2019 (2) TMI 2131 - AT - Income Tax

Addition on account of unexplained cash deposits in the bank account - whether appellant was having sufficient source of income to deposit the same in the bank account? - HELD THAT - If we add the total amount of cash deposit in SBI then the total cash deposit comes to Rs. 4, 09, 92, 430/- as worked out by the assessee being written statement. Out of this cash deposit the AO has accepted that an amount of cash deposit of Rs. 3, 91, 21, 547/- stands explained being the amount of sale shown by the assessee in VAT returns. If we reduce this amount of accepted cash deposit from total cash deposit balance comes to Rs. 18, 70, 883/- being excess of cash deposit over cash sales. Now we consider excess of Cash in hand as on 31.03.2014 of Rs. 38, 58, 600/- over closing cash in hand as on 31.03.2015 of Rs. 13, 00, 087/- it is seen that the said amount comes to Rs. 25, 58, 513/- as against excess cash deposit of Rs. 18, 70, 883/- in excess of sales as per VAT returns. Therefore no amount of cash deposit can be added as unexplained cash deposit. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the addition made by the Assessing Officer (AO) on account of unexplained cash deposits in the bank account amounting to Rs. 31,79,134/- was justified, given the assessee's claim of sufficient source of income to explain such deposits.

(b) Whether the AO erred in making the addition under section 69A of the Income Tax Act on the entire unexplained cash deposits, instead of applying the gross profit (G.P.) rate of 2.89% on the actual unexplained cash deposits.

(c) Whether the Hon'ble CIT(A) erred in sustaining the addition made by the AO without appreciating that unaccounted cash deposits emanating from business should be taxed at the G.P. rate of 2.89%.

(d) Whether the AO correctly considered the total cash deposits in the bank accounts, including deposits in IDBI Bank and State Bank of India, and whether the AO properly accounted for the opening cash balance while determining unexplained cash deposits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (d): Justification and quantum of unexplained cash deposits in bank accounts

Relevant legal framework and precedents: Section 69A of the Income Tax Act empowers the AO to make additions in respect of unexplained cash credits or deposits. The principle is that if cash deposits are not satisfactorily explained as being from a legitimate source, such deposits can be treated as income and added to taxable income. However, legitimate sources such as sales supported by VAT returns and available cash balances are relevant to explain such deposits.

Court's interpretation and reasoning: The AO initially noted total cash deposits of Rs. 4,23,00,681/- comprising Rs. 1,94,56,681/- in IDBI Bank and Rs. 2,28,44,000/- in SBI. The AO allowed benefit for sales declared in VAT returns amounting to Rs. 3,91,21,547/- and made additions on the excess cash deposits over sales.

The assessee challenged the AO's figures, submitting that actual cash deposits in IDBI Bank were Rs. 1,81,48,430/- (not Rs. 1,94,56,681/- as per AO) supported by bank statements and a date-wise chart. Further, the assessee contended that the AO failed to consider the opening cash balance of Rs. 38,58,600/- as on 31.03.2014, which was available for deposit, and that the closing cash balance of Rs. 13,00,087/- as on 31.03.2015 should be taken into account. The net excess cash in hand (opening minus closing) was Rs. 25,58,513/-.

The Tribunal examined the bank statements and date-wise deposit chart and identified that certain deposits included transfers or clearings totaling Rs. 13,08,251/-, which were not cash deposits. Adjusting for these, the total cash deposit in IDBI Bank was Rs. 1,81,48,430/-, aligning with the assessee's claim rather than the AO's figure.

Adding the SBI deposits of Rs. 2,28,44,000/-, the total cash deposits came to Rs. 4,09,92,430/-. Deducting the sales declared in VAT returns of Rs. 3,91,21,547/- left an excess cash deposit of Rs. 18,70,883/-.

However, when the excess cash in hand of Rs. 25,58,513/- (opening minus closing cash balances) was considered, it exceeded the unexplained cash deposits of Rs. 18,70,883/-. This indicated that the excess cash deposits could be explained by the cash available from the previous year's closing balance, negating the presumption of unexplained cash deposits.

Application of law to facts: Since the unexplained cash deposits were less than the excess cash in hand available from the previous year, the Tribunal concluded that the cash deposits were adequately explained by legitimate sources and no addition under section 69A was warranted.

Treatment of competing arguments: The AO's figures were scrutinized and found to include non-cash deposits. The assessee's submission on opening and closing cash balances was accepted as a valid explanation for the cash deposits. The revenue's contention to uphold the AO's figures was rejected due to lack of supporting evidence.

Conclusion: The Tribunal held that the addition made by the AO on account of unexplained cash deposits was not justified and deleted the addition entirely.

Issue (b) & (c): Application of gross profit rate on unexplained cash deposits

Relevant legal framework and precedents: When unexplained cash deposits are linked to business income, it is sometimes appropriate to apply the gross profit rate to estimate taxable income rather than adding the entire amount of cash deposits. This principle ensures that only the profit component is taxed, not the entire turnover.

Court's interpretation and reasoning: The assessee argued that even if some cash deposits were unexplained, the addition should have been restricted to the gross profit margin of 2.89% on such deposits rather than the full amount under section 69A. The CIT(A) had sustained the AO's addition without considering this argument.

The Tribunal noted that since the entire addition was deleted on the ground that the cash deposits were explained by sales and cash balances, the question of applying the gross profit rate did not arise. However, the Tribunal acknowledged the principle that unexplained cash deposits arising from business should be taxed at the gross profit rate rather than the full amount.

Application of law to facts: Given the deletion of the addition on the primary ground of explanation of cash deposits, the Tribunal did not make a separate addition applying the gross profit rate.

Treatment of competing arguments: The revenue did not dispute the applicability of gross profit rate principle but maintained the addition on the basis of unexplained deposits. Since the primary issue of explanation was decided in favour of the assessee, the secondary argument became moot.

Conclusion: The Tribunal did not sustain any addition under section 69A and thus did not apply the gross profit rate. The principle was recognized but not applied due to factual findings.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"When the excess cash in hand as on 31.03.2014 of Rs. 38,58,600/- over closing cash in hand as on 31.03.2015 of Rs. 13,00,087/- is considered, the said amount comes to Rs. 25,58,513/- as against excess cash deposit of Rs. 18,70,883/- in excess of sales as per VAT returns. Therefore no amount of cash deposit can be added as unexplained cash deposit."

Core principles established include:

(i) The total cash deposits in bank accounts must be accurately determined by excluding non-cash deposits such as transfers or clearings.

(ii) Opening and closing cash balances are relevant and should be considered to explain cash deposits in bank accounts.

(iii) Unexplained cash deposits can be negated if adequately explained by legitimate sources including declared sales and available cash balances.

(iv) While the gross profit rate is a recognized method to compute taxable income from unexplained cash deposits linked to business, it is not applicable if the deposits are satisfactorily explained.

Final determination on the issues was to delete the entire addition made by the AO under section 69A on account of unexplained cash deposits for the assessment year under consideration.