AO doesn’t possess jurisdiction to tax any other income in reassessment order

Subhash Runwal Vs ITO (ITAT Pune)

ITAT Pune held that once primary reason to believe that income had escaped assessment fails then AO doesn’t possess jurisdiction to tax any other income in reassessment order. Hence, re-assessment is unsustainable and liable to be quashed.

Facts- The assessee is an individual who failed to file his return of income for the year under consideration hence was identified as ‘non-filer’ by the Revenue. Upon the receipt of information that, the assessee deposited a cash of ₹75Lakhs into his saving bank account maintained with ‘Mahesh Sahakari Bank Ltd’ and was in receipt of certain interest of ₹1.625Lakhs from Mr Vinod Jain the case of the assessee was re-opened u/s 148 of the Act vide notice dt. 30/03/2019.

Assessee duly explained that cash deposit was mostly from past immediate cash withdrawals, hence no addition there account was ultimately made in the assessment framed by the Ld. AO.

However the verification of loan ledger accounts of M/s Vinod Construction & M/s BU Bhandari certain discrepancies were noted and when assessee’s explanation could not convincingly clarify such notified discrepancies, AO added the difference of ₹10Lakhs u/s 69 of the Act and ₹2Lakhs u/s 69A of the Act from the former loan ledger accounts respectively and framed the assessment u/s 144 r.w.s. 147 of the Act.

CIT(A) partly allowed the claim by restricting the addition towards interest discrepancies to ₹150/-, further restricted the addition made u/s 69 of the Act to ₹5Lakhs and dismissed the ground relating to difference in loan account of M/s BU Bhandari thus sustained the addition ₹2Lakhs made by Ld. AO u/s 69A of the Act. Being aggrieved, the present appeal is filed.

Conclusion- Held that, if the income which he has initially formed a reason to believe that such income has escaped assessment, which in fact did not escape assessment owning to operation of provisions of clause (b) of s/s (1) of section 139 of the Act then notice falls out of that particular ground, additional grounds are not available to the Revenue for making additions of any other incomes which do not find place in the 148 notice issued to the assessee. Therefore respectfully following the former judicial precedents we hold that the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but was not so justified when the reasons for the initiation of those proceedings ceased to survive. Thus once re-assessment framed is held as unsustainable in the eyes of law then same cannot be continued, hence quashed.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal agitates DIN & Orders ITBA/APL/S/250/2024- 25/1064009952(1) dt. 09/04/2024 passed by the first appellate authority [‘Ld. NFAC/ CIT(A)’ hereinafter] u/s 250 of the Income-tax Act, 1961 [‘the Act’ hereinafter] which in turn sprung out order of assessment passed u/s 144 r.w.s. 147 of the Act by the Income Tax Officer, Ward-5(4), Pune [‘Ld. AO’ hereinafter] for assessment year 2012-13 [‘AY’ hereinafter];

2. Succinctly stated facts of the cases are that;

2.1 The assessee is an individual who failed to file his return of income for the year under consideration hence was identified as ‘non-filer’ by the Revenue. Upon the receipt of information that, the assessee deposited a cash of ₹75Lakhs into his saving bank account maintained with ‘Mahesh Sahakari Bank Ltd’ [‘MSBL’ hereinafter] and was in receipt of certain interest of ₹1.625Lakhs from Mr Vinod Jain the case of the assessee after recording the reasons and obtaining prior approval of competent authority was re-opened u/s 148 of the Act vide notice dt. 30/03/2019.

2.2 In the event of non-compliance from the assessee, the AO invoking the provisions of section 133(6) of the Act obtained a bank statement from MSBL which revealed him actual cash deposits for the year under consideration were to the extent of ₹54,75,000/- as against the information received through Annual Information Return [‘AIR’ hereinafter] on the basis of which case was re-opened. The assessee vide various notice issued to him u/s 148 & followed by 142(1) of the Act was called upon to explain nature & source such cash deposits.

2.3 In pursuance of notices issued the assessee filed his return of income [‘ITR’ hereinafter] declaring total income of ₹1,68,257/- after considering the gross receipts/income received against (i) interest income, including interest received on balance advanced to two parties viz; M/s Vinod Construction & M/s BU Bhandari, (ii) brokerage income and (ii) saving bank interest etc. The said return of the assessee was subjected to scrutiny assessment u/s 143(3) of the Act. In response thereto the assessee explained computation of income and nature & source of such cash deposits made by him. In support of explanation the assessee placed on records cogent evidences which inter-alia consisted of cash book, bank passbook/statement, cash deposit slips, cash withdrawal details, loan ledger accounts, & brokerage accounts etc. The said explanation that such cash deposits mostly were from past immediate cash withdrawals from bank accounts were verified & after finding them in order no addition there account was ultimately made in the assessment framed by the Ld. AO.

2.4 However the verification of loan ledger accounts of M/s Vinod Construction & M/s BU Bhandari certain discrepancies were noted and when assessee’s explanation could not convincingly clarify such notified discrepancies, the Ld. AO added the difference of ₹10Lakhs u/s 69 of the Act and ₹2Lakhs u/s 69A of the Act from the former loan ledger accounts respectively and framed the assessment u/s 144 r.w.s. 147 of the Act thus assessed the total income at ₹14,40,410/- which also included the addition of difference of towards interest income earned from M/s Vinod Construction ₹72,150/-.

2.5 The said additions were agitated by the assessee before first appellate authority in appeal wherein the Ld. CIT(A) partly allowed the claim by restricting the addition towards interest discrepancies to ₹150/-, further restricted the addition made u/s 69 of the Act to ₹5Lakhs and dismissed the ground relating to difference in loan account of M/s BU Bhandari thus sustained the addition ₹2Lakhs made by Ld. AO u/s 69A of the Act.

2.6 Alleging the actions of both the tax authorities as erroneous on as many as fourteen factual argumentative grounds aggrieved assessee came in present appeal. Since these grounds are inconsonance with rule 8 of ITAT-Rules, 1963 the reproduction for the purpose of adjudication is dispensed with.

3. The Ld. AR Mr Upasani appearing on behalf of the appellant adverting to notice issued to the assessee u/s 148 of the Act and additions made u/s 69 & 69A of the Act at the outset of hearing has raised an oral legal ground challenging the additions of other items as escaped income without making any addition towards cash deposits which formed the substantial basis for reopening. It is contended that, since the Ld. AO did make no addition on account of cash deposits made by the assessee which was predominant element in forming the reasons to believe escapement of income, therefore any other addition in view of amended provision of section 147 of the Act r.w.s. explanations thereto is impermissible in law. To drive home this contention the Ld. Mr Upasani pressed into service the decision of Hon’ble jurisdictional High Court rendered in case of ‘CIT Vs Jet Airways (I) Ltd.’ [2010, 331 ITR 236 (Bom)]. Insofar as the merits of the case is concerned, referring to paper book & other material placed on records, the assessee reiterated its version of contentions as were laid before both the tax authorities below and prayed for deletion of balance addition sustained in first appeal.

4. Per contra, without objecting admission of legal ground raised first-time in present proceedings, the Ld. DR Mr Rajpurohit averred that, said legal ground shall buy no relief to the assessee as while invoking reassessment jurisdiction cash deposit was not only the sole issue but also the interest income undisclosed by the The notice issued u/s 148 of the Act precisely stated two items of escaped income i.e., (1) cash deposits as well as (2) interest income earned by the assessee from M/s Vinod Construction represented by Mr Vinod Jain. In this case since addition towards one of the items (i.e., escaped interest income) which along-with other item also founded the reasons to believe, is made therefore the Ld. AO was well within his jurisdiction to assess any other item which came to his notice during the course of such reopened assessment. Hence the ratio of ‘CIT Vs Jet Airways’ (supra) has no application to the case in hand. Coming to the merits of addition sustained by Ld. CIT(A) it is submitted that, on re-verification substantial relief is already granted and only upon appellant’s failure to disprove balance addition on merits, the same is sustained, therefore there is much-less merits for further relief.

5. We have heard the rival contentions and subject to rule 18 of ITAT-Rules, perused the material placed on records and case laws relied upon by both the parties, considered the facts of the case in the light of settled position of law which also forewarned to parties present.

6. In adjudicating the issues under appeal, we have to first deal with the question as to ‘whether a legal ground raised first time before the Tribunal can be admitted?’ more specifically when it was not raised before the first appellate authority but the subject matter of impugned orders assailed against. In this context, it shall suffice to quote that, the legal ground raised by the appellant first time in the present appeal goes to the root of the matter and admittedly no new facts are required to be investigated or verified for the purpose of its adjudication, therefore such being a legal ground whether raised in written or orally during the course of proceedings deserves admission in the light of ratio laid down by the Hon’ble Apex Court in ‘National Thermal Power Co. Ltd. Vs CIT’ [1998, 229 ITR 383 (SC)]. After due consideration of appellant’s plea and submission, we are satisfied that, the omission to raise aforestated legal ground while filing the memorandum of appeal in the extant case was neither wilful nor unreasonable, for the reason we deem fit to admit it in the light of ‘CIT v Western Rolling Mills Pvt. Ltd.’ [1985, 156 ITR 54 (Bom)], ‘Jute Corporation of India Ltd. v CIT’ [1991, 187 ITR 688(SC)] and ‘Ahmedabad Electricity Co. Ltd. v CIT’ [1993, 199 ITR 351(Bom)]. Ergo, same is admitted and advanced accordingly.

7. We shall now deal with the admitted legal ground which seeks to quash the reassessment for the reason that when no addition of income is made on the basis of which reasons for escapement was recorded for issuance of notice u/s 148 of the Act, then Ld. AO ceased to possess any legal jurisdiction u/s 147 of the Act to tax any other income. In the instance case, we observed that, while recording the reasons for invocation of reassessment jurisdiction the Ld. AO had information from AIR which explicitly spelt-out two items viz; (1) cash deposits of ₹44.75Lakhs and (2) interest of ₹1.625Lakhs. Admittedly, no addition was made on account of cash deposits being fully explained by the assessee with cogent evidences. However, when reassessment order u/s 144 r.w.s. 147 was passed, the Ld.

AO besides making a token addition of interest income of out of the reasons recorded was also made two bullet additions which newly came to his notice during such reopened proceedings; (1) ₹10Lakhs on account of discrepancies in loans advanced to M/s Vinod Construction as unexplained investment u/s 69 of the Act & (2) ₹2Lakhs on account of discrepancies in money transactions with M/s BU Bhandari. Thus the former two addition u/s 69 and u/s 69A were made by invoking explanation 3 to section 147 of the Act. Therefore in adjudicating the legal issue under challenge, we have to deal with relevant fraction of provisions of section 139, section 147, and 149 of the Act.

8. In terms of section 139(1)(b) of the Act, a person being other than company or firm is not under obligation to file return of income if the total income of such person (including the total income of any other persons in respect of which such person is assessable) from all five sources of income as subscribed u/s 14 of the Act (heads of income) does not exceed maximum amount not chargeable to tax [‘Basic Exemption Limit’ or ‘BEL’ hereinafter]. That is to say liability fastened u/s 139(1)(b) of the Act for filing return of income arises only when the total income from all the sources exceeds BEL and not otherwise.

9. On the other hand, for issuance of notice 148 of the Act, the time limit qua quantum of income chargeable to tax has escaped assessment are set u/s 149 of the Act. For the year under consideration the relevant provision as was in force that;

149 Time Limit for notice.

[(1) No notice under section 148 shall be issued for the relevant assessment year,—

[(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) [or clause (c)];

(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year;]

[(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.]

(Emphasis supplied)

10. The conjoint reading of section 139(1)(b) and 149(1)(b) of the Act plainly suggest that, the limit of escaped income set in section 149 of the Act is excluding the amount of BEL embedded in section 139(1)(b) of the Act. By application of stricter interpretation of law laid by Hon’ble Apex Court in ‘CoC(I) Mumbai Vs Dilip kumar & Co’ [2018, 9 SCC 1 (SC)] we say so because if the limit of escaped income set in 149 of the Act is considered to be inclusive of BEL, then it would grant license to the Revenue to issue notice u/s 148 of the Act invariably against all the persons [as defined u/s 2(31) r.w.s. 139(1)(b) of the Act] for their failure to file return in the grip of escapement who may not have earned even a ‘penny’ as income. This interpretation of the law would have draconically defeated the purpose & intent of both section 139(1)(b) and 149(1) of the Act.

11. Now coming to present case, we note that, the total income of the appellant for the year under consideration from all sources (interest & brokerage) did not exceed the BEL, hence admittedly the assessee was neither under obligation nor did he file return of his income u/s 139 of the Act. When the case of the appellant u/s 148 r.w.s. 149(1)(b) of the Act was reopened alleging that there has been escapement income of ₹46,37,500/- arisen to him from two grounds / items i.e., (1) cash deposits of ₹44,75,000/- (2) interest income of ₹1,62,500/-, the assessee did file his return in response thereto declaring net taxable income of ₹1,68,257/-. The material placed on records evidently suggests that, in arriving at former returned income the appellant did fully consider the gross interest income which was one of the two determinants in forming a believe for invoking the reassessment jurisdiction. The appellant being a person i.e., other than company or firm thus in terms of section 139(1)(b) of the Act was entitled to protected BEL ceiling. Since total taxable income arisen to him from all sources including interest & brokerage did not cross the former BEL ceiling, the appellant was absolved from filing requirement, Hence by operation of clause (b) of s/s (1) of section 139 of the Act the addition of interest made while framing the re-assessment u/ 144 r.w.s. 147 of the Act in first place cannot to be said to escaped income, therefore such interest do not solitary could have formed basis for invoking reassessment jurisdiction. On the other hand, records also reveals us that, the addition of interest made by the Ld. AO while framing reassessment u/s 144 r.w.s. 147 of the Act was ill-believed as such addition was not only without any substance but purely was to outdo the settled law and to buy the extended scope subscribed in explanation 3 to section 147 of the Act as there was no addition on first ground/item. This factum when caught sight in first appeal, the Ld. CIT(A) elegantly retained a symbolic portion of such interest addition just to push the case in explanation 3 to section 147 of the Act and consequently to shield additions of other items made outside the purview of 148 notice.

12. Inversely, we also note that, the absence of first ground/item i.e. Cash deposits in this case could have given no power to the Ld. AO to invoke section 147/148 of the Act as the later ground/item which jointly founded the basis for forming reasons to believe was solely incapable of triggering the invocation of reassessment jurisdiction owning to provisions of section 139(1)(b) of the Act. This is more so when addition on this later ground/item i.e. interest did not individually exceed the maximum amount not chargeable to tax e. ₹2,50,000/-. Therefore, for the purpose of adjudicating the validity of re-assessment in view of the law settled by the Hon’ble Jurisdictional Bombay High Court in ‘CIT Vs Jet Airways (I) Ltd.’ (supra) addition of interest of ₹72,150/- made by the Ld. AO which later restricted to ₹150/- by Ld. CIT(A) is floccinaucinihilipilification, hence to be given no consideration, treated & advanced accordingly.

13. Admittedly in the reassessment, the Ld. AO had made no addition in relation to first ground/item despite the fact that he had reason to believe that cash deposits had escaped assessment in the hands of the assessee which was sought to be taxed as per the reasons recorded. The second item ‘interest’ per se was insufficient to give rise to escapement of income on solitary basis so as to trigger the invocation of reassessment jurisdiction u/s 148 r.w.s. 149(1)(b) r.w.s. 139(1)(b) of the Act. Hence, when the very basis of reasons recorded ‘cash deposits’ by the Ld. AO was ultimately not added, then the primary reason to believe that income had escaped assessment fails and such reassessment cannot be treated as a valid order in the eyes of law.

14. The above issue for our consideration is no longer res integra, as the Hon’ble Jurisdictional High Court after sumptuous consideration of explanation 3 to section 147 of the Act, while adjudicating the issue in ‘CIT Vs Jet Airways (I) Ltd.’ (supra) held that when reasons are recorded for bringing to tax ‘X’ income and no assessment is made on the ‘X’ income, the AO does not possess the jurisdiction to tax any other income in the reassessment order. This ratio finds reiterated in ‘SV Jadhav Vs ITO’ [2024, 163 Taxmann.com 263 (Bom)], and also followed in ‘Ranbaxy Laboratories Ltd. Vs CIT’ [2011, 242 CTR 117 (Del)], ‘ACIT Vs MD Mehta’ [24 Taxmann.com 147 (Cha)] and ‘Ganesh Housing Corp. Ltd. Vs DCIT’ [2021, 207 Taxman 180 (Guj)].

15. In view of the aforestated discussion and judicial precedents we are of the considered view that, if the income which he has initially formed a reason to believe that such income has escaped assessment, which in fact did not escape assessment owning to operation of provisions of clause (b) of s/s (1) of section 139 of the Act then notice falls out of that particular ground, additional grounds are not available to the Revenue for making additions of any other incomes which do not find place in the 148 notice issued to the assessee. Therefore respectfully following the former judicial precedents we hold that the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but was not so justified when the reasons for the initiation of those proceedings ceased to survive. Thus once re-assessment framed is held as unsustainable in the eyes of law then same cannot be continued, hence quashed. The legal ground raised in present proceedings thus stands allowed; therefore delving deeper into merits of other additions rendered academic hence snoozed off.

16. In result, the appeal of the assessee is Allowed.

In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Tuesday, 01st day of October, 2024