2025 (3) TMI 1552 - AT - Income Tax

Reassessment under Sections 147/148 quashed for lack of reason to believe, based only on vague bank data

Prabhaben Nandlal Ratpiya Versus The ITO, Ward-1, Junagadh

ITAT held the reassessment proceedings under ss. 147/148 invalid and quashed the reassessment order. It found that the AO reopened the case based solely ... Validity of re-assessment proceedings u/s 147/148 - reasons to believe OR reasons to suspect -deposit in the bank account - HELD THAT:- AO had not applied his mind and acted on mere information basis. The Ld. AO even failed to prove direct nexus with the information and reason recorded for reopening. The above reasons recorded by the assessing officer does not mention the bank account number, which was escaped assessment. The nature of transactions have not been mentioned, in the reasons record. There is non-application of mind of the assessing officer. The assessing officer has not verified the bank account number before issuing notice u/s 148 of the Act. Mere deposit in the bank account does not constitute that income escaped assessment, the money in the bank account may be deposited out of the past savings / by sale of investment etc, which was not verified by assessing officer and hence there is complete non-application of mind. Hence, the Ld. AO reopened assessee`s case on mere borrowed satisfaction and without verifying details. The reasons must show due application of mind to the information. Powers to initiate reassessment proceedings are not exercised in an arbitrary manner. The Courts have analysed and explained in several cases as to what could be the valid reason to believe escapement of income, which would enable the AO to successfully reopen the assessment. It has been held that the words ‘reason to believe’ are stronger than the words ‘reason to suspect’ or ‘reason to doubt’. It requires more than merely ‘satisfaction’ of the AO. The belief entertained by the Assessing Officer must not be arbitrary or irrational. The expression ‘reason to believe’ does not mean purely subjective satisfaction of the AO - The belief must be held in good faith. It cannot be merely pretence. Again, the belief must be of an honest and reasonable person based upon reasonable grounds. AO may act upon direct or circumstantial evidence, but his belief must not be based on mere suspicion, gossip or rumours. The Assessing Officer would be acting without jurisdiction, if the reasons for his belief are not material or relevant. There should be nexus between the information coming into possession of the AO and his belief on the basis of such information that income of the Assessee chargeable to tax has escaped assessment. Reasons recorded by the AO suffer from an infirmity of being misconceived in law and, therefore, initiation of proceeding thereupon is bad in law. Consequently, the assessment finalized by the Assessing Officer u/s 147 is held to be invalid and bad in law, and is hereby quashed. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147/148 was validly initiated where reasons recorded did not specify bank account number, transaction nature, or amount, and where the assessee had not filed a return for the relevant year. 2. Whether the reasons recorded by the Assessing Officer constituted an application of mind and furnished a live nexus between information received and belief that income had escaped assessment, or were vitiated as mere suspicion/borrowed satisfaction/typographical error. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 where reasons omitted specifics Legal framework: Reopening under section 147 requires that the Assessing Officer record in writing reasons to believe that income chargeable to tax has escaped assessment before issuing notice under section 148. The recorded reasons must disclose the material on which the belief is based and a nexus between the information and the belief. Precedent Treatment: The Court relied upon settled authorities of higher courts establishing that 'reason to believe' is stronger than mere suspicion, must be held in good faith, may be based on direct or circumstantial evidence, and cannot be mere rumour. Authorities require that reasons disclose sufficient particulars to show due application of mind. Interpretation and reasoning: The recorded reasons failed to mention the bank account number, the nature of transactions, or the particulars of escaped amount beyond a general aggregate; they also contained what the Bench treated as non-verification of the bank account and no examination of alternative explanations (past savings, sale of investments). The Tribunal found these omissions amounted to lack of material particularity and absence of necessary nexus between information and belief. The fact that no return was filed and that aggregate cash deposits were shown in AIR was insufficient, in the circumstances, to support reopening without further verification or explanation. Ratio vs. Obiter: Ratio - Reasons must demonstrate due application of mind and establish a live link between the information and belief; mere omission of critical particulars (account number, transaction nature) and failure to verify leads to invalid reopening. Obiter - Reference to the procedural requirement that sanction under section 151 was obtained (not determinative of reason sufficiency) and remark that other merits become academic once reassessment quashed. Conclusion: The reopening was invalid. The reasons recorded were misconceived in law for failing to specify essential particulars and to show application of mind; therefore proceedings under section 147/148 were quashed. Issue 2 - Effect of typographical errors, application of mind, and borrowed satisfaction Legal framework: The legitimacy of recorded reasons is measured by substance and sufficiency to show formation of bona fide belief; typographical or clerical errors will not vitiate reasons where the substance unequivocally discloses the basis for belief. However, an AO cannot act on mere borrowed satisfaction or direction from a superior without independent application of mind. Precedent Treatment: The Tribunal referred to higher court pronouncements that distinguishing between mere change of opinion and bona fide reasons is necessary; reopening cannot be founded on mere suspicion or directions without direct/circumstantial evidence and an independent evaluative process by the AO. Interpretation and reasoning: The Revenue argued the omission (bank account number) was a typographical error and did not vitiate reasons. The Tribunal, however, examined the overall content and process: omission of account number and non-mention of transaction nature were not isolated typographical slips but, combined with the AO's failure to verify and to consider innocent explanations for deposits, demonstrated non-application of mind. The Tribunal emphasized that mere reliance on information (e.g., AIR) without verification or explanation and without linking the information to taxable escapement amounts renders the belief arbitrary. Ratio vs. Obiter: Ratio - A mere typographical omission will not invalidate reasons if the record, viewed holistically, shows application of mind and sufficient nexus; conversely, where omissions reflect lack of verification and absence of inquiry into alternative non-taxable sources, reasons are vitiated. Obiter - Observations on what might amount to acceptable corroboration (e.g., verification of bank records or proof negating innocent sources) are illustrative rather than decisive on facts. Conclusion: The purported typographical omission could not be treated as harmless on these facts because the surrounding deficiencies evidenced borrowed satisfaction and non-application of mind; reopening was therefore invalid. Cross-reference between Issues 1 and 2 The determinations on sufficiency of particulars (Issue 1) and the effect of alleged typographical error/borrowed satisfaction (Issue 2) are interdependent: the absence of essential particulars compounded by lack of independent verification converted any lone factual input into an insufficient basis for 'reason to believe.' The Tribunal quashed reassessment on this combined ground. Consequential Reasoning and Relief Because reassessment under section 147/148 was held invalid, all consequential additions and merits adjudications in the impugned assessment were rendered academic; the appeal was allowed and the assessment quashed.