2021 (11) TMI 856 - AT - Income Tax

Invalid reassessment order under Section 147 leads to successful appeal for the assessee

The Tribunal held that the reassessment order under Section 147 was invalid as there was insufficient information to establish income escapement. ... Revision u/s 263 by CIT - Reopening of assessment u/s 147 initiated against assessee - As pe CIT AO had failed to make independent inquiries to verify the source of cash deposited in bank by the assessee and also the claim of interest expenditure as per section 36(1)(iii) - HELD THAT:- What is crucial and important for assuming the jurisdiction to reopen the case of an assessee u/s 147 of the Act is the “belief of the AO of the escapement of income”. The mere fact that the cash is found deposited in the bank account may lead to a suspicion at best but it definitely cannot lead to belief of escapement of income. The cash deposit may be justified by the facts and figures revealed in the income tax return filed by the assessee. In any case there has to be more information in the possession of the AO to form belief that the cash deposits represent assesses own escaped income. In the present case we find that the AO has no categorical information in his possession either regarding the fact of return having been filed by the assessee nor any other information to the effect that the source of the cash deposits was unexplained. No inquiries were independently conducted by the AO regarding the source of cash deposits, which would have surely assisted in the formation of belief of escapement of income with regard to the same. The reasons recorded therefore do not justify the assumption of jurisdiction by the AO to reopen the case of the assessee u/s 147 of the Act. The order passed u/s 147 of the Act therefore is clearly not a valid order in the eyes of law. Collateral proceedings on the said order, u/s 263 of the Act, are therefore, we agree, not sustainable in law. The order passed by the Ld.PCIT u/s 263 of the Act is accordingly set aside. - Decided in favour of assessee. Issues Involved:1. Assumption of Revisionary Jurisdiction under Section 263 of the Income Tax Act.2. Validity of the Original Assessment Order under Section 147 of the Income Tax Act.3. Principles of Natural Justice.Issue-wise Detailed Analysis:1. Assumption of Revisionary Jurisdiction under Section 263 of the Income Tax Act:The Principal Commissioner of Income Tax (Pr.CIT) exercised revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, on the grounds that the Assessing Officer (AO) passed the reassessment order under Section 147 in undue haste without conducting necessary inquiries. Specifically, the Pr.CIT found that the AO failed to independently verify the source of cash deposits in the assessee's bank account and the claim of interest expenditure under Section 36(1)(iii) of the Act. Consequently, the Pr.CIT cancelled the AO’s order and directed a fresh assessment in accordance with the law.2. Validity of the Original Assessment Order under Section 147 of the Income Tax Act:The assessee challenged the validity of the original assessment order under Section 147, arguing that the reasons for the reassessment were based on incorrect facts and demonstrated non-application of mind by the AO. The reasons recorded for reopening the case were primarily based on the information of cash deposits in the bank account, which the AO believed to be unexplained due to the non-availability of the assessee's return of income in the tax system. However, it was later acknowledged that the assessee had indeed filed the return, creating inconsistencies in the AO’s reasoning.The Tribunal found merit in the assessee’s contention that the AO’s belief of escapement of income was not based on tangible material. The information available to the AO, primarily the cash deposits, could at best lead to suspicion but not to a belief of income escapement. The AO did not conduct independent inquiries to verify the source of the cash deposits. The Tribunal held that the AO’s reasons for reopening the case did not justify the assumption of jurisdiction under Section 147, rendering the reassessment order invalid.3. Principles of Natural Justice:The assessee argued that the Pr.CIT violated the principles of natural justice by exercising revisionary powers under Section 263 without proper justification. The Tribunal noted that the validity of the original assessment order could be challenged in collateral proceedings, based on the principle that neither estoppel nor res judicata applies when jurisdiction is in question. The Tribunal cited various judicial precedents supporting the view that the legality of primary proceedings can be contested in subsequent or collateral proceedings.Conclusion:The Tribunal concluded that the reassessment order passed under Section 147 was not valid due to the lack of sufficient information to form a belief of income escapement. Consequently, the revisionary order under Section 263, based on the invalid reassessment order, was also unsustainable in law. The Tribunal set aside the Pr.CIT’s order under Section 263, allowing the assessee’s appeal. The adjudication on the merits of the case was deemed academic and not addressed further. The appeal was allowed, and the order was pronounced on 02.11.2021.