2025 (4) TMI 926 - HC - Income Tax

Reopening of assessment u/s 147 - TCS collected by various entities under Section 206CA Deposits during the demonetization period and time deposit - HELD THAT - In regard to the TCS the Assessee explained that same was related to the transaction of purchase of liquor which was duly accounted for in its books of account. In regard to the cash deposit the Assessee had explained that the cash deposited during the demonetization period was the sale proceeds of goods. It is material to note that the Assessee disclosed that it had deposited Rs. 18, 74, 14, 600/- during FY 2016-17 which was much larger than a sum of Rs. 7, 03, 20, 600/- information of which was available with the AO. Thus the allegations of bulk cash deposit by the Assessee during the demonetization period was contested. The said allegation was premised on the basis that the total cash deposit during the period was Rs. 7, 03, 20, 600/- however the Assessee had clarified that said figure was much higher. There is also no cavil as to the explanation regarding the time deposit of Rs. 10, 00, 000/-. AO had considered said responses and accepted the Assessee s explanation regarding the reconciliation of TCS with proceeds of sales reflected in the books of account and the time deposit made under PM-GKY. The AO had held that no adverse inference is to be drawn on account of such information. With regard to the deposit of cash in the bank account concededly there was no allegation in the notice issued under Section 148A (b) of the Act that the cash deposited by the Assessee in its bank account during the demonetization period was disproportionately higher in comparison with the cash deposited during the corresponding period in the previous financial year. Thus the Assessee had no opportunity to provide any explanation in respect of such allegation. We find merit in the contention that the impugned order passed u/s 148A (d) of the Act had travelled beyond the information furnished to the Assessee which according to the AO was suggestive of its income escaping the assessment. Thus the impugned order passed u/s 148A (d) of the Act cannot be sustained and is set aside. The impugned notice is set aside.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(i) Whether the order passed under Section 148A(d) of the Income Tax Act, 1961 exceeded the scope of the notice issued under Section 148A(b) of the Act;

(ii) Whether the reopening of the assessment for AY 2017-18 was justified on the basis of information provided in the Section 148A(b) notice;

(iii) Whether the alleged unexplained cash deposits during the demonetization period constituted income escaping assessment within the meaning of Section 147 of the Act;

(iv) Whether the reopening was based on permissible grounds or was an impermissible change of opinion;

(v) Whether the Assessee was given a fair opportunity to respond to all material allegations relied upon by the Assessing Officer (AO) in the impugned order under Section 148A(d).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Scope of the order under Section 148A(d) vis-`a-vis the notice under Section 148A(b)

The legal framework mandates that the order under Section 148A(d), which forms the basis for issuance of a notice under Section 148, must be strictly confined to the information contained in the notice under Section 148A(b). The Court examined whether the AO's order dated 19.03.2024 under Section 148A(d) exceeded the scope of the earlier notices dated 01.02.2024 and 14.02.2024 under Section 148A(b).

The AO's notices under Section 148A(b) alleged that certain transactions aggregating Rs. 17,80,23,257/- remained unexplained, specifically focusing on (i) Tax Collected at Source (TCS) under Section 206CA, (ii) cash deposits during the demonetization period, and (iii) a time deposit of Rs. 10,00,000/-. The Assessee responded with explanations and documentary evidence, including reconciliation statements and cash sales details.

However, the impugned order under Section 148A(d) introduced a new allegation that the cash deposits during the demonetization period were disproportionately higher compared to the corresponding period in the previous financial year, based on a detailed percentage increase analysis. This specific comparison and conclusion were not part of the information furnished in the Section 148A(b) notices.

The Court held that such an allegation, which formed the foundation for reopening, was beyond the scope of the original notice and thus deprived the Assessee of an opportunity to respond to this new material. The Court emphasized that the AO cannot travel beyond the information contained in the Section 148A(b) notice while passing the Section 148A(d) order.

Issue (ii): Justification for reopening the assessment under Section 147/148

Section 147 of the Income Tax Act permits reopening of assessments if the AO has reason to believe that income chargeable to tax has escaped assessment. Explanation 1(ii) to Section 148 clarifies that information indicating that income has escaped assessment is a prerequisite.

The AO relied on three categories of information: TCS statements, cash deposits during demonetization, and a time deposit. The Assessee's explanations regarding TCS and time deposit were accepted by the AO, and no adverse inference was drawn. The only remaining ground was the cash deposit during the demonetization period.

The AO relied on an audit objection raised by the Comptroller and Auditor General (CAG) that the assessment was not made in accordance with law concerning cash deposits amounting to Rs. 6,23,39,100/-. The AO compared cash deposits in FY 2015-16 and FY 2016-17, noting a 618.25% increase during the demonetization period as compared to the corresponding period in the previous year. This was treated as information suggesting income escaping assessment.

The Assessee contested this, pointing out that the total cash deposits during FY 2016-17 were Rs. 18,74,14,600/-, significantly higher than the figure relied upon by the AO, and that all deposits were disclosed and explained as proceeds of cash sales. The Court noted that the AO accepted the Assessee's explanations on TCS and time deposits but relied exclusively on the audit objection and disproportionate cash deposit increase to justify reopening.

However, since the disproportionate deposit allegation was not part of the Section 148A(b) notice, the reopening was held to be without proper foundation.

Issue (iii): Whether the reopening was based on permissible grounds or was an impermissible change of opinion

The Assessee argued that the reopening was based on a change of opinion, which is impermissible under settled law. The AO's acceptance of the Assessee's explanations during the original assessment and subsequent reliance on audit objections and disproportionate cash deposit analysis indicated a change of opinion rather than fresh information.

The Court did not explicitly rule on this ground but implicitly recognized the impermissibility by holding that the reopening was based on information beyond that communicated in the Section 148A(b) notice and thus procedurally flawed.

Issue (iv): Whether the Assessee was given a fair opportunity to respond

Since the impugned order under Section 148A(d) introduced new allegations not contained in the Section 148A(b) notices, the Assessee was denied an opportunity to respond to the key basis for reopening. The Court underscored the principle of natural justice requiring that the Assessee be given notice of all material information and a fair chance to explain.

The absence of such opportunity rendered the impugned order unsustainable.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning is encapsulated in the following verbatim extract from the judgment:

"In view of the above, we find merit in the contention that the impugned order passed under Section 148A (d) of the Act had travelled beyond the information furnished to the Assessee, which, according to the AO, was suggestive of its income escaping the assessment. Thus, the impugned order passed under Section 148A (d) of the Act cannot be sustained and is set aside."

The Court established the core principle that the order under Section 148A(d) must be strictly confined to the information contained in the Section 148A(b) notice, and any material beyond that cannot be relied upon for reopening assessments.

The final determination was that the impugned notice under Section 148 was invalid as it was predicated on an order under Section 148A(d) which exceeded the scope of the notice under Section 148A(b). Consequently, the notice was set aside, and the matter was remanded to the AO to reconsider the issue afresh, allowing the Assessee to respond to all material information.

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