THE issue is - Whether mere failure of an assessee to explain the source of cash deposits in its books of account, can lead to an inference that such income of assessee had escaped assessment. NO is the answer.
Facts of the case
The assessees are engaged in the travel agency business. During concerned year, the Assessee , i.e., Indo Arab, filed its return for AY 2002-2003 declaring a total income of Rs.36,02,307/-. The return was processed and an acknowledgement was issued u/s 143(1). Subsequently, the AO received information from the Enforcement Directorate (ED) that in the books of the Assessee there were huge cash deposits. Accordingly, the AO issued a notice u/s 148 requiring the assessee to file its return. The Assessee pleaded that the original return filed by it to be treated as return u/s 148. Inter alia the explanation given by the Assessee for the cash deposits found in its account was that they were counter sales of airline business of around Rs.18 crore during the AY 2002-2003 out of which a large percentage was in cash. Therefore the cash was shown as such in the books which was a normal trade practice. Indo Arab also submitted that u/s 44AB, a tax audit was conducted by its Chartered Accountants (CA), who had verified its books of accounts, inter alia stating that the balance sheet and P&L A/c give a true and fair view of the statement of affairs of the Assessee. The AO, however, rejected such contentions and held that in the absence of books of accounts, the cash deposits in the sum of Rs.3,23,00,550/- for F.Y 2001-2002 was required to be treated as unexplained income. It was accordingly directed to be added back to the income of the Assessee. The AO also disbelieved the contention of another assessee i.e.., RL Travels and held that in the absence of the books of accounts, the cash deposit in the sum of Rs.90,50,000/- ought to be treated as unexplained income. It was accordingly added back to the income.
On appeal, the CIT(A) partly allowed the appeal by Indo Arab and restricted the addition to Rs.46,38,800/-. As regards the appeal by RL Travels, the CIT(A) affirmed the addition made by the AO. On further appeal, the ITAT noted that the observation that there was no plausible explanation offered by the Assessee from the ED's point of view was vague and could not form the basis for the AO to form a belief regarding income escaping assessment. The ITAT was of the view that the said information ought to have been verified from the available record by the AO to form a reason to believe that income had escaped assessment. With regard to the appeal filed by the RL Travels, the ITAT noted that it was a sister concern of Indo Arab and relying on the order in the case of Indo Arab, the ITAT set aside the addition and quashed the reopening of the assessment in the case of RL Travels as well.
Having heard the parties, the High Court held that,
++ it is seen that the decision of this Court in the case of CIT v. Orient Craft Ltd. provides a complete answer to the specific question whether even where a return had not been picked up for scrutiny and there was only an intimation u/s 143(1), the jurisdictional requirement of the AO having to record 'reasons to believe' u/s 147(1) that income had escaped assessment had to be fulfilled. This Court has explained that:
["....The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation u/s 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed u/s 143(3) and the intimation issued u/s 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made u/s 143(3) cannot apply where only an intimation was issued earlier u/s 143(1). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return u/s 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier u/s 143(3) and cases where mere intimations were issued earlier u/s 143(1) may well lead to such an unintended mischief...."]
++ keeping the above legal position in view when the cases on hand are examined, it is seen that as far as Indo Arab is concerned while the AO set out the information received from the ED, he failed to examine if that information provided the vital link to form the 'reason to believe' that income of the Assessee had escaped assessment for the AY in question. While the AO has referred to the fact that the ED gave information regarding cash deposits being found in the books of the Assessee, the AO did not state that he examined the returns filed by the Assessee for the said AY and detected that the said cash deposits were not reflected in the returns. In fact, the AO contradicted himself in the reasons recorded by him by noticing the information of the ED to the above effect and then stating that on perusal of the records for the AY in question it was noticed that the Assessee "had not disclosed these transactions in its books of accounts." Further the AO refers to the ED's information that Mr. Chetan Gupta, partner of the Assessee, failed to explain the sources of the cash deposits as shown in the books of accounts. However, that by itself could not have led the AO to even prima facie conclude that income of the Assessee had escaped assessment. The explanation or the lack of it of the entries in the books of accounts may have certain relevance as far as ED is concerned but that by itself does not provide the vital link for concluding that for the purposes of the Act any part of cash deposits constituted income that had escaped assessment. There is a long distance to travel between a suspicion that income had escaped assessment and forming reasons to believe that income had escaped assessment. While the law does not require the AO to form a definite opinion by conducting any detailed investigation regarding the escapement of income from assessment, it certainly does require him to form a prima facie opinion based on tangible material which provides the nexus or the link to having reason to believe that income has escaped assessment;
++ the next question that had to be examined by the AO was whether what was disclosed in the books of accounts was also disclosed in the returns filed by the Assessees. If it was not disclosed, then possibly the AO could have reasons to believe that the cash deposits reflected in the books of accounts may have escaped assessment. However, no effort appears to have been made by the AO to examine the returns filed by the Assessee in either of these cases. As far as RL Travels is concerned, the further information concerning payments made to third parties, which were unable to be verified by the ED, also required to be assessed by the AO by examining the returns filed to discern whether the said transaction was duly disclosed by the Assessee. It is the treatment of the entries in the books of accounts in the returns filed by the Assessee that would be determinative of whether in fact there was any concealment of relevant information or whether any income had in fact escaped assessment. With the AO in either of these cases not having adopted that approach, it could not be said that the jurisdictional requirement of the AO having to form reasons to believe on the basis of some tangible material that income had escaped assessment was fulfilled. Consequently, this Court finds no error having been committed by the ITAT in the impugned orders in coming to the conclusion that the reopening of the assessments was bad in law.