Cash Deposit used for Creating FD cannot Be Clubbed to Cross ₹50 Lakh Threshold: Madras HC Quashes Section 148A Action [Read Order]

In a recent decision, the Madras High Court has quashed reassessment proceedings initiated under Section 148A of the Income Tax Act, 1961, holding that cash deposits and fixed deposits created out of the same funds cannot be clubbed to artificially cross the ₹50 lakh threshold required for invoking the extended limitation period.

JusticeSenthilkumar Ramamoorthy found that the Assessing Officer failed to examine the bank statements properly before concluding that income exceeding ₹50 lakh had escaped assessment.

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A notice was issued to the assessee-Petitioner, Krishnareddy Venkatesan for AY 2015-16, alleging that he had deposited ₹25.90 lakh in cash and also made a fixed deposit of ₹27 lakh during the relevant financial year.

Based on both of these figures, the department assumed that reopening beyond the standard three-year restriction under Section 149 was justified because income in the form of assets above ₹50 lakh had escaped assessment.

The assessee responded by clarifying that the fixed deposit was created out of the very same cash deposits, and therefore, the amounts could not be treated as separate or independent assets.

The Assessing Officer issued an order under Section 148A(d) stating that the details "need to be verified" and proceeded to treat both the cash deposit and the fixed deposit as escaping income, even though the assessee provided the bank statements to support this explanation.

This approach was contested before the High Court on the grounds that the officer had assumed income escapement beyond the statutory threshold without using his judgment.

The judge noted that it was the Assessing Officer's responsibility to confirm whether the cash deposits were truly used to create the fixed deposit after the assessee submitted the bank statement, however, the same was not done.

The officer could not have reasonably determined that income in the form of assets exceeding ₹50 lakh had eluded assessment without carrying out this fundamental factual exercise. The Court observed that the assessee's claim that the fixed deposit was financed by the identical cash deposits was initially supported by the bank statement.

The High Court ruled that it is legally unsustainable to simply combine cash and fixed deposits without looking at their source connection in order to activate the extended reassessment provisions.

Because of this, the Court remitted the case to the Assessing Officer for new review and set aside both the consequential notice under Section 148 and the order issued under Section 148A(d).

The Assessing Officer was directed to give the assessee a fair chance and issue a new order under Section 148A(d) within two months after reviewing the documents and justifications. The writ petition was allowed accordingly.

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