Reopening Reassessment Solely to Verify Bank Cash Deposits

Reopening Reassessment Solely to Verify Bank Cash Deposits Without Tangible Material Is Without Jurisdiction

Issue

Whether the Assessing Officer can validly initiate reassessment proceedings under Section 147/148 solely to verify the source of cash deposits in an assessee’s bank account, without possessing independent tangible material to form a belief that income chargeable to tax has escaped assessment.

Facts

Reassessment Initiated: For Assessment Years 2010-11 and 2011-12, the Assessing Officer (AO) noted cash deposits in the assessee’s bank accounts.
Reason to Believe: The AO recorded that the assessee had not disclosed the source of these cash deposits or offered them to tax, stating that reopening was necessary to verify the source of income and transactions.
Section 148 Notices: Notices under Section 148 were issued, and reassessment orders were completed treating the cash deposits as unexplained cash credits under Section 68.
Tribunal’s Findings: The ITAT held that mere information regarding cash deposits in a bank account does not automatically lead to the formation of a belief that income has escaped assessment, and there is no mandatory pre-existing requirement to disclose sources of cash deposits prior to an inquiry.
Quashing of Assessment: The Tribunal quashed the reassessment proceedings as lacking jurisdiction and declined to adjudicate on the merits of the addition.

Decision

Reopening an assessment under Section 147/148 merely to conduct a fishing or roving inquiry to verify the source of bank cash deposits is legally impermissible.
In the absence of independent, tangible material showing that the cash deposits represent undisclosed income chargeable to tax, the AO lacks jurisdiction to issue a notice under Section 148.
The ITAT was fully justified in quashing the reassessment proceedings without delving into the merits of the additions, and the issue was decided in favor of the assessee.

Key Takeaways

No Reopening for Verification: Section 147 cannot be used as a tool to conduct exploratory inquiries or verify transactions; the AO must have concrete reason to believe income has escaped assessment, not merely a desire to verify sources.
Cash Deposits Do Not Equal Escaped Income: Information regarding cash deposits in a bank account, standing alone, does not constitute “tangible material” indicating tax evasion.
Jurisdictional Defect Quashes Assessment: If the initial invocation of Section 147/148 lacks jurisdiction due to absence of tangible material, the entire reassessment proceeding is void ab initio, rendering examination of merits unnecessary.

HIGH COURT OF GUJARAT

Principal Commissioner of Income-tax 3

Ashokumar Bhavanbhai Patel

BHARGAV D. KARIA and Niral R. Mehta, JJ.

R/TAX APPEAL NO. 118, 120, 121, 122 of 202

MARCH 4, 2024

Karan Sanghani, Adv. and Mrs Kalpana K Raval for the Appellant. Manish J Shah, Adv. for the Respondent.

ORDER

Bhargav D. Karia, J.- These four Tax Appeals are filed under Section 260A of the Income Tax Act, 1961 (for short, “the Act”) by the appellant -Revenue arising out of the common order dated 6^th March 2023 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Ahmedabad (for short, “the Tribunal”) in ITO v. Ashokkumar Bhavanbhai Patel ITA Nos.1425-1426/Ahd/ 2019 and ITA Nos.1461-1462/Ahd/2019 for the Assessment Years 2010-11 and 2011-12 being cross appeal filed by the assessee and the Revenue.

2. The appellant – Revenue has proposed the following substantial questions of law for the consideration of this Court:

“(a) Whether the Ld. Tribunal was right in quashing and setting aside the reopening of assessment?

(b) Whether the Ld. Tribunal was right in not deciding the merits of the matter and proceeding solely upon the issue of reassessment?”

3. The brief facts of the case are as under:

3.1 The respondent – assessee filed its return of income for the Assessment Years 2010-11 and 2011-12. It was noticed by the Assessing Officer that the assessee had deposited cash in HDFC Bank Limited, Gandhinagar Branch amounting to Rs.15,80,000/-for the Assessment Year 2010-11 and Rs.12,16,500/- in Kotak Mahindra Bank for the Assessment Year 2011-12, but the respondent – assessee did not disclose the source of cash deposit in his bank accounts and did not offer the said income for taxation.

3.2 Therefore, the case of the assessee was reopened for both the Assessment Years by issuing notice dated 30^th March 2016 under Section 148 of the Act.

4. The Assessing Officer passed the assessment order making addition of cash deposit in the bank accounts of the assessee as unexplained income. Similar notice was also issued for the Assessment Year 2012-13 and the assessment order was passed for the said year also.

5. The assessee preferred appeal before the CIT(A). The CIT(A) partly allowed the appeal filed by the assessee.

6. Being aggrieved, both the Revenue and the assessee preferred cross appeal before the Tribunal. The Tribunal, by the impugned judgement and order, disposed of the appeals upholding the challenge of the assessee for the validity of assessment framed under Section 147 of the Act.

7. It was contended before the Tribunal by the assessee that reasons recorded by the Assessing Officer for reopening the assessment could not have led to believe escapement of income at all as the reasons recorded referred to the details of cash deposit in the bank accounts of the assessee as reopening was done only to verify the source of income and the transactions.

8. The Tribunal, therefore, rightly held that there was no mandatory requirement to disclose the source of cash deposit and only information of cash deposit in the bank accounts of the assessee cannot be the basis for formation of belief of escapement of income. The Assessing Officer, has stated in the reasons recorded that the case is being reopened for cash deposit, which cannot be the ground for reopening, as held by the Coordinate Bench of this Court in the case of thePr. CIT v. Manzil Dineshkumar Shah [2018] 406 ITR 326 (Gujarat) which is confirmed by the Hon’ble Supreme Court by rejecting the S.L.P. reported in Pr. CIT v. Manzil Dinesh Kumar Shah (SC) as well as in the case of Vijay Ramanlal Sanghvi v. Asstt. CIT 457 ITR 791 (Gujarat).

9. In the case of Manzil Dineshkumar Shah (supra), it was held as under:

“6. By now it is well settled that even in case where the original assessment is made without scrutiny, the requirement of the Assessing Officer forming the belief that income chargeable to tax has escaped assessment, would apply. Reference in this respect can be made of the judgment in case of Inductotherm (India) P. Ltd. v. M. Gopalan, Deputy Commissioner of Income Tax reported in [2013] 356 ITR 481 (Guj).

7. It is equally well settled that the notice of reopening can be supported on the basis of reasons recorded by the Assessing Officer. He cannot supplement such reasons. The third principle of law which is equally well settled and which would apply in the present case is that reopening of the assessment would not be permitted for a fishing or a roving inquiry. This can as well be seen as part of the first requirement of the Assessing Officer having reason to believe that income chargeable to tax has escaped assessment. In other words, notice of reopening which is issued barely for making fishing inquiry, would not satisfy this requirement.

8. With this background, we may revert to the reasons recorded by the Assessing Officer. Information from the Value Added Tax Department of Mumbai was placed for his consideration. This information contained list of allegedly bogus purchases made by various beneficiaries from Hawala dealers. Assessee was one of them. As per this information, he had made purchases worth Rs.3.21 crores (rounded off) from such Hawala dealers during the financial year 2008-09. According to the Assessing Officer, this information ‘needed deep verification’.”

10. In the facts of the present case also, the reasons recorded by the Assessing Officer for reopening read as under:

“REASONS RECORDED FOR ISSUE OF NOTICE U/S. 148 OF THEI.T. ACT 1961

Information in this case shows that during the FY 200910, the assessee had high value cash deposits amounting to Rs.15,80,000/- maintained with HDFC Bank Ltd. However, the assessee has filed the return of income but has not offered income for taxation, and also not disclosed the source of fund for depositing such amount in the bank account. Thus there was failure on the part of the assessee to disclose fully and truly all the income for taxation. Therefore, to verify the source of income and transaction. I have reason to believe that the income chargeable to tax had escaped to that extent, for AY 2010-11 within the meaning of section 147 of the Act. Hence, in my opinion, this is a fit case for reopening of assessment u/s 147 of the I.T. Act, 1961.”

11. The similar reasons are recorded for the subsequent Assessment Year 2011-12 and 2012-13 also. Similarly, in the case of Vijay Ramanlal Sanghvi (supra), after referring to the decision in the case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Dy. CIT 356 ITR 481 (Gujarat), it was held as under:

“10. In case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Deputy CIT reported in 356 ITR 481 (Gujarat), the Division Bench of this Court observed that for a mere verification of the claim, the power of reopening of assessment could not be exercised and the Assessing Officer cannot seek to undertake a fishing or a roving inquiry and seek to verify the facts which are already on record, as if it were a scrutiny assessment. Similar view was expressed by the Division Bench in case of Deep Recycling Industries v. Dy.CIT (judgment dated 2.08.2016 passed in Special Civil Application No.3611/2013) as well as in case of Krupesh Ghanshyambhai Thakkar (supra). Applying the above decision to the facts of the present case as well as the reasons recorded to reopen the assessment, we are of the opinion that under the guise of reopening the assessment, the Assessing Officer wants to have a roving inquiry. Under the circumstances, in absence of any tangible material to form an opinion that the income chargeable to tax has escaped assessment and in absence of any satisfaction recorded by the Assessing Officer by merely relying upon the information received from the Office of DCIT Central Circle 2(2), Mumbai, the impugned action of reopening the assessment while exercising power under section 148 of the Act cannot be sustained.”

12. In view of the above decisions which are applicable to the facts of the present case, reopening cannot be permitted for fishing or a roving inquiry as the assessee is not required to disclose the source of amount deposited and for verification of the source of deposit, the Assessing Officer cannot reopen the assessment on the ground that the assessee has failed to fully and truly disclose all material of income deposited and therefore, to verify the source of income transaction, notice for reopening was issued. Under the circumstances, in absence of any tangible material to form an opinion that the income chargeable to tax as escaped income and in absence of any satisfaction recorded by the Assessing Officer by merely referring to the cash deposit in the bank accounts of the assessee, the Tribunal has rightly held that reassessment proceedings would be invalid on the basis of the issuance of notice under Section 148 of the Act as the same was without jurisdiction. The Tribunal has, therefore, rightly not quashed and set aside the assessment and therefore, there is no question of deciding the matter filed by the Revenue on merits by the Tribunal.

13. For the foregoing reasons, we are of the opinion that no question of law much less any substantial question of law arises from the impugned order of the Tribunal. The appeals are, accordingly, dismissed.