2022 (1) TMI 1496 - AT - Income Tax

Reopening under s.148 and sanction under s.151 upheld; unexplained bank credits taxed under s.68, appeal dismissed

Arun Duggal Versus DCIT, Central Circle-1, Faridabad

ITAT upheld the validity of reopening under s.148 and sanction under s.151, finding the AO had prima facie reasons to believe escapement of income and ... Validity of assumption of jurisdiction u/s 148 - Validity of reasons recorded u/s 148(2) and validity of sanction u/s 151 - Reasons to beileve - Addition u/s 68 HELD THAT:- At the time of reopening what is required is reasons to believe with regard to escapement of income, AO is not required to establish escapement of income. Establishing escapement of income is the culmination of examination of material and investigation of the facts following the due procedure as envisaged in the Income Tax Act. What is necessary to reopen an assessment is not a final verdict but a prima facie reason. In the instant case, neither the information was wrong nor the reasons to believe were faltered. Hence, we uphold the action of revenue authorities on the issue of impugned u/s 148. Further, from the record, we also find that the assessee was given the entire record for inspection. Hence, the argument of that the relevant information has not been given to the assessee cannot be accepted. The order sheet entries of the AO reveals that “Sh. Vijay Singhla, CA filed a letter seeking inspection of record and filed a challan of Rs. 400/- for the same. Copy of the reasons has also been supplied to him, inspection of the record has also been made by the counsel.” Hence, the contention of the assessee is against the facts on record. Nothing has been done behind the back of the assessee and the assessee has been given ample opportunities on various occasions as to why the case has been reopened and as to what the amounts the revenue is proposing to bring to tax. Assessee has failed every time and feigned ignorance about the account which has opened with his full knowledge and conscience. With regard to the cross examination of Mr. Banga as sought by the assessee, the same could not be provided as Sh. Banga stand left to the heavenly abode. AO cannot be expected to do the impossibility. The principles of natural justice was depend on the circumstances of each case, the set of facts that surround each situation, the nature of enquiry, the rules that govern that procedure, the subject matter being dealt with and the prejudice that can be caused to either side. The principles of natural justice as observed by House of Lords is not engraved on tablets of stone, the rules of natural justice are flexible to adopt to situation and circumstances to advance the cause of justice. Hence, we find that no infarction of principles of natural justice can be attributed to the conduct of the revenue authorities. We find that the revenue department has been conducted enquiries with the bank as to the transactions of the account. The assessee has vehemently argued that entire reopening and assessment is made on the basis of mere credit in the bank account and the credit cannot be called as real income in the hands of the assessee. We reiterate the bare facts of this case, that the assessee has opened, operated and owned two bank accounts in which Rs. 12.81 crores duly deposited. The assessee before the revenue authorities on various occasions denied the knowledge of having any such account. During the statement recorded on 29.12.2015, the assessee said that he was no way associated with Alfa India and he was hearing the name for the first time during the assessment proceedings also the assessee contended that he received nothing from Alfa India and explained that it is operated at the instruction of M/s Jagjit Industries Ltd. Late Sh. Banga has denied that any such instructions were given to Mr. Arun Duggal. These submissions of the assessee when weighed against the documentary evidences collected by the revenue authorities, it can be said that the assessee has miserably failed to explain in the credits in the bank account. Section 68 applicable even to share application money – use of the words “any sum found credited in the books” indicates that the section is widely worded and ITO is not precluded from making enquiry as to the true nature and source thereof even if the sum is credited as share application money. [CIT Vs. Nivedan Vanijyya Niyojan Ltd. [2003 (3) TMI 61 - CALCUTTA HIGH COURT] CIT Vs. Rathi Finlease Ltd. Ltd. [2007 (10) TMI 412 - MADHYA PRADESH HIGH COURT] Merely disowning the bank accounts by the assessee do not lead to the conclusion that the accounts are not maintained by him when there is a direct evidence contrary to the contention of the assessee. Enquiry was also made from State Excise Authorities of Haryana with regard to the proprietary concern of the assessee and it was proved that the assessee was not authorized dealer for sale of liquor. Hence, any business or liquor trade can be attributed and the assessee could not explain the source of deposits and accountability thereof to the revenue authorities. The statement of the brother of the assessee Sh. Sanjay Duggal wherein it was stated that the sales of M/s Jagjeet Industries Ltd. were unreported and under invoicing and the differential proceeds have been received could not be substantiated as the verification of books of accounts of M/s Jagjeet Industries Ltd. by the revenue did not yield any such under reporting or under invoicing. The contention of the assessee that he do not have any kind of interest in M/s Alfa India vide the statement recorded on 20.12.2015 and in the subsequent assessment proceedings cannot cut any ice as the documents, signature, photograph and instructions given to the bank by the assessee himself. There is absolutory no dispute on this issue. The order of the Co-ordinate Bench of ITAT [2021 (1) TMI 909 - ITAT DELHI] has been perused and we find that the said order not dealt on the merits of the issue and the appeal of the assessee was allowed on technicalities of approval u/s 153D. Counsel has also tried to canvass before us that the entire deposits in the bank account of the assessee did not belong to him and therefore, there is no real income accrued or received to the assessee. We are unable to accept such a contention for the reason that, firstly, there are actual deposit in the bank account of the assessee for which no explanation about the nature and the source was explained which has led to addition u/s 68. Secondly, Section 68 is a deeming provision wherein the statute provides that if the assessee is unable to explain the nature and source of the credits, then it is deemed to be income of the assessee as undisclosed sources and is taxed accordingly. Provisions of section 68 apply to all credit entries in the cases including where credit entry has been made in the bank account of the assessee, if the assessee fails to offer any explanation fully corroborated and substantiated by evidences. The ambit of Section 68 is wide and inclusive and this provision applies to all credit entries either in the books of accounts or the bank account of the assessee because the bank account itself forms the account of the assessee where the assessee credits the amount for which he is required to explain the nature and source of such credit. The language of Section 68 applies to all credit entries in whomsoever name they may stand, that is, whether in the name of the assessee or even in the name of a third party as held in the case of Gumani Ram Siri Ram [1973 (2) TMI 50 - PUNJAB AND HARYANA HIGH COURT] No presumption under any other section does not override or exclude Section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under Section 68, nor does it do away with the burden which is on the assessee to establish the requisites of cash credits as held in the cases of Pushkar Mamin Sarraf [1990 (1) TMI 51 - ALLAHABAD HIGH COURT] and Daya Chand [2001 (2) TMI 74 - DELHI HIGH COURT] Hence, we hereby hold that, firstly, the action of the revenue authorities on the issue of notice u/s 148, approval under section 151 was in accordance with the law and secondly, addition u/s 68 has rightly been made as assessee has failed to offer any explanation with regard to nature and source of credit in his bank account and the primary burden cast upon the assessee for proving the credits has not been discharged either before AO or ld. CIT (A) or before us. Accordingly, the action u/s 147/148 as well as the addition made u/s 68 is hereby affirmed. Appeal of the assessee is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under section 148 (reopening) can be validly issued for an assessment year when a search under section 132 had taken place and section 153A (as then in force) restricted assessment scope to specified years. 2. Whether the reasons recorded under section 148(2) and the sanction/approval under section 151 were vitiated by 'borrowed satisfaction', rubber-stamp endorsement or absence of independent application of mind by the Assessing Officer and the sanctioning authority. 3. Whether the material on record (including investigation wing letter and certified bank statements) constituted tangible material sufficient to form a reason to believe for reopening and whether the AO applied his mind to that material. 4. Whether procedural infirmities - delay/ante-dating of reasons supplied, issuance of notices under section 143(2) and 142(1) without allowing time for objections under the GKN procedure, denial of show-cause notice, refusal of cross-examination and non-supply of back material - violated principles of natural justice and vitiated the assessment. 5. Whether addition under section 68 treating large bank credits as unexplained income was permissible in absence of books of account and where the assessee had furnished explanations/insisted on production of back material; and whether findings in a coordinate tribunal order on identical facts affected the departmental stand. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 148 when search was conducted and section 153A applied Legal framework: Section 153A provides a special code for post-search assessments, mandating issuance of notices and assessment/reassessment for specified preceding years and contains a non-obstante clause excluding sections including 147/148. Section 148 operates independently to reopen completed assessments where AO has recorded reasons to believe that income has escaped assessment. Precedent treatment: The Tribunal and High Court jurisprudence were discussed extensively, reflecting two lines - (a) strict / schematic reading of section 153A limiting assessment after search to specified years and barring parallel use of section 148 for those years; and (b) view that sections 153A and 148 operate in different settings and reopening under section 148 remains available where relevant material pertains to an excluded year. Interpretation and reasoning: The Court analysed the statutory scheme and noted that sections serve different purposes: 153A caters to assessments following search for specified years; 148 addresses escapement for a particular year on basis of fresh material. The Tribunal found that material/information received by AO related to credits in bank accounts of the assessee for the relevant year and that section 148 could be validly invoked where material having nexus with escapement of income came to AO's notice. Ratio vs. Obiter: Ratio - sections 153A and 148 have distinct scopes; invocation of section 148 is not per se barred simply because a search occurred, provided material/new information relevant to the year exists and statutory conditions for section 148 are met. Obiter - observations on subsequent amendment to section 153A are contextual. Conclusion: Invocation of section 148 in the facts of the case held permissible; the statutory scheme does not automatically oust section 148 where material relevant to the particular year is available and AO forms reasons to believe. Issue 2 - Validity of reasons recorded under section 148(2) and sanction under section 151 (borrowed satisfaction / mechanical approval) Legal framework: Section 148(2) requires AO to record reasons before issuing notice; section 151 requires higher authority's satisfaction (and recording of satisfaction) as precondition to issue notice beyond prescribed period. The approval/satisfaction must reflect application of mind and not be a ritualistic endorsement. Precedent treatment: The judgment surveyed extensive authority recognizing that approval is a quasi-judicial safeguard and that mere endorsements such as 'approved' or 'I am satisfied' without discernible application of mind may render reopening void. Conversely, authority exists holding that brief approvals are acceptable if the sanctioning authority had material before it and did apply mind. Interpretation and reasoning: The Court examined the chronology (receipt of investigation letter, reasons drafted, sanction and notice on the same date) and the contents of the reasons and sanction. It considered whether the AO and sanctioning authority independently applied mind or merely rubber-stamped investigation material. After reviewing evidence (certified bank statements, AO's scrutiny of return, statements recorded during search and bank KYC), the Court concluded that AO had tangible material and that the sanctioning authority had perused the files and accorded approval; prompt action did not equate to mechanical approval where records showed consideration. Ratio vs. Obiter: Ratio - sanction under section 151 must reflect application of mind; however, promptness or contemporaneousness of steps is not decisive of rubber-stamp; validity depends on whether material was before sanctioning authority and whether reasons and approval have a rational nexus with available material. Obiter - catalogue of authorities and hypotheticals addressing mechanical approvals. Conclusion: On the facts, reasons and sanction were held to be legally valid - the AO recorded reasons based on tangible material and the sanctioning authority examined file and accorded approval; the reopening was not vitiated for borrowed satisfaction or mechanical sanction. Issue 3 - Sufficiency of material / nexus between material and formation of belief Legal framework: For section 148 the AO must have material that establishes a rational nexus to the belief that income has escaped; sufficiency of material is not examined exhaustively at the jurisdictional stage but the recorded reasons must disclose a live link. Precedent treatment: Authorities were cited establishing that third-party/investigation information can be the basis for reopening only after AO subjects it to independent scrutiny and records reasons connecting it to escapement. Interpretation and reasoning: The Court found certified bank statements showing credits, statements recorded during search, and other enquiry results formed a factual foundation. The reasons identified unexplained substantial credits in specific bank accounts; AO had compared with return and noted discrepancies and the assessee's denials. This gave a prima facie material nexus to form requisite belief. Ratio vs. Obiter: Ratio - AO may act on tangible investigation material provided he applies mind and records reasons linking material to escapement; mere receipt of external information without independent scrutiny will not suffice. Obiter - discussion of comparative authorities. Conclusion: Material before AO was held to be tangible and to have rational nexus with belief of escapement; reasons recorded satisfied jurisdictional requirement. Issue 4 - Procedural fairness: supply of reasons/back material, GKN procedure, show-cause notice, cross-examination Legal framework: Principles of natural justice (audi alteram partem), the GKN procedure for supply of reasons and opportunity to object, CBDT instructions requiring issuance of show-cause notice before making additions, and statutory notices under sections 143(2) and 142(1) govern procedural fairness in assessments. Precedent treatment: Authorities emphasize that reasons must be supplied within reasonable time, assessee given opportunity to object and objections disposed by speaking order before final assessment; show-cause notice is required where additions are proposed; cross-examination rights depend on materiality and feasibility. Interpretation and reasoning: The Court reviewed timelines: reasons were supplied and inspection afforded; notices under 143(2)/142(1) were issued; assessee availed inspection and filed replies; the AO called for bank statements and further information and passed the assessment after considering replies. The request for cross-examination of a deceased witness could not be complied with. On show-cause notice, the AO issued requisition notices and provided opportunities; the Court held there was no fatal breach of natural justice on facts. Ratio vs. Obiter: Ratio - compliance with GKN and natural justice principles is fact-sensitive; where reasons are supplied, inspection afforded and the assessee had opportunities to reply, mere sequence or prompt issuance of notices does not automatically vitiate proceedings. Obiter - commentary on CBDT instructions and broader fairness principles. Conclusion: Procedural challenges were rejected on the facts - reasons were supplied, inspection was made, statutory notices issued, and the assessee had opportunities to reply; absence of cross-examination of a deceased officer was not fatal. Issue 5 - Merits of addition under section 68 where no books maintained and impact of coordinate order Legal framework: Section 68 permits taxation of sums credited where assessee fails to satisfactorily explain nature and source; onus lies on assessee to establish identity, creditworthiness and genuineness; bank credits may be assessed notwithstanding mode of payment or absence of formal books. Precedent treatment: The Court noted authorities both restraining application of section 68 in certain scenarios (e.g., where statutory bookkeeping regime/section 2(12A) considerations arise) and binding precedents upholding additions where assessee fails to discharge onus or where investigation material shows credits to be unexplained or linked to bogus entries. Interpretation and reasoning: The Court examined documentary evidence (account opening forms, KYC, bank statements) showing the assessee's connection with bank accounts receiving large credits, the assessee's contradictory statements and inability to satisfactorily explain credits. The tribunal accepted that section 68 applies broadly and that the assessee failed to discharge the burden of explanation; coordinate tribunal order that quashed assessment on other technical grounds did not negate the factual sufficiency for application of section 68 in the present proceedings. Ratio vs. Obiter: Ratio - where unexplained bank credits are supported by documentary bank records and the assessee cannot satisfactorily explain nature/source, addition under section 68 is sustainable; a coordinate order on different technical grounds does not automatically invalidate merits of addition here. Obiter - extensive references to other benches and cases. Conclusion: Addition under section 68 was upheld on the facts - assessee failed to satisfactorily explain substantial bank credits; absence of books did not preclude application of section 68 and coordinate technical relief did not alter the present conclusion on merits.