assessee had indeed filed a manual return on 31st March 2007, which declared an income of Rs. 1,12,030. The reopening was initiated based on information from the Investigation Wing regarding a cash deposit of Rs. 6,00,000 in the assessee's bank account, without any new material or information indicating that this amount was assessable income that had escaped assessment.

The tribunal noted that the Assessing Officer (AO) proceeded under the wrong presumption that the assessee had not filed a return, leading to the reopening without verifying the records. The AO's belief that the income had escaped assessment was based solely on the cash deposit information, without any direct nexus or tangible material linking the deposit to assessable income. The tribunal emphasized that the reopening should not be used for investigation purposes but should be based on legitimate reasons to believe that income had escaped assessment. The tribunal referred to various judgments, including those of the Karnataka High Court and the Supreme Court, to support the view that mere cash deposits do not constitute sufficient grounds for reopening an assessment. Consequently, the tribunal held that the reopening of the assessment was invalid and quashed it.

2. Addition of Cash Deposit of Rs. 6,00,000:

The assessee contended that the cash deposit of Rs. 6,00,000 in the bank account was sourced from a cash withdrawal of the same amount on the same date from the same bank. The AO, however, did not accept this explanation and treated the deposit as unexplained income. The tribunal observed that there were multiple withdrawals and deposits in the assessee's bank account, and the AO did not have any tangible material to believe that the deposit constituted assessable income. The tribunal reiterated that the AO's reopening was based on the incorrect assumption that the cash deposit was unexplained, without any direct nexus to assessable income. As the reopening itself was held invalid, the tribunal did not need to further address the addition of the cash deposit.

3. Addition Beyond Reasons: Low Household Withdrawals Reduced to Rs. 55,000:

The assessee also challenged the addition of Rs. 58,000 on account of alleged low household withdrawals, arguing that it was beyond the scope of reopening and not supported by any cogent material on record. The tribunal did not specifically address this issue in detail, as the primary ground of invalid reopening was upheld, rendering other grounds infructuous.

Conclusion:

The tribunal quashed the reopening of the assessment under Section 148, holding it to be invalid due to the AO's incorrect assumption and lack of tangible material linking the cash deposit to assessable income. Consequently, other grounds of appeal became infructuous, and the appeal of the assessee was allowed. The tribunal emphasized the necessity for the AO to apply their mind to the material before forming a belief that income had escaped assessment, rather than using reopening as a means for investigation.