2025 (9) TMI 451 - HC - Income Tax

AO lacked jurisdiction to reopen assessment under Section 147 over demonetisation cash deposits; notices under 148 and 148A(d) quashed

HC allowed the petition, holding that AO lacked jurisdiction to reopen assessment under section 147. The court found no foundational nexus between ... Reopening of assessment u/s 147 - cash deposited during the demonitisation period - Assessee contended that there is no nexus between the information available with the respondent Assessing Officer and alleged escapement of income - HELD THAT:- AO was of the view that the petitioner being a prudent business man would never keep such huge cash on hand as idle money at the business premises and therefore, arrived at the conclusion that the petitioner failed to provide any justification for requirement of such huge cash on hand. It also appears that the respondent AO has brushed aside the replies filed by the petitioner in response to the summons issued u/s 131A of the Act issued by Assistant/Deputy Director of Income Tax (Investigation)-II Rajkot by observing that the petitioner did not submit complete details required for verification of source of cash deposited during demonitisation. On the basis of reply filed by the petitioner, it appears that the petitioner has provided audited books of accounts, bank statement and entire cash book along with reply in addition to replies filed by the petitioner in response to the summons issued by Assistant/Deputy Director of Income Tax (Investigation)-II Rajkot. AO without considering the same and only on the information that the petitioner has deposited huge cash amount in the bank account during the demonitisation period, had come to the conclusion that it is a fit case for reopening the assessment. There is no foundational fact available so as to enable AO to assume jurisdiction to reopen the assessment as the information made available to the AO by the Investigation wing has not resulted into any nexus with material available on record so as to come to the prima facie conclusion that it is a fit case to reopen the assessment on account of escaped income of the cash deposited during the demonitisation period. It also appears from the record that the respondent AO has failed to consider that there was sufficient cash balance in the books of account and there is nothing on record to suggest that such cash balance has cropped up only on 8.11.2016 on the eve of demonitisation period. Therefore, AO could not have assumed jurisdiction to reopen the assessment and accordingly, the petition succeeds and is hereby allowed. Impugned order passed u/s 148A(d) is hereby quashed and set aside. Consequentially, the impugned notice u/s 148 of the Act of even date is also quashed and set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) had requisite foundational material and a prima facie nexus between information received and material on record to form satisfaction under section 148A(d) to reopen assessment for the relevant assessment year on account of alleged cash deposits during the demonetisation period? 2. Whether the AO's satisfaction based on the proposition that 'a prudent businessman would not keep huge cash on hand' constitutes a valid basis for reopening where books of account, audited financial statements, bank statements and cash book were placed on record? 3. Whether replies and materials previously furnished in response to summons under section 131A (Investigation wing) affect the validity of the AO's satisfaction for reopening under section 148A/148? 4. Whether the existence of an alternative efficacious statutory remedy (appeal to CIT(A)) precludes exercise of writ jurisdiction under Article 226 where jurisdictional satisfaction under section 148A(d) is challenged? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of foundational facts and nexus for satisfaction under section 148A(d) Legal framework: Section 148A(d) requires the AO to record satisfaction, based on information available, that there is escapement of income and that reopening is justified; such satisfaction must rest on foundational facts and a prima facie nexus between information and material available on record. Precedent treatment: No earlier judicial authorities are cited in the judgment; the Court proceeds on statutory principles governing reopening and jurisdictional facts for initiation of reassessment proceedings. Interpretation and reasoning: The Court examined the material relied upon by the AO and found absence of any record evidence showing that the deposited cash was over and above the cash balance already reflected in the cash book. The information from the Investigation wing about cash deposits during demonetisation was not linked to any material demonstrating that such deposits constituted unaccounted income or that they were not part of existing cash balances. The Court held that where available books, audited statements and particulars were produced, unelaborated information without nexus to those records does not constitute a foundational fact to assume jurisdiction to reopen. Ratio vs. Obiter: Ratio - Reopening under section 148A(d) cannot be predicated on isolated information unless there is a prima facie nexus to material on record demonstrating escapement of income; AO must identify foundational facts justifying jurisdiction. Conclusion: The AO lacked foundational facts and requisite nexus; satisfaction to reopen was not legally sustainable. Issue 2 - Validity of satisfaction based on 'prudent businessman' speculation where books and audited accounts exist Legal framework: Jurisdictional satisfaction must be founded on objective material; speculative or generalized observations about what a 'prudent businessman' would or would not do cannot substitute for concrete evidence of escapement. Precedent treatment: Judgment does not rely on specific authority but applies statutory requirement of objective nexus and material to support reopening. Interpretation and reasoning: The AO concluded that a prudent businessman would not keep large cash balances and therefore the petitioner failed to justify cash on hand. The Court found this to be an impermissible inferential leap because the nature of the petitioner's business (transportation and need to pay suppliers/transporters in cash) reasonably explained holding substantial cash. The presence of audited books and cash book supporting the cash balance negated the AO's speculative premise. Ratio vs. Obiter: Ratio - A conclusion based on generalized business prudence without examination of business-specific practices and documentary evidence is insufficient to form jurisdictional satisfaction for reopening. Conclusion: AO's reliance on the 'prudent businessman' assumption was inadequate and could not sustain reopening in the face of contemporaneous books and explanations. Issue 3 - Effect of replies and materials furnished under summons (section 131A) and evidentiary sufficiency Legal framework: Material furnished voluntarily or in compliance with statutory summons that bears on source and nature of deposits must be considered by AO before recording satisfaction to reopen; rejection of such material requires reasoned disproof or demonstration of incompleteness that affects nexus. Precedent treatment: No precedents cited; Court applies general legal principle that material placed on record must be weighed and cannot be summarily brushed aside. Interpretation and reasoning: The petitioner had furnished audited accounts, bank statements, entire cash book and multiple responses to section 131A summons. The AO recorded that the submissions were incomplete but did not identify specific deficiencies or reconcile how the missing particulars would affect the alleged escapement finding. The Court held that merely stating incompleteness without articulating how the outstanding information negates the explanation is insufficient to create a basis for reopening. Ratio vs. Obiter: Ratio - Where comprehensive books, audited accounts and prior replies are on record, AO must engage with such material and cannot disregard them in forming satisfaction to reopen absent demonstrable and specific lacunae affecting the finding of escapement. Conclusion: The AO failed to properly consider or rebut the materials produced; that failure vitiated the satisfaction to reopen. Issue 4 - Availability of alternative statutory remedy and exercise of writ jurisdiction Legal framework: Existence of alternative remedies is a factor in the exercise of extraordinary writ jurisdiction; however, where jurisdictional error is demonstrated (absence of foundational facts), writ relief is maintainable notwithstanding availability of appeal. Precedent treatment: The judgment notes the respondent's contention regarding alternative remedy but does not treat it as a bar to relief when jurisdictional satisfaction is invalid. Interpretation and reasoning: Although the respondent argued that the petitioner could challenge any reopening order before the appellate authority, the Court determined that the primary question was jurisdictional - whether AO could assume power to reopen. Because that assumption itself was without foundation, judicial review under Article 226 was appropriate to quash the impugned order and notice. Ratio vs. Obiter: Ratio - Availability of statutory appellate remedies does not preclude writ relief where a jurisdictional defect in the initiation of proceedings is established. Conclusion: Writ jurisdiction was rightly invoked and exercised to quash the reopening order and notice for lack of jurisdictional foundation. Overall Conclusion and Disposition (Ratio of the Court) The AO's order under section 148A(d) and consequent notice under section 148 were quashed because (a) no foundational fact or prima facie nexus linked the information of cash deposits to escapement of income beyond the cash balances reflected in audited books and cash book; (b) speculative reasoning about what a 'prudent businessman' would do was insufficient in the face of business-specific explanations and documentary evidence; and (c) materials previously furnished under summons were not adequately considered or rebutted. The Court therefore held the AO had no jurisdiction to reopen the assessment and allowed the petition.