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Bir Bahadur Singh v. Ito
Structured Summary of the Court's Opinion
Factual and Procedural Background
This appeal was filed by the assessee against the order dated 26 May 2011 passed by the learned Commissioner of Income Tax (Appeals) in relation to assessment under section 143(3) read with section 147 of the Income Tax Act, 1961 for the assessment year 2008-09.
The assessment had been reopened by the Assessing Officer. The reasons furnished to the assessee (via letter dated 25 April 2012) stated that during the financial year 2007-08 the assessee had made cash deposits of Rs. 10,24,100 in his savings bank account and that no return of income was filed by the assessee. On the basis of this, the Assessing Officer recorded a reason to believe that income chargeable to tax had escaped assessment and issued a notice under section 148 on 14 September 2009 which was served on the assessee's counsel on the same date.
The appeal raises, among other grounds, the validity of the reassessment proceedings. The principal question for adjudication was whether reassessment proceedings could lawfully be initiated on the basis of the reasons recorded by the Assessing Officer.
Legal Issues Presented
- Whether reassessment proceedings under section 147/148 can be lawfully initiated on the basis of the reasons recorded (specifically, whether cash deposits in the assessee's bank account without further material constitute a reason to believe that income chargeable to tax has escaped assessment).
- Whether the statutory requirement that reasons for reopening an assessment must be recorded before issuance of notice was complied with in this case (the reasons produced showed a mention of service of notice).
Arguments of the Parties
Appellant (the Assessee)
- The opinion identifies that the assessee filed the appeal and challenged the validity of the reassessment proceedings (grounds of appeal no. 1 and 2). The opinion does not provide a detailed, itemised account of the assessee’s submissions beyond the fact of this challenge.
Respondent (Department / Departmental Representative)
- The Departmental Representative contended that deposits in the bank account, reflected through information available (for example, AIR), can constitute sufficient material on which the Assessing Officer may form a reason to believe that income had escaped assessment.
- She relied on several judicial decisions to support the proposition that at the initiation stage what is required is the existence (rather than the adequacy) of material indicating escapement of income.
- The Departmental Representative specifically referred to the decisions in CIT v. Nova Promoters & Finlease (P.) Ltd, Phool Chand Bajrang Lal v. ITO and a coordinate bench decision in Mithila Credit Services Ltd. v. ITO, among other precedents mentioned.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| National Thermal Power Co. Ltd. v. Commissioner Of Income Tax [1998] 229 ITR 383 | Authority that an assessee is not precluded from raising a legal issue on appeal even if it was not raised before the authorities below. | The court relied on this principle to allow consideration of the assessee's challenge to the validity of reassessment even though the issue was not examined by the CIT(A). |
| Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxmann 1 | Principle that the Assessing Officer must have recorded reasons to believe escapement of income before issuing notice under section 147/148. | The court invoked this authority to hold that, where reasons are recorded after issuance of the notice (or show service of the notice), the reassessment proceedings fail for want of reasons recorded prior to issuance of notice. |
| Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxmann 479 | Reasons recorded for reopening must be read as they were recorded; no additions, deletions or inferences from unrecorded reasons are permissible; reasons must be self-explanatory and provide the link between conclusion and evidence. | The court applied this principle to examine only the reasons as recorded and to require that those reasons themselves indicate escapement of income rather than merely pointing to desirability of further inquiry. |
| ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 | Reasons for formation of belief must have a rational connection or direct nexus between the material coming to the notice of the ITO and the belief of escapement of income; not every vague or remote material suffices. | The court used this decision to require a direct nexus between the recorded reasons (material) and the conclusion that income has escaped assessment. It found no such nexus in the present reasons which merely recorded bank deposits. |
| CIT v. Nova Promoters & Finlease (P.) Ltd [2012] 342 ITR 169/206 Taxmann 207 | Invoked by the Departmental Representative to support reliance on bank deposits/AIR as sufficient material. | The court observed that the decision did not relate to the legal issue of reopening of assessment and that the questions before that High Court did not concern reopening; consequently, it held that the decision could not be treated as authority on the specific legal issue in this case. |
| Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 | Authority where the Supreme Court held reassessment was rightly initiated on the basis of subsequent information that was specific, relevant and reliable and after recording reasons. | The court distinguished the present facts from Phool Chand, stating it did not see material facts in the present case materially similar to those in Phool Chand. |
| Mithila Credit Services Ltd. v. ITO (IT Appeal No. 1078/Delhi of 2013; dated 23.5.2014) | Decision where reopening was based on specific information from Directorate of Investigation indicating the assessee's name as a beneficiary of alleged bogus transactions. | The court noted the factual distinction: in Mithila Credit the recorded reasons pointed to beneficiary status in alleged bogus transactions; in the present case only bank deposits were recorded and such deposits by themselves did not indicate income escaping assessment. |
Court's Reasoning and Analysis
The court proceeded in a step-by-step fashion, applying established legal principles to the recorded reasons:
- Procedural requirement as to timing of reasons: The court observed that the reasons produced show a mention of service of the notice dated 14 September 2009, which indicates the reasons were recorded after issuance of the notice. The court emphasised the elementary requirement that reasons must be recorded before issuance of the notice under section 148; relying on Prashant S. Joshi, the court held that absence of reasons recorded prior to notice is alone fatal to reassessment.
- Examination of the content of the recorded reasons alone: The court reiterated the settled principle (from Hindustan Lever) that reasons must be examined as recorded—no additions, deletions, or inferences from unrecorded material are permissible. The court must "hear" only the reasons that the Assessing Officer recorded; nothing external can be used to bolster those reasons.
- Nexus between reasons and escapement of income: Citing ITO v. Lakhmani Mewal Das, the court required a rational connection or direct nexus between the material forming the basis of belief and the conclusion that income has escaped assessment. The court distinguished between (a) factors that directly indicate escapement of income (cause and effect relationship), and (b) factors that merely suggest a need for inquiry which might lead to detection.
- Application to the facts: The recorded reasons only stated that cash deposits of Rs. 10,24,100 had been made in the assessee's bank account and that no return was filed. The court held that such deposits, by themselves, do not establish that the deposits constitute undisclosed income. The reasons did not show that the assessee was engaged in a business or that the deposits represented income chargeable to tax; therefore there was no direct nexus between the recorded material and escapement of income.
- Consideration of the Department’s precedents: The Departmental Representative's reliance on cases where bank deposits or AIR information supported reassessment was considered. The court found Nova Promoters not to have decided the reopening issue, Phool Chand factually distinguishable, and Mithila Credit to have involved specific information showing beneficiary status in bogus transactions—facts not present here. The court accepted the general proposition that existence (not adequacy) of material is to be seen at the initiation stage, but reaffirmed that the material still must indicate escapement rather than merely justify further inquiry.
- Conclusion from the foregoing: On the dual bases that (a) the recorded reasons appear to have been recorded after issuance of notice (procedural defect), and (b) on their face the recorded reasons (bank deposits) do not demonstrate a rational nexus to escapement of income, the reassessment proceedings were held to be unsustainable.
Holding and Implications
Holding: The reassessment proceedings initiated by the Assessing Officer are quashed and the appeal is allowed.
Implications:
- Direct effect: The reassessment proceedings under section 147/148 are quashed. Consequently, all consequential additions made in the impugned reassessment proceedings are rendered academic and infructuous.
- Broader precedent: The opinion applies established authorities concerning (a) the procedural requirement that reasons be recorded prior to issuance of notice, (b) the requirement that recorded reasons must be read as they stand, and (c) the need for a rational nexus between recorded material and escapement of income. The court distinguished several precedents relied upon by the Department on the facts of the present case. The opinion does not state that it is creating a new legal principle beyond the application of existing decisions.
End of summary based exclusively on the provided opinion.
ORDER
Pramod Kumar, Accountant Member - This appeal, filed by the assessee, call into question correctness of the order dated 26th May 2011 passed by the learned CIT(A) in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961, for the assessment year 2008-09.
2. It is a case of reopened assessment, and one of the grievances raised in this appeal, as set out ground of appeal no. 1 as also ground of appeal no. 2, is against the validity of reassessment proceedings. We will take up this issue first.
3. This assessment was reopened, as noted in the reasons recorded for reopening the assessment- furnished to the assessee vide Assessing Officer's letter dated 25th April 2012, on the following ground:
"During the financial year 2007-08, the assessee has made transaction of Rs 10,24,100 (deposits in cash) in his saving bank account but no return of income was filed by the assessee. As such, it was reason to believe that there is an escapement of income at Rs 10,24,100 on the part of the assessee. Therefore, in the light of the above fact that the income chargeable to tax for the assessment year 2008-09 has escaped assessment within meanings of section 147 of the Income Tax Act, notice was issued under section 148 on 14.9.2009 which was served upon the assessee through his counsel Sri Arun Kumar Agarwal, Advocate, on 14/09/2009."
4. The short question that we are required to adjudicate is whether or not, on the basis of the above reasons, reassessment proceedings can be lawfully initiated. This aspect of the matter was not examined by the CIT(A), but, as is the settled legal position in the light of Hon'ble Supreme Court's judgment in the case of National Thermal Power Co. Ltd. v. Commissioner Of Income Tax [1998] 229 ITR 383 , the assessee is not precluded from raising this legal issue at this stage, on the ground that the same has not been raised before the authorities below. Learned Departmental Representative, in all fairness, did not raise this technicality either. We, therefore, proceed to examine this issue on merits.
5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
6. A plain look at the reasons for reopening the assessment, as produced before us, show that these reasons were recorded after the notice was served on 14th September 2009 as a mention about the fact of service of notice is set out in the recorded reasons itself. It is only elementary that the reasons are to be recorded before issuance of notice, and in the absence of any reasons for reopening having been recorded prior to reopening of assessment, the reassessment proceedings fail for this short reason alone. Hon'ble Bombay High Court, in the case of Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxmann 1 has observed: "The AO must have reasons to believe that such is the case (i.e. any income chargeable to tax has escaped assessment for a particular year) before he proceeds to issue notice under s. 147". In other words, when no reasons are recorded for reopening the assessment prior to issuance of notice, the reassessment proceedings must fail for that reason alone. However, for the reasons we will set out now, the conclusions will be no different even if it is presumed that this communication, extracts from which are reproduced before, only conveys the reasons already recorded prior to issuance of notice.
7. It is well settled in law that reasons, as recorded for reopening the reassessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor anything can be deleted from the reasons so recorded. Hon'ble Bombay High Court, in the case of Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxmann 479 , has, inter alia, observed that "……….It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons." Their Lordships added that "The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….". Therefore, the reasons are to be examined only on the basis of the reasons as recorded. The next important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment, all that is necessary is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. While dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 ,
" the reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."
8. Let us, in the light of this legal position, revert to the facts of the case before us. All that the reasons recorded for reopening indicate is that cash deposits aggregating to Rs 10,24,100 have been made in the bank account of the assessee, but the mere fact that these deposits have been made in a bank account does not indicate that these deposits constitute an income which has escaped assessment. The reasons recorded for reopening the assessment donot make out a case that the assessee was engaged in some business and the income from such a business has not been returned by the assessee. As we donot have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether the assessee could be said to be engaged in any business; all that is to be examined is whether the fact of the deposits, per se, in the bank account of the assessee could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs 10,24,100 has escaped assessment of income because the assessee has Rs 10,24,100 in his bank account but then such an opinion proceeds on the fallacious assumption that the bank deposits constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escaped assessment.
9. Learned Departmental Representative has referred to a number of judicial precedents in support of her stand that even deposits in the bank account, as having come to the notice of the Assessing Officer through AIR, can be reason enough for holding the belief that income has escaped assessment. She has relied upon the decisions in the cases of CIT v. Nova Promoters & Finlease (P.) Ltd [2012]342 ITR 169/206 Taxmann 207/18 taxmann.com 217 (Delhi) but then none of the questions before Honble High Court had anything to do with reopening of assessment and this decision can not, therefore, be taken as an authority on the legal issue which did not even come up for specific adjudication before Their Lordships. As for her reliance on Honble Supreme Courts judgment in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456/69 Taxmann 627 , that was case in which Their Lordships concluded that the AO "rightly initiated the reassessment proceedings on the basis of subsequent information, which was specific relevant and reliable, and after recording the reasons for formation of his own belief that in the original assessment proceedings, the assessee had not disclosed the material facts truly and fully and, therefore, income chargeable to tax had escaped assessment" and we are unable to see anything on the facts of the present case which are materially similar to the facts of the said case. As regards her reliance on the decision of a coordinate bench in the case of Mithila Credit Services Ltd. v. ITO [IT Appeal No. 1078/Delhi of 2013; dated 23.5.2014], it is important to bear in mind the fact that it was a case in which the Assessing Officer had reopened the assessment on the basis of receipt of information from Directorate of Investigation, and, as noted by the Assessing Officer in the reasons recorded for reopening the assessment, "the name of the assessee figures as one of the beneficiaries of these alleged bogus transactions" in the information given by the directorate. If the assessee was a beneficiary of such a scam, the income was indeed to have been taxed in its hands but then in the case before us the only reason for reassessment proceedings was the fact of deposit of bank account which by itself does not lead to income being taxed in the hands of the assessee. Learned Departmental Representative has referred to several other judicial precedents in support of the proposition that at the stage of initiation of reassessment proceedings, all that is to be seen as existence, rather than adequacy, of the material to come to the conclusion that income has escaped assessment. To us, there cannot be any, and there is no, doubt on the correctness of this proposition but then, as we have elaborately explained earlier in this order, the material must indicate income escaping assessment rather than desirability of further probe in the matter which may or may not lead to income escaping the assessment. On the basis of reasons as recorded in this case, such an inference about income escaping assessment, in our humble understanding, cannot be drawn.
10. In view of the reasons set out above, as also bearing in mind entirety of the case, we are of the considered view that the reasons recorded by the Assessing Officer, as set out earlier, were not sufficient reasons for reopening the assessment proceedings. We, therefore, quash the reassessment proceedings. As the reassessment itself is quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous.
11. In the result, the appeal is allowed in the terms indicated above.
rahul
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