No Nexus, No Reopening: ITAT Sets Aside Assessment

The assessee is an individual who made a declaration of income in his return for AY 2014-15, which was assessed under section 143(1). After that, the assessing officer opened an assessment of the assessee under section 147, taking notice of certain additions made in remand proceedings for AY 2015-16. In accordance with the pattern of such cases, the AO was of the opinion that there were huge cash deposits and purchases of property by the assessee in question for the relevant year, which were considered to be out of proportion to his declared income.

Thus, he believed that the income of the assessee escaped assessment and made additions to the tune of Rs. 48.28 lakh in an ex parte assessment. The CIT(A) maintained the addition considering the fact that there was no response from the assessee to the notices issued to him. However, before the Tribunal, the assessee challenged the legality of the reopening, arguing that the reasons noted therein were mere suspicion without any concrete material.

Issue Before Court: Whether reassessment under section 147 is valid when the “reason to believe” is based merely on suspicion and inferred from similar transactions in another assessment year, without any direct nexus or tangible material?

Tribunal Decided: It was found by the tribunal that the process of reopening the assessment was neither legally nor jurisprudentially sustainable. According to the Tribunal, the assessing officer merely inferred the case based on additional income generated in a later year and assumed that similar transactions made in the current year would lead to income escaping assessments as well. The latter point clearly shows nothing more than suspicion and no sincere belief at all. It was further held that the existence of cash deposits or investments, even if disproportionate to declared income, does not automatically lead to a conclusion of escapement of income without further inquiry or material evidence.

The Tribunal emphasised that “reason to believe” must be based on objective material having a live link with the formation of belief and cannot be replaced by conjecture or assumption. It should be noted that the tribunal also dismissed the use of Explanation 2(b) of Section 147 by the AO since the “deeming fiction” applies only when there is a finding of under-reporting of income and not when suspicion exists. Since there was no proof of such suspicion in the recorded reasons, the entire procedure of reassessment became invalid. Therefore, the assessment order made under Section 147 was set aside.

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