2025 (5) TMI 827 - AT - Income Tax

Reopening of assessment - Reason to believe - unexplained cash deposits - HELD THAT - AO has initiated the proceedings based on the information available with him and recorded the reasons for reopening the assessment however he does not make any addition on the basis of reasons recorded for initiating the proceedings. However he made the addition on verification of some other transaction entered by the assessee during the year. Therefore in our considered view the ratio of the decision of Ranbaxy Laboratories Ltd. 2011 (6) TMI 4 - DELHI HIGH COURT is squarely applicable to the facts in the present case. Further we observed that the ld. CIT (A) has tried to distinguish the case of Ranbaxy Laboratories Limited and Jet Airways (I) Ltd. (supra) by heavily relying on the decision of N Govindaraj 2015 (8) TMI 271 - KARNATAKA HIGH COURT . In our considered view the decision of Ranbaxy Laboratories Limited (supra) is the decision of Hon ble jurisdictional High Court which is squarely applicable to the facts of the present case. Therefore reasons recorded in the reassessment notice do not survive in this case as held in the case of Ranbaxy Laboratories Limited (supra). Accordingly ground raised by the assessee is allowed and all other grounds raised by the assessee are not adjudicated at this stage.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the notice issued under section 148 of the Income-tax Act, 1961 was valid, particularly in light of the reasons recorded by the Assessing Officer (AO) for reopening the assessment;

- Whether the reasons recorded for initiating reassessment proceedings were adequate, bona fide, and related to the additions ultimately made by the AO;

- Whether the reassessment proceedings were initiated mechanically without proper enquiry or application of mind, thereby rendering the proceedings invalid;

- Whether the approval under section 151 for issuance of notice under section 148 was valid and based on proper satisfaction;

- Whether the addition of Rs. 36,00,000/- on account of unexplained cash deposits was justified given the explanation and affidavits submitted by the assessee;

- Whether the Tribunal should quash the reassessment proceedings or the addition made thereunder.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Notice under Section 148 and Adequacy of Reasons Recorded

The legal framework governing reopening of assessments under section 148 requires that the AO must record valid reasons to form a belief that income has escaped assessment. The reasons must be specific, relevant, and must relate to the additions proposed. The law as per various precedents, including the decisions of the jurisdictional High Court, mandates that reopening should not be based on vague or mechanical reasons.

In the present case, the AO recorded reasons based on information received from the Annual Information Return (AIR) via the Director of Income Tax (Investigation), Kanpur, through the Principal Commissioner of Income Tax, Ghaziabad. The reason cited was the sale of a property by the assessee for Rs. 1.2 crores, allegedly not disclosed in the return, thus triggering reassessment proceedings under section 148.

However, during the reassessment, the AO made additions on a different transaction involving sale of agricultural land for Rs. 23,00,000/- and cash deposits totaling Rs. 47,50,000/-, which was not the basis of the reasons recorded for reopening. The AO treated the unexplained difference of Rs. 36,00,000/- as income and made additions accordingly.

The assessee challenged the validity of the notice on the ground that the additions made were not commensurate with the reasons recorded for reopening and that the AO's action amounted to conducting a roving enquiry beyond the scope of the reasons recorded.

The Tribunal examined the precedents cited, notably the decisions of the jurisdictional High Court in the case of Ranbaxy Laboratories Ltd. and the Bombay High Court in Jet Airways (I) Ltd., which hold that the AO cannot make additions on grounds different from those recorded as reasons for reopening. The Tribunal found that the AO did not make any addition based on the original reason (sale of property for Rs. 1.2 crores) but proceeded to add income based on a different transaction (sale of agricultural land and cash deposits).

The Tribunal noted that the lower appellate authority (CIT(A)) had attempted to distinguish these precedents by relying on a Karnataka High Court decision in N Govindaraju vs. ITO, but the Tribunal held that the jurisdictional High Court's decision in Ranbaxy Laboratories Ltd. was squarely applicable and binding.

Applying the law to facts, the Tribunal concluded that the reasons recorded for reopening did not survive scrutiny, as the AO's additions were unrelated to those reasons. Hence, the notice under section 148 was invalid.

Validity of Approval under Section 151

The assessee contended that the approval given under section 151 for issuance of notice under section 148 was mechanical and lacked the requisite satisfaction. This issue is closely linked to the validity of the notice itself.

The Tribunal did not expressly adjudicate this ground separately but implicitly treated it as subsumed within the invalidity of the notice under section 148, given that approval under section 151 must be based on valid reasons and proper satisfaction.

Addition of Rs. 36,00,000/- on Account of Cash Deposits

The assessee submitted affidavits and plausible explanations regarding the source of the cash deposits, which were not adequately considered by the AO or the CIT(A). The assessee argued that the addition was arbitrary and against settled law, as no proper enquiry was conducted on the explanation provided.

However, since the Tribunal allowed the ground relating to invalidity of the notice and reassessment proceedings, it did not adjudicate the merit of the addition or the treatment of the affidavits at this stage.

Competing Arguments and Court's Reasoning

The Revenue relied on the findings of the CIT(A) who had upheld the validity of the notice and the additions. The Tribunal, however, found the CIT(A)'s reliance on the Karnataka High Court decision insufficient to override the binding precedent of the jurisdictional High Court in Ranbaxy Laboratories Ltd.

The Tribunal emphasized the principle that reassessment proceedings must be confined to the reasons recorded and cannot be extended to unrelated transactions discovered during the course of reassessment. The Court underscored that reopening must not be used as a tool for roving enquiries.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The reasons recorded in the reassessment notice do not survive in this case, as held by the Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Limited (supra)."

This establishes the core principle that the AO must make additions strictly in accordance with the reasons recorded for reopening the assessment under section 148. Any deviation renders the notice and subsequent proceedings invalid.

Further, the Tribunal concluded:

"Accordingly, ground no.2 raised by the assessee is allowed and all other grounds raised by the assessee are not adjudicated at this stage."

This signifies that the reassessment proceedings were quashed on the ground of invalid notice, without delving into the merits of the additions or other procedural issues.

In sum, the Tribunal partly allowed the appeal by quashing the reassessment proceedings initiated under section 148 due to invalid reasons recorded, thereby reinforcing the principle that reopening of assessments must be based on valid and relevant reasons strictly connected to the additions sought.