2024 (12) TMI 988 - HC - Income Tax

AO's demonetization cash deposit reopening notice quashed for inadequate consideration of taxpayer's documentary evidence and explanations

Narsimha Trading Co. Versus Income Tax Officer, Ward 1 (2) (3)

The Gujarat HC quashed a reopening notice issued by the AO regarding cash deposits during demonetization. The petitioner had adequately explained the cash ... Reopening of assessment - Reason to believe - cash deposit in the bank account during demonetization period - HELD THAT:- Petitioner has explained the cash deposit in the bank account during demonetization period. AO however, has discarded above explanation of the petitioner only observing that the petitioner has failed to furnish supporting and corroborative evidence proving direct nexus of cash deposited during demonetization with the amount of cash received from the customers. Such reasons assigned by the AO in the order disclosing the objection is contrary to the facts on record as the petitioner has explained in detail about cash deposited in the bank account during the year under consideration. It also appears from the record that the petitioner has along with the objections, submitted the requisite details, copies of bank statements, audited balance-sheet account etc. which was not even referred to by the AO 0in the order disposing the objection. AO has formed reasonable belief that income chargeable to tax has escaped assessment only on the basis of the information available with him regarding the failure on the part of the petitioner-assessee of known source for the cash deposited ignoring that the petitioner has categorically stated in the reply that the cash deposited is out of the sales which is duly reflected in the books of account. In absence of any independent application of mind by the respondent-Assessing Officer and in absence of any live link between the information received and the material available record, the impugned notice cannot be sustained. Merely because the Assessing Officer wishes to verify veracity of cash deposit cannot be the basis for reopening for making roving and fishing inquiry by reassessment even in case where the return was not scrutinized before acceptance originally. Therefore, respondent assessing officer could not have assumed jurisdiction to issue the impugned notice for reopening. Decided in favour of assessee. Issues Involved:1. Validity of the assumption of jurisdiction by the Assessing Officer to issue a notice for reopening the assessment under Section 148 of the Income Tax Act, 1961.2. Whether the reasons recorded for reopening the assessment demonstrate a valid 'reason to believe' that income has escaped assessment.3. Adequacy of the evidence and application of mind by the Assessing Officer in forming the belief that income chargeable to tax has escaped assessment.4. Allegations of conducting a 'roving and fishing inquiry' by the Assessing Officer.Detailed Analysis:1. Validity of the Assumption of Jurisdiction:The petitioner challenged the jurisdiction of the Assessing Officer to issue the notice dated 30.03.2021 for reopening the assessment for the Assessment Year 2017-18 under Section 148 of the Income Tax Act, 1961. The petitioner argued that the notice was issued merely to conduct a roving and fishing inquiry, which is impermissible under the law. The court noted that the Assessing Officer must have a 'reason to believe' that income has escaped assessment, which should be based on tangible material and not merely on suspicion or conjecture.2. Reasons Recorded for Reopening:The reasons recorded for reopening the assessment were based on information flagged by the Directorate of Income Tax (Systems) indicating that the petitioner had made a cash deposit of Rs. 56,07,000/- during the demonetization period, which was not conclusively proved as a known source. The petitioner contended that the reasons were based on incorrect facts, as the actual cash deposit during the demonetization period was Rs. 80,07,000/-, and that there was no live link between the information received and the material available with the Assessing Officer. The court observed that the reasons recorded did not demonstrate an independent application of mind by the Assessing Officer and lacked a live link between the information and the material on record.3. Adequacy of Evidence and Application of Mind:The petitioner provided a detailed explanation and reconciliation of cash sales and deposits, along with supporting documents such as bank statements and audited balance sheets. However, the Assessing Officer rejected the petitioner's objections, stating that there was no supporting evidence to prove a direct nexus between the cash deposited and the amount received from customers. The court found that the Assessing Officer failed to consider the details and documents provided by the petitioner, and the reasons for reopening were contrary to the facts on record.4. Allegations of Roving and Fishing Inquiry:The petitioner alleged that the notice was issued to conduct a roving and fishing inquiry, which is not permissible. The court agreed with the petitioner, stating that the Assessing Officer cannot reopen an assessment merely to verify the veracity of cash deposits without any tangible material or independent application of mind. The court emphasized that reopening should not be used as a tool for conducting fishing inquiries, especially when the return was not scrutinized before acceptance originally.Conclusion:The court concluded that the respondent-Assessing Officer failed to assume jurisdiction in the absence of any tangible material to arrive at a prima facie reason to believe that income had escaped assessment. Consequently, the impugned notice dated 30.03.2021 issued under Section 148 of the Act for reopening the assessment for A.Y. 2017-18 was quashed and set aside. The court ruled in favor of the petitioner, making the rule absolute with no order as to costs.