Reassessment proceeding based on ED information without correlating with returns filed is invalid

Commissioner of Income Tax Vs. M/s. Indo Arab Air Services (Delhi High Court), I.T.A. No. 292/2015, Date of Order: 20.10.2015

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.

It is in this context that the Court finds that the decision in Mitsui & Company India (F) Ltd. v. Income Tax Officer (2012) 26 Taxmann.com 1, on which considerable reliance was placed by Mr. Kamal Sawhney, is distinguishable on facts. The nature of the information provided by the governmental agency in that case did not itself refer to any amounts or entries in the books of accounts of the Assessee. In the present case, however, the information received from the ED makes a reference to what was found in the books of accounts of the Assessee.

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, the 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. This is consistent with the settled legal position as noticed hereinbefore.