2025 (5) TMI 694 - AT - Income Tax

Reopening of assessment u/s 147 - Undisclosed income - deposits in the bank account opened under a duplicate PAN which differed from the PAN used for filing returns - HELD THAT - Since the assessee did not make any compliance to the notices the ld. AO who was bound to complete the assessment in a best judgment manner and in the absence of any proof submitted by the assessee regarding expenses etc. was also bound to treat entire amount as the income of the assesse. Hence the challenge to the orders on technical grounds i.e. for issuance of notice u/s 148 and for completion of best judgment assessment under section 144 are dismissed. When we come to the facts of the case we find that the assessee by his own admission has been maintaining two PAN numbers. One PAN number has been used for opening the bank account and the second PAN number has been used for filing the income tax return. The assessee submits that the deposits in the bank account made under PAN No. AAGFI8468H have been duly explained in the audit report and return filed under PAN No. AAEFJ6725H. Therefore there is no basis for making the kind of addition that the ld. AO have. Considering that the fault is clearly that of the assessee for doing an act impermissible in law the onus is entirely upon the assessee to show before the ld. AO that the deposits made in the HDFC Bank account opened under PAN No. AAGFI8468H are duly explained by the returns and audit report filed under PAN No. AAEFJ6725H. Since this has not happened in the first round of assessment therefore we deem it appropriate to restore the matter back to the file of the ld. AO to give the assessee an opportunity to file the necessary evidences before the ld. AO to support his case Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

• Whether the reopening of assessment under section 148 of the Income Tax Act, 1961 was valid and within limitation, given the facts of the case.
• Whether the best judgment assessment under section 144 was justified in the absence of compliance by the assessee.
• Whether the deposits in the bank account opened under a duplicate PAN, which differed from the PAN used for filing returns, could be treated as unexplained income warranting addition.
• Whether the assessee was denied natural justice due to non-receipt or non-accessibility of notices and orders, compounded by the partner's ill health and lack of computer literacy.
• Whether the quantum of cash deposits as determined by the Assessing Officer (AO) was accurate and whether the profit declared on admitted deposits was reasonable.

Issue-wise Detailed Analysis

1. Validity and Limitation of Reopening under Section 148

Legal Framework and Precedents: Section 148 permits reopening of assessments where the AO has reason to believe that income has escaped assessment. Generally, the notice must be issued within three years from the end of the relevant assessment year, except in cases of income escaping assessment exceeding Rs. 50 lakhs, where the limitation extends to ten years.

Court's Interpretation and Reasoning: The AO issued notice under section 148 within the extended ten-year period, relying on information from the NMS system indicating substantial cash deposits in the bank account. The assessee contended that no tax evasion existed as all deposits were explained under the original PAN, and thus reopening was barred by limitation. The Tribunal found that the AO had prima facie reason to believe income had escaped assessment, justifying the issuance of notice under section 148. The Court emphasized that the AO must act on credible material before him.

Application of Law to Facts: Since the AO had information of large cash deposits and no return was filed under the PAN linked to that bank account, the reopening was valid and within limitation.

Competing Arguments: The assessee argued that the duplicate PAN was erroneously allotted and that all deposits were disclosed under the original PAN. However, the Court noted that the use of two PANs was impermissible and placed the onus on the assessee to explain the deposits.

Conclusion: The reopening under section 148 was valid and not barred by limitation.

2. Justification of Best Judgment Assessment under Section 144

Legal Framework: Section 144 allows the AO to complete assessment to the best of his judgment where the assessee fails to comply with notices or to furnish required information.

Court's Reasoning: The AO issued notices under section 142(1), but the assessee failed to respond or file returns. Consequently, the AO completed the assessment under section 144 treating the entire cash deposits as income. The Tribunal agreed that in absence of any compliance or evidence from the assessee, the AO was justified in adopting a best judgment assessment.

Application of Law to Facts: The non-compliance by the assessee warranted the AO's action under section 144.

Competing Arguments: The assessee claimed inability to access notices due to ill health and lack of computer literacy. The Tribunal acknowledged these facts but maintained that the AO's action was justified given the non-response.

Conclusion: The best judgment assessment under section 144 was justified in the circumstances.

3. Treatment of Deposits under Different PANs and Explanation of Income

Legal Framework: PAN is a unique identifier for taxpayers. Use of multiple PANs by the same entity is impermissible and may cause discrepancies in assessment. Income must be explained and supported by audit reports and returns.

Court's Interpretation: The assessee maintained two PANs: one for banking transactions and another for filing returns and audit reports. The AO treated deposits under the bank account PAN as unexplained income since returns were filed under a different PAN. The assessee argued that deposits were explained in returns filed under the original PAN.

Key Evidence and Findings: The assessee admitted the existence of two PANs and the deposits in the bank account under the second PAN. The audit report and returns were filed only under the original PAN. The AO did not consider the audit report or returns filed under the original PAN in the assessment under the second PAN.

Application of Law to Facts: The Tribunal found that the fault lay with the assessee for maintaining two PANs and failing to properly explain deposits under the PAN linked to the bank account. The onus was on the assessee to prove that deposits under the second PAN were explained by returns filed under the first PAN.

Treatment of Competing Arguments: The assessee's explanation was accepted in principle, but since no evidence was submitted during assessment proceedings, the AO's addition was upheld. However, the Tribunal directed restoration of the matter to the AO to allow the assessee an opportunity to produce evidence explaining the deposits.

Conclusion: The deposits under the second PAN were prima facie unexplained, but the assessee should be given a chance to substantiate their explanation before final assessment.

4. Natural Justice and Non-Compliance Due to Ill Health and Illiteracy

Legal Framework: Principles of natural justice require that the assessee be given an opportunity to be heard and to comply with notices. However, non-compliance cannot indefinitely delay assessment.

Court's Reasoning: The assessee's partner was ill with COVID and not computer literate, which delayed access to notices and orders. The Tribunal condoned the delay in filing the appeal on these grounds. Nonetheless, the AO was justified in proceeding with assessment due to non-response.

Application of Law to Facts: The Tribunal balanced the equities by allowing the appeal despite delay and restoring the matter for fresh adjudication, ensuring the assessee's right to be heard.

Conclusion: Delay was condoned, but non-compliance during assessment proceedings justified the AO's action. The matter was restored to ensure fair opportunity.

5. Quantum of Deposits and Profit Declared

Legal Framework: Income tax is chargeable on profits, not gross receipts. The profit element must be reasonable and supported by evidence.

Court's Findings: The AO found cash deposits of Rs. 13,92,18,000/-, while the assessee admitted only Rs. 7,22,69,000/- deposits with a declared profit of Rs. 27,910/-. The AO observed that the profit declared was abnormally low compared to accepted taxation rates and that the assessee failed to explain the difference in deposits.

Application: The Tribunal noted the discrepancy and the lack of explanation for the full deposit amount. However, since the matter was restored for fresh assessment, the AO was directed to consider the evidence submitted by the assessee regarding the quantum and profit element.

Conclusion: The declared profit was not accepted as reasonable. The AO was to reassess after considering evidence.

Significant Holdings

"An AO has to act on the basis of the materials before him. The materials that were before him indicated that there was cash deposit of Rs. 13,92,18,000/- in a bank account by an assessee which had not filed an income tax return. That gave the ld. AO a prima facie reason to believe that income had escaped assessment."

"Considering that the fault is clearly that of the assessee, for doing an act impermissible in law, the onus is entirely upon the assessee to show before the ld. AO that the deposits made in the HDFC Bank account opened under PAN No. AAGFI8468H are duly explained by the returns and audit report filed under PAN No. AAEFJ6725H."

"Since this has not happened in the first round of assessment, therefore, we deem it appropriate to restore the matter back to the file of the ld. AO to give the assessee an opportunity to file the necessary evidences before the ld. AO to support his case."

The Tribunal established the principle that while reopening and best judgment assessments are justified on credible material and non-compliance, the assessee must be afforded a fair opportunity to explain apparent discrepancies, especially where procedural irregularities or genuine hardships exist.

Final determinations:

• The reopening under section 148 was valid and not barred by limitation.
• The best judgment assessment under section 144 was justified due to non-compliance.
• The use of two PANs by the assessee was impermissible and raised suspicion on deposits.
• The assessee failed to initially prove that deposits under the second PAN were explained under returns filed under the first PAN.
• The appeal was allowed for statistical purposes by restoring the matter to the AO for de novo assessment after allowing the assessee to submit evidence explaining the deposits and profit.