2025 (7) TMI 996 - AT - Income Tax

Additions on protective basis u/s 69A - un-explained cash deposits in the bank account - transactions of corelating purchase of alcoholic liquor - Statement of the assessee was recorded u/s 131 by the DDIT Investigation Bathinda where the assessee has denied the opening of any bank account with OBC and has stated that the bank account which is the subject matter of dispute in the instant case has been fraudulently opened by Mr Amit Doda ( Prop M/s Gagan Wines) in the name of the assessee (without the assessee s knowledge) - HELD THAT - We find that the assessee himself is a retailer of alcoholic liquor under license granted by State Excise authorities and his gross turnover as declared in his return amounting to Rs. 83.36 lakhs also matches with the related purchase as reflected in form 26AS (excluding the fraudulent purchase as discussed above) and transacted through HDFC bank against which a net profit of Rs. 1, 65, 519/- is disclosed and accepted by the AO in scrutiny proceedings. We also note that the assessee has restricted his claim of TCS (u/s 206C) to the extent of actual purchase made by him from parties who are all distributors of alcoholic liquor under control of State Excise authorities. Moreover for all practical purpose it would not have been humanly possible for the assessee (a retail trader) to execute a turnover of such huge amount of Rs. 15 crores in a short span of only fourteen days considering the capacity of his license category which only empowers him to sell to actual consumers over the counter. Moreover the assessee coming to know of such scrupulous activities being carried out in his name has rightly taken shelter under the provisions of law by filing the FIR and necessary legal proceedings are under way and the law will take its own course in the matter. We also find that the AO has conducted proper enquiry and has arrived at a logical conclusion regarding the transactions carried out by the aforesaid two alleged parties and has found out that the necessary proceedings against both of them has been initiated in respect of the financial transactions indulged in by them. Considering the factual aspect of the matter on merits of the case we are of the opinion that the addition on protective basis made by the AO in the hands of the assessee is not legally justified and the same is directed to be deleted. Appeal of assessee allowed.

Summary

The core legal questions considered in this appeal include:

1. Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 was valid, specifically addressing the adequacy of the Assessing Officer's (AO) reasons to believe that income had escaped assessment, and whether such reasons were based on independent application of mind or merely borrowed from the Investigation Wing.

2. Whether the notice issued under section 148 was validly served in accordance with the procedural requirements under section 282 of the Act.

3. Whether the addition of Rs. 15,00,06,000/- on a protective basis under section 69A of the Act, representing unexplained cash deposits in a disputed bank account, was justified in the hands of the assessee, who denied ownership and operation of the said bank account.

4. Whether the Assessing Officer and the first appellate authority erred in sustaining the addition despite the assessee's claim of fraudulent opening and operation of the bank account by third parties, supported by FIR and police investigation.

Issue 1: Validity of Reopening under Section 147

The legal framework requires the AO to form a reason to believe, based on material on record, that income chargeable to tax has escaped assessment. The AO must independently apply his mind and not merely rely on information or satisfaction borrowed from other authorities, such as the Investigation Wing. Precedents cited by the appellant include various decisions of the ITAT and High Courts emphasizing that reopening based on borrowed satisfaction or mere suspicion is invalid.

The Court noted that the AO's reasons for reopening were based on information received from the DDIT (Investigation), Bathinda, without independent application of mind. The appellant relied on authoritative precedents where reopening was quashed due to lack of independent satisfaction by the AO. However, the Tribunal did not adjudicate on this legal issue as the appeal was allowed on merits.

Issue 2: Validity of Notice under Section 148 and Service Requirements

The assessee contended that the notice under section 148 was not served in the manner prescribed under section 282 of the Act, rendering the reassessment proceedings invalid. Additionally, the approval under section 151 was alleged to have been granted mechanically without due application of mind.

The Tribunal did not address these procedural contentions in detail, as the appeal was allowed on substantive grounds. The legal principle requires strict compliance with procedural mandates for valid reopening and reassessment, but this was not the basis of the final decision.

Issue 3: Justification of Addition under Section 69A on Unexplained Cash Deposits

Section 69A permits addition of unexplained cash credits in the hands of the assessee if the source is not satisfactorily explained. The AO made an addition of Rs. 15 crore on protective basis, representing cash deposits in a bank account allegedly maintained by the assessee. The assessee denied having any knowledge or control over the disputed bank account (Oriental Bank of Commerce Account No. 02831131002070) and claimed that it was fraudulently opened and operated by M/s Gagan Wine Trade and Financers Ltd. and M/s New Gagan Wines, with forged signatures and without his consent.

The assessee supported this claim with a copy of the FIR lodged against the alleged perpetrators and documents showing that the bank account was operated exclusively by these third parties through an authorized signatory, Mr. Raj Kumar. The bank account was used for cash deposits totaling Rs. 15 crore over a short period (13.03.2012 to 26.03.2012), immediately transferred by cheque to the said parties. The assessee had no access to the cheque books, made no deposits or withdrawals, and derived no benefit from these transactions.

The AO's own findings indicated that the addition of Rs. 15 crore had already been made in the hands of the actual beneficiaries, M/s Gagan Wines and M/s New Gagan Wines, who were found to be involved in unexplained cash credits. The addition in the assessee's hands was only protective.

The Tribunal observed that the assessee's declared turnover and income were consistent with the capacity of his retail liquor license and the transactions reflected in Form 26AS and TCS returns. It was practically impossible for the assessee to have conducted transactions of Rs. 15 crore in just fourteen days, given the license restrictions.

The Tribunal also noted that the assessee had taken prompt legal action by filing an FIR and that criminal proceedings were ongoing. The AO had conducted proper inquiries and found that the disputed transactions were attributable to the third parties.

Applying the law to these facts, the Tribunal concluded that the addition on protective basis was not legally justified and directed its deletion. This conclusion was based on the absence of any nexus between the assessee and the disputed bank account or cash deposits, and the presence of evidence supporting the assessee's claim of fraud.

Issue 4: Treatment of Competing Arguments and Evidence

The revenue relied on the AO and CIT(A) orders confirming the addition, emphasizing the cash deposits and the lack of satisfactory explanation. The CIT(A) dismissed the assessee's submissions for lack of supporting documents and justified the addition on the basis of cash deposits in bank accounts maintained in the assessee's name.

The assessee countered with documentary evidence including the FIR, bank account opening forms, signatures of authorized signatories unrelated to the assessee, and TCS returns showing purchases from the alleged fraudulent parties. The assessee's argument that the bank account was fraudulently opened and operated without his knowledge was supported by police investigation and ongoing criminal proceedings.

The Tribunal gave due weight to the factual matrix, the improbability of such large transactions by a retail licensee, and the evidence of fraud. It found the revenue's case to be unsubstantiated in the context of the protective addition and ruled in favor of the assessee.

Significant Holdings:

"Considering the factual aspect of the matter on merits of the case we are of the opinion that, the addition on protective basis, made by the AO in the hands of the assessee is not legally justified, and the same is directed to be deleted."

"Moreover, the assessee coming to know of such scrupulous activities being carried out in his name, has rightly taken shelter under the provisions of law by filing the FIR and necessary legal proceedings are under way and the law will take its own course in the matter."

"For all practical purpose, it would not have been humanly possible for the assessee (a retail trader) to execute a turnover of such huge amount of Rs. 15 crores in a short span of only fourteen days considering the capacity of his license category, which only empowers him to sell to actual consumers over the counter."

"Since we have decided the appeal in favour of the assessee on merits we do not adjudicate on the legal issues raised by the assessee, which will just be of academic interest."

The core principle established is that protective additions under section 69A cannot be sustained against an assessee who demonstrates, with credible evidence, that the alleged unexplained cash credits pertain to a bank account fraudulently opened and operated by third parties without his knowledge or control. The mere presence of cash deposits in a bank account in the assessee's name is insufficient to justify addition if the assessee can prove lack of ownership and benefit.

The final determination was to delete the addition of Rs. 15 crore made on protective basis in the hands of the assessee, thereby allowing the appeal on merits without deciding the validity of reopening or procedural issues.