A tax notice from the Income Tax Department over unexplained cash deposits can be a serious issue for any taxpayer, particularly when the case involves old transactions and reassessment proceedings initiated years after the relevant assessment year.
But can the tax department reopen an assessment beyond the statutory time limit merely because a taxpayer had substantial cash deposits in a bank account?
A recent Income Tax Appellate Tribunal (ITAT) ruling has accentuated the importance of following the limitation provisions before reopening an old tax assessment.
The ruling is important for taxpayers because it highlights an important distinction: a tax department’s ability to question a transaction does not automatically mean that an old assessment can be reopened at any point in time.
ALSO READ
The case
In Dharamvir Singh v. ITO, Ward-1, Ambala [ITA No. 66/Chd/2024, AY 2015-16, order dated 7 April 2025], the Chandigarh ITAT dealt with the validity of reassessment proceedings initiated under sections 147/148 where the alleged income escaping assessment was ultimately below Rs. 50 lakh, but the proceedings had been initiated after expiry of the normal limitation period.
STORIES YOU MAY LIKE
The Tribunal held that the reassessment was time-barred and quashed the proceedings in their entirety.
The taxpayer had not originally filed a return under section 139(1). Based on information available through the Department’s Non-Filers Monitoring System, the Assessing Officer (AO) initiated reassessment proceedings on the premise that the taxpayer had made substantial cash deposits in his bank account during FY 2014-15.
The order under section 148A(d) referred to cash deposits of Rs. 50.90 lakh. However, the figures appearing in the subsequent proceedings were materially different. The notice under section 148A(b) referred to Rs. 28.80 lakh deposited in an OBC account and a Rs. 22 lakh time deposit, while the assessment order recorded cash deposits of Rs. 15.84 lakh across OBC, HDFC and SBI accounts and other credit entries. Ultimately, the AO made an addition of Rs. 41,45,150 under section 69A, treating the amount as unexplained money.
The taxpayer challenged the reassessment before the ITAT, including through additional legal grounds questioning the proceedings on limitation. The Tribunal admitted these grounds because they went to the root of the validity of the reassessment and did not require investigation of fresh facts. In doing so, it relied upon the Supreme Court’s principle in National Thermal Power Co. Ltd. v. CIT [229 ITR 383 (SC)] that a pure legal issue may be raised at the appellate stage where the relevant facts are already available on record.
The crucial issue before the Tribunal was the Rs. 50 lakh threshold governing extended reassessment proceedings. The ITAT noted the inconsistencies in the amounts referred to at different stages and observed that the Revenue could not demonstrate the basis on which the figure of Rs. 50.90 lakh had been mentioned in the section 148A(d) order. In the Revenue’s own case, the amount ultimately alleged to have escaped assessment and added by the AO was only Rs. 41.45 lakh.
The Tribunal therefore held that the case fell within the normal three-year limitation framework under section 149, rather than the extended period applicable where the statutory conditions, including the Rs. 50 lakh threshold, were satisfied. Since the assessment year involved was an old year and proceedings under section 148A had been initiated only in March 2022, they were beyond the applicable three-year limitation period.
The ITAT also relied upon the Rajasthan High Court’s ruling in Abdul Majeed v. ITO [2022] 140 taxmann.com 485, which emphasised that, where reassessment is sought after the normal three-year period, the Revenue must possess material satisfying the statutory monetary threshold. A mere possibility or assumption that additional undisclosed income might exist cannot be used to cross that threshold and obtain the benefit of the extended limitation period.
Thus, the extended reassessment limitation cannot be invoked simply by mentioning an amount exceeding Rs. 50 lakh in the section 148A proceedings. There must be supporting material demonstrating that the income which has escaped assessment actually amounts to, or is likely to amount to, the statutory threshold. In this case, the Revenue could not substantiate the initial figure of Rs. 50.90 lakh, while its own ultimate case involved alleged escapement of only Rs. 41.45 lakh. The longer limitation period was therefore unavailable.
Accordingly, the taxpayer succeeded because the reassessment itself was initiated beyond the permissible limitation period. The ITAT quashed the reassessment as invalid in law and allowed the taxpayer’s appeal. Once the reassessment was quashed on this jurisdictional ground, the Tribunal did not consider it necessary to decide the taxpayer’s remaining grounds challenging the additions on merits.
ALSO READ
Reassessment notice: What taxpayers must check
According to Ashish Mehta, Partner at Khaitan & Co, among other things, taxpayers should verify:
Consistency – Do all documents cite the same escaped income amount?
Threshold – Is escaped income ≥ Rs. 50,00,000 to justify reopening beyond three years?
Documentary basis – Is the reopening based on concrete documents or vague allegations/software flags?
Timing – Was the notice issued within the statutory limitation period?
Approvals – Was the notice issued after requisite approvals of the higher authorities, as mandated under the law, were received?
“If the Section 148A(d) order cites only a Risk Management System alert without proper documentary evidence indicating income having escaped assessment, there is a possibility to challenge such proceedings at the threshold itself,” said Mehta.
Limitation defects are jurisdictional and do not require the taxpayer to either admit or deny any factual allegations made in the notices issued by the tax department. It is a settled legal position that legal issues can be raised for the first time even during appellate proceedings if they do not require verification of fresh facts.
Taxpayers should immediately flag such discrepancies as a procedural defence.
“As a basic strategy, one must document every discrepancy with dates and page references, request written clarification from the Assessing Officer, and cite inconsistencies in appellate submissions as proof that reopening lacked a sound foundation,” Mehta recommended.
How are taxpayers protected under Section 148A?
Section 148A operates as a pre-notice safeguard intended to prevent reassessment proceedings from being initiated mechanically or solely on the basis of unverified information.
Before issuing a notice under section 148, the Assessing Officer (AO) may, where necessary, conduct an inquiry into the information suggesting that taxable income has escaped assessment, after obtaining the prescribed approval.
The AO must thereafter issue a show-cause notice under section 148A(b), setting out the relevant information and material on which the proposed reassessment is based.
After considering the taxpayer’s response and the material available on record, the AO is required to pass an order under section 148A(d) determining whether it is a fit case for issuance of notice under section 148. Importantly, this exercise cannot be merely mechanical.
Where the Revenue seeks to reopen an assessment beyond the normal limitation period, the material available must also satisfy the conditions prescribed under section 149, including the applicable monetary threshold.
Section 149 permits reopening beyond three years only if the Assessing Officer possesses evidence that escaped income of Rs 50,00,000 or more. It is a settled legal position that mere suspicion or software alerts do not suffice. Extended reopening timelines require a higher level of proof evidencing escapement of income.
The Dharamvir Singh ruling demonstrates the importance of this safeguard. Although the section 148A(d) order referred to alleged cash deposits of Rs. 50.90 lakh, the Revenue could not substantiate the basis for that figure, while the eventual alleged escapement was Rs. 41.45 lakh.
The ITAT held that the extended limitation period could not be invoked merely by referring to an amount above the statutory threshold without supporting material. Consequently, the reassessment was held to be time-barred and was quashed.
Thus, the section 148A process is intended to ensure that the taxpayer is heard and the factual basis, amount of alleged escapement and limitation requirements are properly examined before the Revenue assumes jurisdiction to reopen an assessment.
“It is pertinent to note that the reassessment time limits were subsequently revised under the Finance Act (No. 2) of 2024. Accordingly, a show-cause notice under section 148A may now be issued within three years from the end of the relevant assessment year, or within five years where the escaped income is Rs. 50 lakh or more,” said CA (Dr.) Suresh Surana.
“The corresponding section 148 notice may generally be issued within three years and three months, or within five years and three months, respectively. These amended limits should not be applied retrospectively while analysing the proceedings in Dharamvir Singh,” Surana further added.
Reassessment over old transactions: Key takeaway
The ruling highlights that taxpayers receiving reassessment notices concerning old bank transactions should not restrict their response to explaining the source of the deposits.
They should first examine whether the reassessment itself has been validly initiated. In particular, taxpayers should verify the relevant assessment year, the date of the notice, the applicable limitation period and, where the notice has been issued beyond the normal three-year period, whether the material available with the Assessing Officer genuinely demonstrates income escaping assessment of Rs. 50 lakh or more.
Taxpayers should also carefully compare the amounts and transactions referred to in the notice under section 148A(b), the order under section 148A(d), the reasons or underlying information supplied by the Department and the subsequent notice under section 148.
Material inconsistencies in bank-account details, deposit figures or the nature of transactions may indicate that the proceedings were initiated without adequate verification or proper application of mind. A request should be made for the underlying information, bank statements and other material relied upon where these have not been furnished.
At the same time, taxpayers should preserve available evidence explaining the transactions, including bank statements, cash-flow statements, income records, sale documents, loan confirmations and records of transfers between their own accounts.
Disclaimer: This article is based on the Chandigarh ITAT order in Dharamvir Singh, Village Thamber v. Income Tax Officer – Ward-1, Ambala. [ITA No. 66/Chd/2024, AY 2015-16, order dated 7 April 2025]. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
aniltikotekar4sme.com 