2026 (3) TMI 162 - AT - Income Tax

Reopening of assessment invalidated where reasons and sanction lacked application of mind; peak credit addition deleted.

Reopening of assessment was invalid because the reasons recorded for issuance of notice and the sanction were factually incorrect and mechanically granted ... Reopening invalid for lack of application of mind to recorded reasons - bank deposit addition explained by agricultural income Reopening invalid for lack of application of mind to recorded reasons - The reassessment proceedings initiated by issue of notice under section 148 were invalid because the assessing officer recorded incorrect factual figures and neither he nor the approving authority applied independent mind to the materials. - HELD THAT: - The Tribunal found that the reasons recorded for reopening relied on incorrect figures (stating deposits and investments totalling Rs. 47.77 lakhs) which, on examination of bank statements, were not reflected and, after allowance for withdrawals, resulted in a much smaller unexplained peak balance. The reasons therefore were shown to be based on borrowed or incorrect information without any individual enquiry or nexus between the material and a belief that income had escaped assessment. The approval under section 151(1) was issued mechanically on the same incorrect figures without meaningful application of mind by the higher authority. The Tribunal applied settled law that reopening founded on wrong reasons to believe or on mechanical approval is bad in law and renders reassessment void ab initio, citing relevant High Court and Tribunal precedents to support that approval must reflect recorded satisfaction and independent consideration of the materials. [Paras 13, 15, 19] Notice under section 148 and consequent proceedings are invalid for want of application of mind to the recorded reasons and for mechanical approval. Bank deposit addition explained by agricultural income - The addition made on account of alleged unexplained peak bank deposit was deleted on facts because the deposit was adequately explained by the assessee's agricultural income from inherited land. - HELD THAT: - On the factual material, the assessee, a widow cultivating about thirty acres of agricultural land (certified by the local panchayat) had agricultural income which, after expenses, was found to be sufficient to account for the modest bank deposit treated as unexplained by the AO. The Tribunal took a practical view that such agricultural receipts plausibly explained the deposit and, applying that conclusion to the record, held the addition unsustainable and deleted it. [Paras 12] The addition on account of peak bank deposit is explained by agricultural income and is deleted. Final Conclusion: The reassessment proceedings were held void for lack of application of mind by the AO and the sanctioning authority, and on the merits the addition attributable to the bank peak deposit was deleted; the assessee's appeal is allowed. Issues: Whether the reassessment proceedings initiated by issuance of notice under section 148 read with section 147 of the Income-tax Act, 1961 (and sanctioned under section 151(1) of the Income-tax Act, 1961) were valid where the reasons recorded and the sanctioning approval were factually incorrect and mechanical; and whether addition of Rs. 5,61,923 on account of alleged unexplained bank deposits (peak credit) is sustainable.Analysis: The Tribunal examined the recorded reasons for initiation of reassessment and the sanction granted under section 151(1) of the Income-tax Act, 1961 and found that the factual figures stated in the reasons (aggregate Rs. 47,77,923) were incorrect and not supported by the assessee's bank statements. The AO had not made an individual inquiry into the relevant bank account and the reasons were therefore based on borrowed or incorrect information. The sanctioning authority also issued approval in a mechanical manner without evident application of mind to the materials on record. The Tribunal applied the established legal principle that reopening founded on wrong or unexamined reasons and mechanical approval is invalid, and considered authorities holding that absence of application of mind in recording reasons or granting sanction renders reassessment void. On merits, the Tribunal considered the assessee's uncontested ownership and cultivation of thirty acres of agricultural land and accepted that agricultural income and legitimate sources could reasonably account for the modest bank deposit flagged as unexplained. The Tribunal therefore concluded that the addition under the peak credit approach was factually explained and unsustainable.Conclusion: The reassessment proceedings initiated by notice under section 148 read with section 147 of the Income-tax Act, 1961 are invalid due to incorrect reasons and mechanical sanction under section 151(1) of the Income-tax Act, 1961; and the addition of Rs. 5,61,923 on account of alleged unexplained bank deposits is deleted. The appeal is allowed in favour of the assessee.