Section 148A(d) (of Income Tax Act, 1961) requires tangible evidence to reopen assessment. AO can't reopen on remote possibilities or assumptions.

Case Name:

Abdul Majeed vs. Income Tax Officer (High Court of Rajasthan)

Key Takeaways:

- The court emphasized the importance of strictly interpreting taxing statutes and adhering to the statutory requirements for reopening assessments.

- The department's decision to reopen the assessment was based on mere conjecture and not supported by material evidence on record.

- The court clarified that the expression "material available on record" in Section 148A(d) (of Income Tax Act, 1961) requires tangible evidence and cannot be interpreted to include remote possibilities or assumptions.

Issue:

Whether the Income Tax Department had sufficient material on record to justify reopening the assessment under Section 148A (of Income Tax Act, 1961) and issuing a notice under Section 148 (of Income Tax Act, 1961), for an amount exceeding Rs. 50 lakh, as required by Section 149(1)(b) (of Income Tax Act, 1961).

Facts:

- The department issued a notice under Section 148A(b) (of Income Tax Act, 1961) to the assessee, alleging that income chargeable to tax for the assessment year 2015-16 had escaped assessment, based on certain cash deposits in the assessee's bank account.

- The assessee responded, stating that the total cash deposits were only Rs. 19.39 lakh, not Rs. 52.75 lakh as alleged by the department, and provided bank statements to support their claim.

- Despite the assessee's reply and bank statements, the department passed an order under Section 148A(d) (of Income Tax Act, 1961) and issued a notice under Section 148 (of Income Tax Act, 1961), assuming that the assessee might have additional bank accounts.

Arguments:

- The assessee argued that the department lacked material evidence to suggest that the income chargeable to tax that escaped assessment amounted to or was likely to exceed Rs. 50 lakh, as required by Section 149(1)(b) (of Income Tax Act, 1961) for reopening assessments beyond three years.

- The department contended that the legal requirement under Section 148A (of Income Tax Act, 1961) is only a prima facie case for reopening the assessment and not a full-fledged inquiry. It argued that the inference drawn from the undisclosed cash deposits, coupled with the assessee's NRI status, justified the assumption of additional bank accounts.

Key Legal Precedents:

- Section 148A (of Income Tax Act, 1961) - Conducting inquiry and providing opportunity before issuing notice under Section 148 (of Income Tax Act, 1961).

- Section 149(1)(b) (of Income Tax Act, 1961) - Time limit for issuing notice under Section 148 (of Income Tax Act, 1961) when three years have elapsed from the end of the relevant assessment year.

Judgment:

The court quashed the impugned order and notices, holding that the department failed to place any material on record suggesting that the income chargeable to tax that escaped assessment exceeded Rs. 50 lakh. The court emphasized that the decision under Section 148A(d) (of Income Tax Act, 1961) must be based on material available on record, and mere conjecture or assumption about additional bank accounts cannot justify reopening the assessment beyond the statutory time limit.

FAQs:

Q1: What is the significance of the Rs. 50 lakh threshold in this case?

A1: Section 149(1)(b) (of Income Tax Act, 1961), imposes a threshold of Rs. 50 lakh for reopening assessments beyond three years from the end of the relevant assessment year. If the income chargeable to tax that escaped assessment does not exceed Rs. 50 lakh, the department cannot reopen the assessment after three years.

Q2: What did the court mean by "material available on record"?

A2: The court clarified that the expression "material available on record" in Section 148A(d) (of Income Tax Act, 1961) requires tangible evidence and cannot be interpreted to include remote possibilities or assumptions. In this case, the department lacked material evidence to suggest that the escaped income exceeded Rs. 50 lakh.

Q3: Can the department reopen an assessment based on mere assumptions or conjectures?

A3: No, the court held that the department cannot reopen an assessment based on mere assumptions or conjectures, such as the assessee having additional bank accounts without any supporting evidence.

Q4: What is the significance of this judgment?

A4: This judgment reinforces the principle of strict interpretation of taxing statutes and emphasizes the need for the tax authorities to adhere to statutory requirements and have sufficient material evidence on record before reopening assessments, especially beyond the statutory time limit.

Heard.

With the consent of the parties, the matter is heard finally as the reply has been filed.

This writ petition seeks to assail correctness and validity of order dated 29.03.2022 passed by the respondent, whereby, after initiating proceedings under Section 148A(d) (of Income Tax Act, 1961), 1961 (herein after referred to as ‘the Act’) on the formation of an opinion that income chargeable to tax has escaped assessment, the authority proceeded to issue notice under Section 148 (of Income Tax Act, 1961).

Brief facts, relevant and necessary for adjudication of the controversy involved in the present writ petition are that on 15.03.2022, the respondent issued notice under clause (b) of Section 148A (of Income Tax Act, 1961) on the basis of certain information which suggested that income chargeable to tax for the assessment year 2015-2016 has escaped assessment within the meaning of Section 147 (of Income Tax Act, 1961). The notice was sent along with the details of the cash deposits in the account of the assessee maintained with the Corporation Bank, which according to the notice disclosed deposit of a total amount of Rs.52,75,000/-.

The notice stated that the assessee did not disclose this amount of cash deposit during the relevant financial year and, therefore, on that basis, the proceedings are required to be initiated. Replying to the said notice, the petitioner-assessee stated that the initiation of proceedings on the basis that the cash deposits during the relevant financial year are Rs.52,75,000/- is factually incorrect and according to the petitioner-assessee, the total amount of cash deposit in his bank account in the Corporation Bank was only Rs.19,39,000/-. The petitioner- assessee, in order to satisfy the authority that the total cash deposits in that particular financial year were only Rs.19,39,000/-, also annexed along with the reply, complete bank statement of transactions done during the financial year in question.

The competent authority, however, proceeded to pass an order for issuance of notice under Section 148 (of Income Tax Act, 1961) on 29.03.2022. Thereafter, a notice under Section 148 (of Income Tax Act, 1961) has been issued to the petitioner-assessee. The order dated 29.03.2022 passed under Section 149A(d) (of Income Tax Act, 1961) as also notice under Section 148 (of Income Tax Act, 1961) have been assailed in this petition.

Learned counsel for the petitioner-assessee contended before us that in order to initiate proceedings under Section 148 (of Income Tax Act, 1961), the law requires the authority to first arrive at satisfaction after holding an enquiry in terms of provisions contained in Section 148A (of Income Tax Act, 1961) based on material available on record which must suggest that income chargeable to tax has escaped assessment. He would further contend that in case this exercise is under taken beyond a period of three years with reference to the concerned assessment year, the proceedings under Section 148 (of Income Tax Act, 1961) could be initiated only when the total amount of the alleged income which is said to have escaped assessment is more than Rs.50,00,000/-, otherwise such exercise may not lead to proceedings under Section 148A (of Income Tax Act, 1961) because of statutory impediment under Section 149 Sub-Section 1 Clause (b) (of Income Tax Act, 1961).

Learned counsel for the petitioner-assessee vehemently contended that the entire material, which has been collected by the authority, does not contain any material to even remotely suggest that the total income which according to them escaped assessment is more than Rs.50,00,000/-. Only on conjecture that the assessee may have some more bank accounts, order has been passed under Section 148A(d) (of Income Tax Act, 1961) followed by notice under Section 148 (of Income Tax Act, 1961). Therefore, it is argued, the order and proceedings are liable to be set aside. Per-contra, learned counsel appearing for the revenue would submit that the authority has drawn detailed proceedings after giving proper opportunity of hearing to the petitioner-assessee by issuing notice under Section 148A (of Income Tax Act, 1961). Pursuant to the notice, the petitioner-assessee submitted his reply and the petitioner-assessee could not dispute that during the relevant assessment year, certain cash deposits were made by the petitioner-assessee. While the department’s stand is that the cash deposits are more than Rs.50,00,000/-, this being disputed by the petitioner- assessee, is essentially in the realm of factual dispute which could not be gone into by this court in exercise of its jurisdiction under Article 226 of the Constitution of India. His further submission is that the legal requirement as incorporated under Section 148A (of Income Tax Act, 1961) is only a prima-facie case for opening of assessment and not a full fledged enquiry in the matter which otherwise would be subject matter of assessment proceedings. He would further submit that the inference drawn by the authority on the basis of the fact that the account in which undisclosed cash deposits of more than Rs.19,00,000/- were made itself suggests that the assessee, who is otherwise an NRI, may have many more bank accounts. He would submit that such an inference taken together with the cash deposit details disclosed during enquiry, by itself, is sufficient to validate the impugned order and issuance of notice under Section 148 (of Income Tax Act, 1961).

We have heard learned counsel for the parties and perused the records. After amendment carried out in the income tax under The Finance Act, 2021, even before proceedings under Section 148 (of Income Tax Act, 1961) could be drawn, the law requires an order to be passed under Section 148A (of Income Tax Act, 1961) by conducting an enquiry in the manner provided under Section 148A (of Income Tax Act, 1961) and satisfaction to be arrived at on the basis of material available on record that income chargeable to tax has escaped assessment for the relevant assessment year. The relevant provisions contained in Section 148A (of Income Tax Act, 1961), being relevant, are extracted as below:-

“148A. Conducting inquiry providing opportunity before issue of notice under section 148 (of Income Tax Act, 1961). - The Assessing Officer shall, before issuing any notice under section 148 (of Income Tax Act, 1961),-

(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

(b) provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 (of Income Tax Act, 1961) should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

(c) consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);

(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148 (of Income Tax Act, 1961), by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

Provided that the provisions of this section shall not apply in a case where,-

(a) a search is initiated under section 132 (of Income Tax Act, 1961) or books of account, other documents or any assets are requisitioned under section 132A (of Income Tax Act, 1961) in the case of the assessee on or after the 1st day of April, 2021; or

(b) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under section 132 (of Income Tax Act, 1961) or requisitioned under section 132A (of Income Tax Act, 1961), in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(c) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 (of Income Tax Act, 1961) or requisitioned under section 132A (of Income Tax Act, 1961), in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, [relate to, the assessee; or

(d) the Assessing Officer has received any information under the scheme notified under section 135A (of Income Tax Act, 1961) pertaining to income chargeable to tax escaping assessment for any assessment year in the case of the assessee.]

Explanation.-For the purposes of this section, specified authority means the specified authority referred to in section 151 (of Income Tax Act, 1961).]

The provision is explicitly clear that the Assessing Officer shall, before issuing any notice under Section 148 (of Income Tax Act, 1961), conduct enquiry, the details of which have been contained in Sub Clause (a) (b) & (c), which requires seeking prior approval of specified authority with respect to the information;

providing an opportunity of being heard to the assessee and consideration of the reply of the assessee. Sub-Clause (d) of Section 148A (of Income Tax Act, 1961) mandates that after conducting enquiry by affording an opportunity of hearing and consideration of reply, the authority shall decide, on the basis of material available on record, including reply of the assessee, whether or not it is a fit case for issuance of notice under Section 148 (of Income Tax Act, 1961), by passing an order. The expression ‘material available on record’, has been consciously used by the legislature to put a fetter on the exercise of power in the manner that an order under Section 148A (of Income Tax Act, 1961) deciding to issue notice under Section 148 (of Income Tax Act, 1961) can be based only on the basis of material available on record.

Therefore, the decision in the enquiry as contemplated under Section 148A (of Income Tax Act, 1961) needs to be based on material available on record. The words ‘material available on record’, in its just, fair and logical interpretation would only mean a tangible material and can not be interpreted to mean remote likelihood of availability of material, it being taxing statute, requiring strict construction. The notice which was issued to the petitioner-assessee by invoking jurisdiction under Section 148A(d) (of Income Tax Act, 1961) by the authority was based on information regarding undisclosed cash deposits reflected by various transactions, which according to the authority, was more than Rs.52,00,000/-.

However, when the petitioner-assessee filed his reply, he clearly disclosed that the total amount of cash deposits in the bank by him was only Rs.19,39,000/- and not Rs.52,75,000/- as alleged in the notice. The petitioner-assessee along with his reply annexed complete bank statements showing all debit and credit transactions, which have also been placed before us. The total transactions, which have been shown, do not exceed the amount as has been stated by the petitioner-assessee.

While considering the reply and the bank statements, the competent authority did not dispute the transactions, which were placed before it along with the reply filed by the petitioner- assessee. Therefore, the very basis of initiation of proceedings that income exceeding more than Rs.50,00,000/- had escaped assessment, was factually not correct. But then, the authority thereafter, without disputing the transactions, proceeded to pass an order for issuance of notice under Section 148 (of Income Tax Act, 1961) on conjecture, which is reflected from what has been stated in para 6 of the impugned order dated 29.03.2022, which is reproduced herein below:-

“6. The submission filed by the assessee has been considered under clause (c) of 148A of the Act for A.Y. 2015-16 but not found tenable as the assessee has furnished copy of one saving account only, there may be one or more account(s) in Corporation Bank in his name or PAN.

Thus, it is logical to conclude that the assessee’s reply is not fully satisfactory with respect to the above mentioned escapement of income in his case for AY 2015-16. It is crystal clear from what has been recorded in para 6 of the impugned order that though the competent authority did not dispute various transactions meaning thereby that the material available on record, did not show any cash deposits more than what was asserted by the petitioner-assessee, which was far less than the amount as stated in the notice under Section 148A(d) (of Income Tax Act, 1961), the officer proceeded to hold that there may be one or more accounts in the Corporation Bank in his name or PAN. It is on this surmise, bereft of any material on record that the authority seems to justify its action and impugned order dated 29.03.2022.

The provisions contained in Section 148A(d) (of Income Tax Act, 1961) referred to here in above, clearly show that the decision has to be taken on the basis of material available on record. The material available on record before the authority did not disclose any cash deposit or any other transactions which can be said to have escaped assessment, which was more than Rs.50,00,000/-. At the most, the exercise could justify the conclusion that the prima- facie, cash transactions and deposits of Rs.19,39,000/- have escaped assessment.

Had it been a case of opening of the case within a period of three years having elapsed from the end of the relevant assessment year, the order of the authority could be well justified on the touch stone of the legal requirement as embodied under Section 148A (of Income Tax Act, 1961). However, in the present case, undisputedly it is a case where more than three years have elapsed from the end of the relevant assessment year. In that case, in order to initiate proceeding under Sections 148 (of Income Tax Act, 1961), it is not only required to be shown that some income chargeable to tax has escaped assessment, but also that it amounts to or is likely to amount to Rs.50,00,000/- or more than for that year.

For this purpose, it is relevant to refer to the provision contained in Section 149(1)(b) (of Income Tax Act, 1961), which is reproduced herein below:-

“149. Time Limit for notice.-(1) No notice under section 148 (of Income Tax Act, 1961) shall be issued for the relevant assessment year,-

(b) if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of-

(i) an asset;

(ii) expenditure in respect of a transaction or in relation to an event or occasion; or

(iii) an entry or entries in the books of account, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more:]

Provided that no notice under section 148 (of Income Tax Act, 1961) shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if [a notice under section 148 (of Income Tax Act, 1961) or section 153A (of Income Tax Act, 1961) or section 153C (of Income Tax Act, 1961) could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section or section 153A (of Income Tax Act, 1961) or section 153C (of Income Tax Act, 1961), as the case may be], as they stood immediately before the commencement of the Finance Act, 2021:

Provided further that the provisions of this sub- section shall not apply in a case, where a notice under Section 153A (of Income Tax Act, 1961), or section 153C (of Income Tax Act, 1961) read with section 153A (of Income Tax Act, 1961), is required to be issued in relation to a search initiated under section 132 (of Income Tax Act, 1961) or books of account, other documents or any assets requisitioned under section 132A (of Income Tax Act, 1961), on or before the 31st day of March, 2021:

Provided also that for the purposes of computing the period of limitation as per this section, the time or extended time allowed to the assessee, as per show- cause notice issued under clause (b) of section 148A (of Income Tax Act, 1961) or the period during which the proceeding under section 148A (of Income Tax Act, 1961) is stayed by an order or injunction of any court, shall be excluded:

Provided also that where immediately after the exclusion of the period referred to in the immediately preceding proviso, the period of limitation available to the Assessing Officer for passing an order under clause (d) of section 148A (of Income Tax Act, 1961) is less than seven days, such remaining period shall be extended to seven days and the period of limitation under this sub-section shall be deemed to be extended accordingly.

Explanation.-For the purposes of clause (b) of this sub-section, “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.

[(1A) Notwithstanding anything contained in subsection (1), where the income chargeable to tax represented in the form of an asset or expenditure in relation to an event or occasion of the value referred to in clause (b) of sub-section (1), has escaped the assessment and the investment in such asset or in more than one previous years relevant to the assessment years within the period referred to in clause (b) of sub-section (1), a notice under section 148 (of Income Tax Act, 1961) shall be issued for every such assessment year for assessment, reassessment or recomputation, as the case may be.]

(2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151 (of Income Tax Act, 1961).]”

Therefore, while passing an order under Section 148A (of Income Tax Act, 1961), the authority is required to reach satisfaction to not only that income chargeable to tax has escaped assessment, but in case where three years have elapsed from the end of the relevant assessment year, the order under Section 148A (of Income Tax Act, 1961) for issuance of notice under Section 148 (of Income Tax Act, 1961) could be passed if there were no statutory impediment as contained in Section 149 Sub-section (1)(b) (of Income Tax Act, 1961), referred to here in above.

The authority, as is apparent, sought to bridge this statutory impediment not on the basis of any material available on record but only with the help of a surmise that the assessee may have some more accounts. Even before this Court, when the reply has been filed by the respondent, no material has been placed to show that at the time when the authority passed order under Section 148A (of Income Tax Act, 1961), there was some material on record that the income chargeable to tax which escaped assessment amount to or is likely to amount Rs.50,00,000/- or more for that year.

On conjoint reading of the provisions contained in Section 148A (of Income Tax Act, 1961) and what has been provided under Section 149 (of Income Tax Act, 1961), it is vividly clear that in order to initiate proceedings under Section 148A (of Income Tax Act, 1961), it is not enough that in case where notice is proposed to be issued under Section 148 (of Income Tax Act, 1961) after three years have elapsed from the end of the relevant assessment year that there should exist material available on record to reach to conclusion that some income chargeable to tax has escaped assessment, but the amount should be more than Rs.50,00,000/-. Only on the basis that the cash deposits of Rs. 19,39,000/- chargeable to tax have escaped assessment, without anything more, the authority was not justified in jumping to the conclusion that the assessee may have more bank accounts. If such an interpretation is placed on the provision of Section 148A(d) (of Income Tax Act, 1961) with reference to expression ‘material available on record’, then in that case, it will open flood gate and even without availability of any material, the authority would be initiating proceedings under Section 148 (of Income Tax Act, 1961), which will completely frustrate the object of incorporation of Section 148A (of Income Tax Act, 1961) in the Act. It is well settled principle of interpretation that the taxing statute is required to be construed strictly.

The interpretation as has been suggested by the learned counsel for the revenue cannot be placed upon the expression ‘material available on record’ to include possibility of collection of any relevant or tangible material for opening of proceedings under Section 148A (of Income Tax Act, 1961). Learned counsel for the revenue has placed reliance upon the decision of the Delhi High Court in the case of Gulmuhar Silk Pvt. Ltd. Versus Income Tax Officer Ward 10 (3), W.P.(C) 5787/2022 and CM Appl. 1729/2022, decided on 07.04.2022. The decision in the said case does not apply in the facts and circumstances of the present case. It is not a case where the assessee is disputing the factual aspects with regard to transactions. Present is a case where the respondent has failed to place before the Court any material to suggest that the income exceeding Rs.50,00,000/- chargeable to tax has escaped assessment, which would warrant issuance of order under Section 148A(d) (of Income Tax Act, 1961) followed by issuance of notice under Section 148 (of Income Tax Act, 1961).

In the result, the impugned order and the proceedings are unsustainable in law. The impugned order and the notices are quashed and set aside.

The petition is accordingly allowed.

No order as to costs.