2025 (7) TMI 94 - AT - Income Tax

Reopening of assessment - reasons to believe - reliance on data of AIR which indicating alleged cash deposits - HELD THAT - It can be seen from the reasons recorded except relying on the data available with the ITD system A.O. has not made independent anaylization of the entries before forming belief that income has escaped assessment. The identical issue came up in the case of Mahavir Prasad 2017 (10) TMI 1377 - ITAT DELHI reasons recorded are highly vague farfetched and cannot by any stretch of imagination lead to conclusion of escapement of income and these are merely presumption in nature; that it is a case of mechanical action on the part of the AO as there is non-application of mind much less independent application of mind so as to show that he formed an opinion based on any material that such deposits represented income. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, was valid and justified on the basis of the reasons recorded by the Assessing Officer (A.O.).

- Whether the reasons recorded by the A.O. for reopening the case, primarily based on the Annual Information Return (AIR) data indicating cash deposits, constituted a valid reason to believe that income had escaped assessment.

- Whether the A.O. applied independent and tangible analysis before forming the belief necessary to invoke the reassessment provisions.

- Whether the reassessment proceedings initiated on the basis of the AIR data were legal or amounted to mechanical action without application of mind.

- Whether the additions made by the A.O. on the ground of unexplained cash deposits were sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening under Section 147 of the Income Tax Act

Relevant Legal Framework and Precedents:

Section 147 of the Income Tax Act empowers the Assessing Officer to reopen an assessment if he has reason to believe that income chargeable to tax has escaped assessment. The validity of reopening hinges on the existence of tangible, credible, and relevant material forming the basis of such belief. Mere suspicion or conjecture is insufficient. Judicial precedents emphasize that the reasons recorded must reflect an independent application of mind and should not be based on mechanical or routine reliance on information such as AIR data without further analysis.

The Tribunal in the case of Mahavir Prasad (supra) held that reopening based solely on AIR data without independent analysis was invalid. The reasons recorded must establish a nexus between the information and the belief that income has escaped assessment.

Court's Interpretation and Reasoning:

The Court examined the reasons recorded by the A.O. which were primarily based on the AIR data indicating cash deposits in the bank account of the Assessee. It was found that the A.O. did not undertake any independent or detailed scrutiny of the entries before forming the belief that income had escaped assessment.

The Court noted that the reasons were "mechanical" and lacked any tangible or cogent material beyond the AIR data. The A.O. had not demonstrated any nexus between the cash deposits and undisclosed income, nor had he applied his mind independently to the facts of the case.

Key Evidence and Findings:

The AIR data reflected cash deposits in the Assessee's bank account for the relevant financial year. However, the Assessee had filed his return declaring income and claimed deductions under Chapter VI-A. The A.O. relied solely on the AIR data without further verification or corroborative evidence to establish that the deposits were unexplained or represented undisclosed income.

Application of Law to Facts:

Applying the principles laid down in Mahavir Prasad and other precedents, the Court held that reliance solely on AIR data, without independent analysis or credible material, does not satisfy the requirement of "reason to believe" under Section 147. The reopening was thus held to be illegal and without jurisdiction.

Treatment of Competing Arguments:

The Department contended that the AIR data was credible information and that the A.O. had applied his mind in recording the reasons. The Court rejected this contention, emphasizing that the reasons recorded did not reflect any independent application of mind or nexus between the data and the belief of escapement of income.

Conclusion:

The reopening of the assessment was quashed as invalid due to lack of valid reasons and non-application of mind by the A.O., rendering the reassessment proceedings void.

Merits of Addition on Unexplained Cash Deposits

Since the Court held the reassessment proceedings to be void on the legal ground of invalid reopening, it did not adjudicate the merits of the addition made by the A.O. regarding unexplained cash deposits. The issue was rendered academic and no findings were recorded on the substantive claim of undisclosed income.

3. SIGNIFICANT HOLDINGS

- "There is no nexus between the prima facie inference arrived in the reasons recorded and information; the information was restricted to cash deposits in bank account but there was no material much less tangible, credible, cogent and relevant material to form a reason to believe that cash deposits represented income of the assessee."

- "The proceedings initiated are based on surmises, conjectures and suspicion and therefore, the same are without jurisdiction; that the reasons recorded are highly vague, farfetched and cannot by any stretch of imagination lead to conclusion of escapement of income and these are merely presumption in nature."

- "It is a case of mechanical action on the part of the AO as there is non-application of mind much less independent application of mind so as to show that he formed an opinion based on any material that such deposits represented income."

- The Court held the reassessment proceedings initiated under Section 147 to be "bad in law and deserves to be quashed."

- The final determination was that the appeal filed by the Assessee is allowed on the ground of invalid reopening, and the merits of the addition were not adjudicated.