2025 (9) TMI 1244 - AT - Income Tax

Reassessment under s.147 limited to recorded reasons; AO cannot add unrelated income like agricultural receipts or bank interest

Ashok Kumar Versus Assessment Unit, Income Tax Department.

ITAT (Dehradun) held that where reassessment under s.147 was initiated for unexplained cash deposits, the AO could not make independent additions on ... Reopening of assessment u/s 147 - additions on items not forming part of the recorded reasons - assessee had deposited cash in the bank account sources of which was not explained - AO made further addition on account of agriculture income by holding the same as income from other sources being unexplained and also made additions towards the bank interest which was not part of the reasons recorded - HELD THAT:- Bombay High Court in the case of CIT vs Jet Airways (I) Ltd. [2010 (4) TMI 431 - BOMBAY HIGH COURT] has held that “it is not open to AO to independently assess some income other than the income referred in section 148 for which reason was recorded Authorities below had exceeded their jurisdiction of making additions on the issues which are not forming part of the reasons recorded for re-opening the assessment when it was found that the reasons recorded are not correct and additions made based on such incorrect reasons does not survived. Therefore, no additions could be made dehorse the reasons recorded for initiating the proceedings u/s 147 of the Act and the same are hereby deleted. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings initiated under section 147/148 are valid when the recorded reason for reopening (cash deposit alleged to belong to assessee) is found to be incorrect and deleted on appeal. 2. Whether the Assessing Officer (AO) has jurisdiction to make additions on items not forming part of the recorded reasons for reopening once the foundational reason is found to have no legs to stand. 3. Whether additions in respect of bank interest and agricultural income (treated as 'income from other sources') could be sustained when those items were not part of the reasons recorded for reopening. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment initiation when recorded reason is found incorrect Legal framework: Sections dealing with reopening of assessment require that the AO record reasons to believe that income has escaped assessment and serve notice under section 148. Explanation 3 (to section 147) permits assessment of items not included in the reasons if such items come to the AO's notice during the course of proceedings, but only after the reassessment action has been validly initiated. Precedent treatment: The Tribunal relied on authoritative High Court pronouncements emphasizing that conditions for valid reassessment (formation of opinion, reasoned satisfaction and proper notice) must be independently established and that Explanation 3 does not permit the AO a carte blanche to mount roving inquiries or to improve/supplement the reasons for reopening retrospectively. Those precedents were followed. Interpretation and reasoning: The Tribunal reasoned that where the very basis for initiation - here, the allegation that the assessee deposited Rs.76,00,000 in his bank account - is shown to be factually incorrect and the addition based on that basis is deleted, the raison d'être of the reassessment ceases. Explanation 3 operates only after it is found that the reassessment was validly initiated; it cannot be used to salvage or expand jurisdiction when the foundational reasons themselves collapse. Thus the initiation loses its support when the principal reason is shown not to subsist. Ratio vs. Obiter: Ratio - reopening must be independently valid; Explanation 3 cannot be read to validate reassessment where the initial reasons do not survive. Obiter - observations that emphasize policy against roving inquiries reinforce the ratio but are ancillary. Conclusion: Reassessment initiation becomes invalid for purposes of considering other unrelated items when the principal reason recorded for reopening is found to be incorrect and deleted; thus the AO's jurisdiction to proceed further on that basis is lost. Issue 2 - Scope of AO to make additions beyond recorded reasons for reopening Legal framework: Assessment/reassessment under sections 147/148 is constrained by the reasons recorded; Explanation 3 allows inclusion of other items only if they are discovered in the course of valid reassessment proceedings. A fresh notice under section 148 is necessary if the AO intends to take into account new issues not connected to the original reasons. Precedent treatment: The Tribunal followed High Court authorities which hold that the AO cannot, after serving a section 148 notice on one basis and then accepting the assessee's contention that that basis does not survive, proceed to assess other, unrelated items without issuing a fresh notice; the AO cannot improve or supplement the reasons post hoc. Interpretation and reasoning: The Tribunal observed that once the initial reason for reopening was negated (account not belonging to assessee; addition deleted), there remained no jurisdictional foothold for the AO to assess items not forming part of the reasons. The statutory scheme contemplates limits on AO's inquiry to prevent unfettered, exploratory reassessments; requiring fresh notice when new issues arise preserves fairness and statutory safeguards. Ratio vs. Obiter: Ratio - AO lacks jurisdiction to make additions on issues not forming part of recorded reasons where the foundational reason is invalidated; a fresh notice is required for new issues. Obiter - policy considerations against roving inquiries and the purposive reading of Explanation 3. Conclusion: Additions beyond the scope of the recorded reasons are without jurisdiction and are liable to be deleted where such additions were not part of the grounds for reopening and the original basis for reopening fails. Issue 3 - Specific additions (agricultural income treated as income from other sources; bank interest) not part of reasons recorded Legal framework: Additions can be made only on items forming part of the reasons to believe or such items subsequently discovered in the course of valid reassessment proceedings; otherwise a fresh section 148 notice is required. Precedent treatment: The Tribunal applied the settled position from higher court rulings that where additions relate to items not forming part of the reasons and the reassessment's foundational reason fails, such additions are unsustainable. Those rulings were followed to the extent relevant. Interpretation and reasoning: The AO had converted declared agricultural income into 'income from other sources' and made addition towards bank interest though these items were not part of the reasons recorded for initiating reassessment. Because the alleged cash deposit (the recorded reason) was found not to belong to the assessee and the related addition was deleted by the appellate authority, the AO could not sustain additions on unrelated items. Accordingly, the Tribunal held that such additions exceeded jurisdiction. The appellate authority had already restricted the interest addition; the Tribunal concluded that even these restricted additions could not survive as they were beyond the scope of the reasons. Ratio vs. Obiter: Ratio - additions on agricultural income and bank interest that were not part of the recorded reasons and were assessed after the foundational reason failed are without jurisdiction and must be deleted. Obiter - discussion on quantum of interest allowed by the lower appellate authority is explanatory and ancillary to the jurisdictional conclusion. Conclusion: The additions made by the AO on agricultural income and bank interest, being beyond the reasons recorded for reopening and coming after the foundational reason was negated, are without jurisdiction and are deleted. Grounds contesting reopening and additions succeed accordingly. Cross-references For Issues 1-3: The Tribunal's conclusions are interdependent - the invalidation of the primary reason for reopening (Issue 1) directly informs the jurisdictional limit on assessing other items (Issue 2), which in turn determines the fate of specific additions (Issue 3).