Assessment u/s 147 can be opened if cash is deposited in Bank but not disclosed in the ITR

Section 147 of the Income Tax Act deals with provisions of “income escaping assessment”. The grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts.

The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith. It cannot merely be a pretence. Any assessee could receive a notice under section 148 in case the AO believes that such individual’s income chargeable to tax might have escaped assessment. Let us refer to the case of Pillu Ram Sahal v. ITO (ITAT Jaipur) where the issue under consideration was whether the re-opening of assessement u/s 147 was justified in law or not?

Facts of the Case on opening of assessment under Section 147:

• The AO on the basis of information received noted that the assessee (an individual) had deposited cash of Rs 14 lakhs in the bank account with Bank of Baroda.
• The AO had initiated the proceedings u/s 147 by issuing notice u/s 148.
• The AO completed the assessment u/s 143(3) read with section 147 whereby the addition of Rs. 15.50 lakhs were made on account of unexplained deposit in the bank account.
• The assessee challenged the action of the AO including the validity of reopening of assessment before the CIT(A) but could not succeed.

Observations of ITAT on opening of assessment under Section 147

• The AO had recorded the reasons for reopening of the assessment as under:
  1. The assessee had deposited cash of Rs. 14,00,000 in Bank of Baroda during the F.Y. but no return of income was filed for the AY 2010-11.
  2. Thus, this transaction was not verifiable and the assessee did not disclose fully and truly all material facts necessary for assessment.
  3. Therefore, AO had reason to believe that income of Rs. 14,00,000 has escaped assessment.
• Thus, the very fact of deposit of cash of Rs 14 lakhs and not filing of the return of income by the assessee itself constituted a tangible material to form the belief that income assessable to tax had escaped assessment.
• ITAT further noted that JCIT after considering the reasons also recommended the reasons recorded by the AO for issuing notice u/s 148.
• Based on these facts, the Pr.CIT finally granted the approval.
• Therefore, it was not a case where the prudent person could have taken another view or opinion.
• Accordingly, ITAT did not find any error or illegality in the impugned order of the CIT(A) upholding the validity of reopening of the assessment.

The assessee had appealed before the ITAT against the CIT(A) in confirming the actions of the AO in making an addition of Rs. 15,50,000 on account of alleged unexplained cash u/s 68.

What is Section 68?

Section 68 of the Income Tax Act pertains to cash credit. According to Section 68, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

However, where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless:

• the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited &
• such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

What is Section 69 in Income Tax?

Section 69 is the weapon of the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee & naturally which are not recorded in the books of accounts, if any, maintained by him. Section 69 also gives power to AO to treat the value of investments as the income of the assessee if the assessee does not offer any explanation or the explanation offered by him is not satisfactory.

According to Section 69, where the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

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Facts of the Case on addition of Rs. 15.50 lakhs made u/s 68

• The AO made an addition on account of unexplained cash deposited in the bank account of the assessee.
• The assessee contended before the AO as well as CIT(A) that this amount was deposited out of past savings.
• The assessee further explained that it was his life-long savings, required by his son for business purposes.
• Therefore, due to compulsion of the wife of the assessee, the assessee had deposited this amount in the bank account which was utilized by his son for his business purposes.
• The AO found that the assessee has not substantiated the explanation of source of deposit by any documentary evidence. The CIT(A) has confirmed the addition made by the AO.

Observations of ITAT

• According to the ITAT, the facts were not in dispute that the assessee has deposited the cash in the bank account to the tune of Rs. 14 lakhs with Bank of Baroda.
• The assessee explained before the AO that the deposits of the cash were made out of past savings of the assessee.
• The assessee produced cash book prepared by the assessee to show that this was an opening balance.
• However, since the assessee was not assessed to tax and there was no supporting evidence for having the opening credit balance of Rs. 15.75 lakhs, therefore, the AO after allowing the benefit of Rs. 25,000 had made the addition of remaining amount of Rs.15.50 lakhs.
• Though the said addition made by the AO was based on cash book and over and above the deposit of Rs. 14 lakhs were not justified when cash book itself was rejected by the AO, however, the question remained regarding the source of deposit of Rs. 14.00 lakhs.
• ITAT found that except the cash book prepared by the assessee in support of the source of deposit, no other material was produced by the assessee regarding the past savings of the assessee.
• Therefore, the explanation of the assessee regarding the bank deposit in the bank was not satisfactory due to the failure on the part of the assessee to explain the source/deposits.
• The addition made by the AO was based on the facts in the case of CIT vs Smt. P.K. Noorjahan (supra).
• It was pertinent to note that in the said case it was found that the assessee was even not capable of earning income due to her age at that point of time.
• The assessee also explained the source of investment as income from the properties which were left by her mother’s first husband.
• Though the said explanation was not found to be satisfactory, however, by considering the surrounding circumstances that the assessee being a Muslim lady of 20 years was not having any source of income, therefore, she was not capable of earning any income.
• The addition made by the AO was deleted. The said decision was based on peculiar facts.

• In the case in hand, the assessee never explained before the AO that the said amount belongs to his son but right from beginning the assessee was claiming that this deposit is sourced by his past savings.
• Once the assessee was capable of earning income then failure to explain the source of deposit in the bank would attract the provisions of Section 69.
• Hence, in the facts and circumstances of the case, plea of the assessee could not be accepted that the disclosed source of income of the assessee was not sufficient for making the deposit in the bank.
• If the said amount of deposit could not be assessed as income of the assessee then the very object and purpose of provisions of Section 69 of the Act was defeated.
• Section 69 contemplated that if the assessee was found to have invested money without explaining the source of the same then it would be deemed as unexplained investment.
• Therefore, the reasons for failure of the assessee to explain the source of deposit in the bank account as not having sufficient disclosed source of income could not be a ground for immunity from attracting the provisions of Section 69 and consequential deletion of such addition made by the AO.

In conclusion, reopening of assessment u/s 147 where the AO has reason to believe is justified and failure to explain the source of deposit of investment would attract provisions of Section 69 liable for addition.

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