Where belief of escapement of income as per reasons recorded fails no other addition can be made by the AO – High Court
In a recent judgment, Hon’ble Allahabad High Court has upheld that where the belief of escapement of income as per reasons recorded fails no other addition can be made by the AO.
ABCAUS Case Law Citation:
4921 (2025) (12) abcaus.in HC
The appellant assessee was a Doctor. For the relevant Assessment Year her case was opened for scrutiny assessment u/s 148 of the Act. As per reasons recorded, the belief of escapement of income of the AO was only on account of source of investment in mutual funds. The assessment completed u/s. 143(3) r.w.s. 147 of the Act accepting the returned income without making any addition.
Subsequently, the PCIT perused of record of assessment and found that the AO omitted several issue, i.e. invoking section 50C of the Act to make addition of the excess of the stamp duty value to the actual consideration received, no enquiry was conducted with respect to exemption of capital gain u/s 54F of the Act, source of cash deposits in bank was not examined etc.
The PCIT further noted that the case of the assessee was reopened for examining the source of investment in mutual funds. However, with respect to source of investments, no enquiry or investigation was made by the Assessing Officer.
The PCIT also noted that many queries raised by the AO were un-answered / not completely answered yet the Assessing Officer had accepted the returned income of the assessee as also several claims /issues were allowed without being examined.
Replying to show cause notice under section 263, the assessee stated that there was no error in the order of the AO since the assessee had explained to the satisfaction of the AO that there was no escapement of income vis a vis source of investment in mutual funds remaining unexplained, for which reason the case of the assessee was reopened.
It was pointed out to the PCIT that from the contents of assessment order it was evident that the reasons to believe recorded by the Assessing Officer failed. It was stated that it is settled proposition of law that if no addition had been made by the Assessing Officer in the assessment order on the basis of the reasons recorded, notice u/s. 148 becomes invalid and no addition can be made on any other income.
Not impressed by the submissions of the assessee, the PCIT held that held the said assessment order was to be erroneous causing prejudice to the interest of revenue and passed the impugned order u/s 263 of the Act by partly setting aside the Assessment Order with the directions to the Assessing Officer to examine the said issues.
The Tribunal noted that the PCIT did not dispute the proposition of law that where the basis for assuming jurisdiction u/s 147 of the Act fails no addition can be made on any other issues. The PCIT however held that the said proposition was not applicable in the present case since, as per the PCIT, the AO’s order was erroneous in accepting assesses explanation on the issue for which reopening was resorted. As per the PCIT therefore it was not a case where there was no escapment of income as noted by the AO in his reasons recorded.
The Tribunal observed that PCIT did not point out any infirmity in the explanation of the assessee of the investments being from disclosed sources having being accounted for in her books of accounts and disclosed in her Balance Sheet. The explanation of the assessee was reasonable, plausible and logical that when the investment was disclosed in the Balance Sheet of the assessee, it goes without saying that the source of investment in the same stood duly accounted for and also disclosed.
The Tribunal opined that it was not that the investment is from sources outside the books of the assessee. There was no question of the same being from undisclosed sources and no need therefore for the AO to make any inquiries vis avis the source of the same.
The Tribunal opined that there is no dispute with respect to the proposition of law that where the belief of escapement of income fails no other addition can be made by the AO.
The Tribunal held that there was neither any error in the order of the Assessing Officer, vis a vis issue for which reopening was resorted to, making no addition on account of investment in mutual funds and also with respect to the other issues. The Assessing Officer could not have made any enquiry with respect to the same on account of settled proposition of law accepted by the PCIT also.
The Tribunal further held that errors noted by the PCIT were clearly fall beyond the scope of enquiry of the Assessing Officer during the reassessment proceedings.
Accordingly, the Tribunal held that the order of the PCIT was not sustainable in law and was set aside.
Not satisfied with the order of the Tribunal, the Revenue challenged it before the Allahabad High Court.
The Hon’ble High Court observed that the Tribunal had categorically found that the ‘reason to believe’ did not exist to reassess the assessee. In that regard, it was found that investments made by the assessee in mutual funds were duly reflected in his books of accounts. On that all investments were made through banking channels.
The Hon’ble High Court further observed that the above finding of the Tribunal was not assailed or doubted by the revenue. To that extent, it remained admitted to the revenue that there did not exist any valid ‘reason to believe’ to reassess the assessee. Once the ‘reason to believe’ did not exist, the jurisdiction never arose with the revenue authorities to reassess the assessee.
The Hon’ble High Court also observed that other additions never formed the basis for initiation of re-assessment proceedings inasmuch as those additions were not recorded in the ‘reason to believe’.
As a result, the appeal of the Revenue was dismissed as lacking merit.
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