Fresh Probe Data Warrants Reassessment but Unjustified 5% Income Addition Fails Scrutiny: ITAT [Read Order]

The Raipur bench of the Income Tax Appellate Tribunal, held that the reopening of assessments for three consecutive years was legally sustainable, based on fresh information from the Investigation Wing pointing towards suspicious transactions. However, restricted the additions made by the Assessing Officer (AO), observing that the estimation of income at 5% of deposits was unjustifiable.

The appeals are filed by Pradeep Kumar Agrawal, a trader engaged in the business of paddy, rice, allied products and transportation services. The assessee had filed returns declaring relatively small taxable incomes. Subsequently, based on information received from the Investigation Wing at Raipur, the AO noted that the assessee’s bank accounts reflected substantial RTGS credits and corresponding large cash withdrawals.

The credits amounted to more than ₹8,31,02,597 during the year under scrutiny, with cash withdrawals of ₹4,67,78,900. The AO issued notices seeking an explanation for the transactions, but the assessee either failed to comply or provided delayed and insufficient responses. In the absence of proper explanation, the AO completed reassessment proceedings under Section 147 read with Sections 144 and 144B of the Income Tax Act, 1961. The deposits were treated as business receipts, and income was estimated at 5% of the total credits.

This resulted in additions of ₹3,59,78,500 for Assessment Year (A.Y.) 2015-16, ₹41,55,130 for A.Y. 2016-17 and ₹29,76,959 for A.Y. 2017-18. The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [CIT(A)] , confirmed the action of the AO, leading to second appeals before the Tribunal.

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The Assessee, represented by Sunil Kumar Agrawal, argued that the reassessment proceedings were void on multiple grounds. It was contended that the reopening of assessments under Section 147 was illegal as it was based merely on borrowed satisfaction and suspicion without any tangible material.

It was submitted that the approvals obtained under Section 151 of the Act were mechanical, pointing out that incorrect figures had been recorded in the sanctioning documents. It was argued that no notice under Section 143(2) was issued after. Therefore, this procedural lapse rendered the entire reassessment void.

It was argued that the additions were made on issues that did not form part of the recorded reasons for reopening, particularly since the reasons referred to unexplained deposits whereas the additions were made under the head of business income.

It was further contended that the estimation of 5% on total bank deposits was unjustified and excessive, especially when the lower gross profit rate declared by the assessee in earlier years, which had been accepted in scrutiny assessments.

The Revenue, represented by Priyanka Patel, submitted that the reopening was fully justified, as the information provided by the Investigation Wing regarding high-value deposits and withdrawals constituted fresh and credible material. It was contended that since the assessee did not file a fresh return in response to the notice under Section 148, the AO was not obliged to issue a notice under Section 143(2) of the Income Tax Act.

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The Bench comprising Judicial Member, Ravish Sood and Accountant Member, Arun Khodpia upheld the validity of reopening under Section 147, noting that the information received from the Investigation Wing was fresh material that the AO could act upon. The Bench held that merely on change of opinion, the action by AO cannot be termed illegal.

On the issue of notice under Section 143(2), the Tribunal observed that the assessee had not filed a return in response to the Section 148 notice, and hence, the Assessing Officer was not obligated to issue such notice. Accordingly, the reassessment could not be held invalid on this ground.

The Tribunal observed that in tax jurisprudence, the best guide for estimation of business income is the assessee’s own gross profit history from preceding years, particularly when such results have been accepted in scrutiny assessments. Thus, on the substantive issue of additions, the Tribunal held that the estimation of 5% of bank deposits as income was excessive and without any rational basis.

Subsequently, since the assessee had consistently disclosed lower gross profit rates, which were never rejected by the department, applying a flat rate of 5% led to an inflated and unjustified addition.

Therefore, The Tribunal directed that the additions be restricted by adopting the average gross profit rate from the preceding three years as a benchmark instead of an unjustified percentage.

Thus, the appeals of the assessee were partly allowed.

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