Cash Deposits Alone Cannot Justify Reassessment Without Tangible Material: Gujarat HC

PCIT Vs Ashokumar Bhavanbhai Patel (Gujarat High Court)

Summary: The Gujarat High Court dismissed four Tax Appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961, arising from the common order dated 6th March 2023 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Ahmedabad, for Assessment Years 2010-11 and 2011-12. The Tribunal had upheld the assessee’s challenge to the validity of reassessment proceedings under Section 147 of the Act.

The Assessing Officer had noticed cash deposits of Rs.15,80,000/- in HDFC Bank Limited for Assessment Year 2010-11 and Rs.12,16,500/- in Kotak Mahindra Bank for Assessment Year 2011-12. The assessee had not disclosed the source of the cash deposits or offered the amount for taxation. Notices under Section 148 were consequently issued on 30th March 2016, followed by assessment orders treating the cash deposits as unexplained income. The CIT(A) partly allowed the assessee’s appeals, after which both sides preferred cross appeals before the Tribunal.

Before the Tribunal, the assessee contended that the reasons recorded for reopening did not establish escapement of income and showed that the Assessing Officer merely intended to verify the source of the cash deposits and transactions. The Tribunal accepted the challenge to the validity of the reassessment.

The High Court considered the reasoning in Principal Commissioner of Income Tax vs. Manzil Dineshkumar Shah and Vijay Ramanlal Sanghvi. It held that reopening cannot be undertaken merely for a fishing or roving inquiry or for verification of the source of a cash deposit. The Court noted the absence of tangible material forming an opinion that income chargeable to tax had escaped assessment and the absence of satisfaction beyond merely referring to the cash deposits.

The Court therefore held that the Tribunal had rightly found the reassessment proceedings invalid and without jurisdiction. It further held that there was no question of law, much less any substantial question of law, arising from the Tribunal’s order. The four appeals filed by the Revenue were accordingly dismissed.

Background and Reassessment Proceedings

The respondent-assessee had filed returns of income for Assessment Years 2010-11 and 2011-12. The Assessing Officer noticed cash deposits of Rs.15,80,000/- in HDFC Bank Limited, Gandhinagar Branch, for Assessment Year 2010-11 and Rs.12,16,500/- in Kotak Mahindra Bank for Assessment Year 2011-12.

According to the assessment proceedings, the assessee had not disclosed the source of the cash deposits in the bank accounts and had not offered the amount for taxation. The cases were therefore reopened by notices dated 30th March 2016 under Section 148 of the Act.

The Assessing Officer subsequently made additions treating the cash deposits as unexplained income. A similar notice was also issued for Assessment Year 2012-13 and an assessment order was passed for that year.

Proceedings Before the CIT(A) and Tribunal

The assessee challenged the assessment orders before the CIT(A), who partly allowed the appeals. Thereafter, both the Revenue and the assessee filed cross appeals before the Tribunal.

The Tribunal, by its common order dated 6th March 2023, upheld the assessee’s challenge to the validity of the assessment framed under Section 147 of the Act.

The Revenue subsequently approached the Gujarat High Court under Section 260A and proposed two substantial questions of law concerning whether the Tribunal was correct in quashing and setting aside the reopening of assessment and whether it was correct in not deciding the merits of the matter after deciding the reassessment issue.

Reasons Recorded for Reopening

The reasons recorded for Assessment Year 2010-11 stated that information showed high-value cash deposits amounting to Rs.15,80,000/- with HDFC Bank Ltd. The reasons further stated that the assessee had filed the return of income but had not offered income for taxation and had not disclosed the source of funds deposited in the bank account.

The Assessing Officer stated that the case was being reopened to verify the source of income and transaction and recorded that he had reason to believe that income chargeable to tax had escaped assessment within the meaning of Section 147 of the Act.

The High Court noted that similar reasons had been recorded for the subsequent Assessment Years 2011-12 and 2012-13.

High Court’s Analysis of Reopening

Reopening Cannot Be Used for Fishing or Roving Inquiry

The Court relied upon the principles stated in Manzil Dineshkumar Shah, where it was held that even where an original assessment was made without scrutiny, the Assessing Officer was required to form a belief that income chargeable to tax had escaped assessment.

The Court also referred to the principle that reopening must be supported by the reasons recorded by the Assessing Officer and that such reasons cannot be supplemented subsequently. Reopening cannot be permitted for a fishing or roving inquiry.

In the present case, the High Court found that the reasons recorded referred to the cash deposits and stated that the case was being reopened to verify the source of income and transaction. According to the Court, mere reference to the cash deposits could not constitute the necessary basis for reopening the assessment.

Absence of Tangible Material and Satisfaction

The Court also relied upon the principles stated in Inductotherm (India) P. Ltd. Vs M. Gopalan, Dy.CIT and Vijay Ramanlal Sanghvi.

In the latter decision, as reproduced in the supplied judgment, the Court had held that for mere verification of a claim, the power of reopening could not be exercised and that the Assessing Officer could not undertake a fishing or roving inquiry under the guise of reopening the assessment.

The Gujarat High Court found that, in the present case, there was no tangible material to form an opinion that income chargeable to tax had escaped assessment and no satisfaction recorded by the Assessing Officer beyond referring to the cash deposits in the assessee’s bank accounts.

Source of Cash Deposit and Reassessment

The Court held that reopening could not be permitted merely to verify the source of the amount deposited in the bank account. It concluded that the assessee was not required, in the circumstances considered by the Court, to disclose the source of the amount deposited in the manner relied upon for initiating the reassessment.

Accordingly, the reasons recorded by the Assessing Officer did not provide a sustainable basis for exercising the power under Section 148 of the Act.

Tribunal’s Order Upheld

The High Court held that the Tribunal had rightly concluded that the reassessment proceedings were invalid on the basis of the notices issued under Section 148 and that the reassessment was without jurisdiction.

The Court further held that since the reassessment proceedings themselves were invalid, there was no question of the Tribunal deciding the merits of the matter in the Revenue’s appeals.

Final Decision

The Gujarat High Court concluded that no question of law, much less any substantial question of law, arose from the impugned order of the Tribunal.

The four Tax Appeals filed by the Revenue were accordingly dismissed.

Cases Discussed

• Principal Commissioner of Income Tax vs. Manzil Dineshkumar Shah — Gujarat High Court — 2018 (406) ITR 326(Guj)
• Vijay Ramanlal Sanghvi vs. Assistant Commissioner of Income Tax — Gujarat High Court — 2003 (146) taxmann.com 55(Guj)
• Inductotherm (India) P. Ltd. Vs M. Gopalan, Dy.CIT — 2013 356 ITR 481 (Guj)
• Deep Recycling Industries v. Dy.CIT — judgment dated 2.08.2016 passed in Special Civil Application No.3611/2013
• Krupesh Ghanshyambhai Thakkar Vs DCIT — Gujarat High Court
• S.L.P. — 2019 (101) com 259(SC)

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

[1] 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 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 the Principal Commissioner of Income Tax vs. Manzil Dineshkumar Shah reported in 2018 (406) ITR 326(Guj) which is confirmed by the Hon’ble Supreme Court by rejecting the S.L.P. reported in 2019 (101) com 259(SC) as well as in the case of Vijay Ramanlal Sanghvi vs. Assistant Commissioner of Income Tax reported in 2003 (146) taxmann.com 55(Guj).

[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 THE I.T. ACT, 1961

10. 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) Ltd vs. M. Gopalan, Deputy CIT reported in (2013) 356 ITR 481, it was held as under:

“10. In case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Deputy CIT reported in (2013) 356 ITR 481, 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.