2024 (7) TMI 1645 - AT - Income Tax

Unexplained cash deposits - as argued source of cash deposited in bank to have come out of sale proceeds of agricultural lands - financial transactions in the bank account of the assessee HELD THAT - The assessee has withdrawn cash from the said bank account on various dates within the financial year as date wise reflected in the cash flow statement furnished by the assessee and it is seen that sufficient cash balance are available with the assessee on the date of deposit of cash in the bank account in the month of March 2010 and as per contention of the assessee it is the same cash that has been redeposited. We also agree with the argument of AR that it is not the case of the department that cash withdrawn by the assessee from PNB Gramin bank during the period April 2009 till January 2010 (as reflected in bank account) has been invested or spent somewhere else or has been utilized elsewhere . In absence of any such adverse finding the benefit of cash availability cannot be denied to the assessee. Considering the transactions of cash withdrawn from the same bank account by the assessee during the same financial year we allow the assessee the benefit of redeposit in absence of any findings regarding the utilization of the said cash drawn elsewhere and we direct the addition to be deleted. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal include: (1) Whether the Assessing Officer (AO) erred in framing the reassessment order without disposing of the objections raised by the assessee against the reopening of assessment under section 148 of the Income Tax Act, 1961 ("the Act"); (2) Whether the initiation of reassessment proceedings under section 147 was valid, given the absence of a valid reason to believe that income had escaped assessment; (3) Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the addition of Rs. 62,18,200/- as unexplained cash deposits in the assessee's bank account under section 69A of the Act; and (4) Ancillary issues relating to procedural irregularities and the correctness of the assessment provisions applied.

Regarding the first issue on the disposal of objections to reopening, the legal framework mandates that when an assessment is reopened under section 147, the AO must record reasons to believe and issue a notice under section 148. The assessee may file objections to these reasons, which the AO is required to dispose of by a separate, speaking order before proceeding with reassessment. This procedural mandate is grounded in the Supreme Court's decision in GKN Driveshafts (India) Ltd. vs. ITO, which held that failure to pass such a speaking order renders the reassessment order illegal and liable to be quashed. The Gujarat High Court further reinforced this principle in General Motors India (Pvt.) Ltd. vs. DCIT and Arvind Mills Ltd. vs. ACWT, emphasizing the necessity of disposing objections distinctly to afford the assessee an opportunity for judicial review by way of writ petition.

In the instant case, the AO recorded the assessee's objections to the reasons recorded under section 148 but did not pass a separate speaking order disposing of those objections. Instead, the AO addressed the objections in the body of the assessment order by accepting a corrected figure of cash deposit but failed to issue a distinct order on objections. The CIT(A) upheld this approach, reasoning that the objections were "effectively disposed of" within the assessment order and no prejudice was caused to the assessee. The Tribunal, however, rejected this view, holding that the legal mandate requires a separate speaking order, distinct from the assessment order, to dispose of objections. The Tribunal cited the precedents mentioned above and the Amritsar Bench's earlier decision in Tarlochan Singh vs. ITO, where identical facts led to quashing of the assessment order for similar procedural lapses.

On the second issue concerning the validity of initiation of reassessment under section 147, the assessee contended that the AO lacked a valid reason to believe that income had escaped assessment and that there was no proper application of mind before assuming jurisdiction. The AO's initiation was based on cash deposits of Rs. 62,18,200/- in the assessee's bank account during the relevant year without any return filed. While the Tribunal did not explicitly delve into the sufficiency of reasons recorded, it observed that the procedural infirmity in disposing of objections was a fatal flaw. Since the Tribunal decided the appeal on merits in favour of the assessee on the addition issue, it deemed the other legal grounds, including this one, academic and refrained from adjudicating further.

The third and principal substantive issue relates to the addition of Rs. 62,18,200/- as unexplained cash deposits under section 69A of the Act. The AO and CIT(A) held that the cash deposits represented unexplained income, relying on the absence of credible evidence to establish the source of funds. The assessee had explained that the cash deposits originated from sale proceeds of agricultural land effected in the previous financial year (2008-09), supported by an unregistered agreement of sale dated 10/04/2008. However, the CIT(A) found the explanation unsatisfactory due to lack of registration, absence of evidence that the agreement was acted upon, failure to produce bank statements of purchasers, and no confirmation from purchasers or family members regarding the source and receipt of funds. Additionally, the CIT(A) noted the delay of nearly a year in depositing the cash into the bank and the lack of explanation for the interim holding of cash.

In response, the assessee's authorized representative submitted a detailed cash flow statement for the relevant financial year 2009-10 (assessment year 2010-11), demonstrating that the cash deposited in March 2010 was withdrawn in cash from the same bank account during the same year in multiple tranches. The opening balance as on 01/04/2009 was Rs. 20.30 lakhs, with subsequent credits by way of bank transfers undisputed by the revenue. The cash withdrawals totaled Rs. 73.5 lakhs, and the redeposit of Rs. 62,18,200/- in March 2010 was thus explained as redeposit of cash withdrawn earlier from the same account. The assessee argued that since the department did not contend that the withdrawn cash was spent or invested elsewhere, the benefit of cash availability must be given to the assessee.

The Tribunal accepted this explanation on merits, observing that the dispute relating to the sale agreement and sale proceeds pertained to the previous year (2008-09) and was not relevant to the year under appeal. The Tribunal emphasized that the bank statement and cash flow statement for the year 2009-10 showed sufficient cash availability with the assessee at the time of redeposit and that the revenue had not established any diversion or utilization of the withdrawn cash elsewhere. Therefore, the addition under section 69A was not sustainable. The Tribunal directed deletion of the addition of Rs. 62,18,200/- and allowed the appeal on this ground.

The Tribunal's reasoning on this issue is encapsulated in the following excerpt from the order: "We find on reading of the bank statement, that the opening balance brought forward on 1st April 2009 is 20.30 lakhs, and there has been subsequent credit in the said account vide bank transfers (other than cash), to which neither the AO nor the Ld CIT(A) has raised any queries at any stage. Subsequently, the assessee has withdrawn cash from the said bank account on various dates within the financial year... We also agree with the argument of the Ld AR, that it is not the case of the department that cash withdrawn by the assessee... has been invested or spent somewhere else or has been utilized elsewhere. In absence of any such adverse finding, the benefit of cash availability cannot be denied to the assessee."

Regarding the ancillary grounds, including the contention that the assessment was framed under incorrect provisions (section 147/143(3) instead of section 144), and the alleged failure of the CIT(A) to consider the assessee's submissions, the Tribunal found these issues to be academic in light of its decision on the merits of the addition and the procedural infirmity concerning disposal of objections. Consequently, these grounds were not adjudicated.

The significant holdings of the Tribunal include:

1. The AO's failure to dispose of the objections raised by the assessee against the reopening notice under section 148 by a separate, speaking order is a procedural illegality, as mandated by the Supreme Court in GKN Driveshafts (India) Ltd. and endorsed by the Gujarat High Court in General Motors India (Pvt.) Ltd. and Arvind Mills Ltd. The assessment order passed without such disposal is liable to be quashed. However, since the Tribunal decided the appeal on merits, this ground was not finally adjudicated.

2. On merits, the addition of Rs. 62,18,200/- as unexplained cash deposits under section 69A was unsustainable where the assessee demonstrated through bank statements and cash flow analysis that the cash deposited was withdrawn earlier from the same bank account in the same financial year and there was no evidence of diversion or utilization elsewhere. The Tribunal held: "Considering all factual circumstances... we allow the assessee the benefit of redeposit... and direct the addition... to be deleted."

3. The Tribunal distinguished the issue of sale proceeds of agricultural land and related cash receipts in the prior year (2008-09) as irrelevant to the assessment year under appeal (2010-11), focusing solely on the transactions within the relevant year.

4. The Tribunal declined to adjudicate other legal grounds raised by the assessee, deeming them academic in view of the decision on merits.

In conclusion, the Tribunal allowed the appeal, deleted the addition of Rs. 62,18,200/-, and set aside the assessment order on the grounds discussed. The order was pronounced in open court on 22.07.2024.