2025 (5) TMI 117 - AT - Income Tax

Unexplained money u/s 69A - unexplained cash deposits in her bank account during the demonetization period - HELD THAT - We are unable to comprehend that as to how the mere absence of narrations mentioning the purpose for which cash was withdrawn from the bank accounts in the cash book can justifiably form a basis for rejecting the claim of the assessee that the said amount was thereafter utilized for making cash deposits in her bank account during the demonetization period. As the department had not placed on record any material that would conclusively dislodge and disprove the claim of the assessee that the cash deposit made in her bank account during the demonetization period was sourced from the cash balance that was available with her on 08.11.2016 i.e during the pre-demonetization period therefore we do not find any substance in the aforesaid observation of the CIT(A). CIT(A) s observation that the assessee had during the pre-demonetization period made the subject cash withdrawals in Tamil Nadu which thereafter were claimed by her to be deposited during the demonetization period in her bank account at Hyderabad is not only based on facts which are not discernible from the record but is rather based on his misconceived observations. The assessee had though stated that the cash withdrawals were made from her bank accounts as the same was required for incurring expenses towards traveling stay other local purchases of consumables and other on-site expenses that would be involved in execution of the contract for installation of equipment and kits in 112 hospitals in the State of Tamil Nadu in November 2016 but had nowhere stated that the cash was withdrawn by her in Tamil Nadu. D.R on being confronted by the aforesaid infirmity in the observation of the CIT(A) failed to rebut the same. We thus vacate the adverse inference drawn by the CIT(A) based on the aforesaid misconceive facts. Accordingly in terms of our observations we vacate the addition that had been sustained by the CIT(A) - Decided in favour of assessee. Deduction of certain expenditure viz. Employees cost Business promotion expenses and Travelling expenses - HELD THAT - Ostensibly a perusal of the reply filed/uploaded by the assessee in the course of the assessment proceedings on 11.10.2019 prima facie reveals that she had filed certain documents supporting her aforesaid claim for deduction of expenses. We deem it fit to restore the matter to the file of the A.O. with a direction to re-adjudicate the aforesaid issue in the backdrop of the reply/details that were filed by the assessee along with her reply that was uploaded in the course of the assessment proceedings. As it has been the assessee s claim before the CIT(A) as well as before us that the subject expenses were incurred wholly and exclusively in the course of her business therefore the A.O. is directed to verify the same in the backdrop of the mandate of Section 37(1). Disallowance of 10% of sundry creditors/outstanding liabilities - HELD THAT - The assessee though on the course of the assessment proceedings could not obtain a copy of the confirmation of the aforesaid creditor viz. M/s. DHR Holdings India Pvt. Ltd but had thereafter procured the same in the course of the proceedings before the CIT(A) and uploaded/filed it on 01.09.2022 i.e during the appellate proceedings with the first appellate authority. However we find that there is no whisper in the order of the CIT(A) about the aforesaid confirmation from creditor that was filed/uploaded by the assessee in the course of the proceedings before him. We are of the view that as the confirmation of the aforesaid creditor has a strong bearing on verifying the authenticity of the said creditor therefore the CIT(A) ought to have taken cognizance of the same. Be that as it may we are of the view that the matter in all fairness requires to be restored to the file of A.O. with a direction to re-adjudicate the issue after considering the confirmation of the aforementioned creditor. Disallowance of 10% of sundry creditors (less than Rs. 10, 000/-) of Rs. 12, 682/- - We would mince no words in observing that we are unable to fathom that as to on what basis an ad hoc disallowance of the aforesaid sundry creditors has been carried out by the A.O. As there is no basis for the aforesaid disallowance/addition therefore we are constrained to vacate the same. Part disallowance i.e 10% of the opening balances of the sundry creditors that have been brought forward from the preceding year - We are of the view that no disallowance of any part of the said brought forward balances could have been made by the A.O during the year under consideration. Accordingly the disallowance to the said extent is vacated. The Ground of appeal partly allowed/allowed for statistical purposes in terms of our aforesaid observations.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal pertain to the following issues:

1. Whether the addition of Rs. 76.50 lakhs as unexplained money under Section 69A of the Income Tax Act, 1961 (the Act) was justified, given the assessee's explanation regarding the source of cash deposits made during the demonetization period.

2. Whether the disallowance of expenditure amounting to Rs. 17,90,629 on an adhoc basis at 10% was justified, particularly concerning employees cost, business promotion expenses, and travelling expenses claimed by the assessee.

3. Whether the disallowance of 10% of sundry creditors amounting to Rs. 38,29,272 was justified, especially considering the nature of the liabilities and the confirmations of creditors provided during appellate proceedings.

4. Whether the assessee was liable to pay interest under Section 234B of the Act.

5. General grounds challenging the orders of the lower authorities as being opposed to law, facts, and natural justice.

Issue-wise Detailed Analysis

1. Addition of Rs. 76.50 lakhs as unexplained money under Section 69A

Legal Framework and Precedents: Section 69A of the Act deals with unexplained money found credited in the books of the assessee or deposited in a bank account, where the assessee fails to satisfactorily explain the source of such money. The burden lies on the assessee to prove the legitimacy of the cash deposits.

Court's Interpretation and Reasoning: The Assessing Officer (A.O.) observed that during the demonetization period, the assessee made cash deposits totaling Rs. 96 lakhs in her bank account. The assessee explained that these deposits were sourced from cash withdrawals made from her bank accounts during the pre-demonetization period (April to November 2016). The A.O. rejected this explanation primarily on the ground that the assessee's cash holding pattern in previous years did not support the claim of having Rs. 1.23 crore in cash on 8th November 2016. The A.O. accepted only Rs. 19.50 lakhs as cash in hand and treated the balance Rs. 76.50 lakhs as unexplained money.

The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the addition but failed to consider the confirmations and evidence provided by the assessee, including the cash book and ledger extracts, which demonstrated the nexus between cash withdrawals and deposits.

The Tribunal, after examining the records, found that the assessee had withdrawn Rs. 1.23 crore in cash during the pre-demonetization period and had explained the purpose of such withdrawals-incurring expenses related to a government contract for supplying medical equipment across 112 hospitals in Tamil Nadu. The Tribunal noted that the books of accounts supporting this explanation were not rejected by the lower authorities and that the A.O. failed to produce any material disproving the availability of the cash balance.

The Tribunal criticized the A.O.'s reliance solely on the assessee's past cash holding pattern and nature of business as insufficient grounds to reject the explanation. It also vacated the adverse inference drawn by the CIT(A) based on the absence of narrations in the cash book and the mistaken observation that withdrawals were made in Tamil Nadu (which was not supported by record).

Key Evidence and Findings: The assessee's cash book, bank statements showing cash withdrawals and deposits, ledger extracts, and the contract letters for the government supply were crucial. The absence of contradictory evidence from the department was also significant.

Application of Law to Facts: The Tribunal applied the principle that the burden of proof lies on the department to disprove the assessee's explanation once a plausible source is demonstrated. The mere inconsistency with past cash patterns was insufficient to reject the explanation.

Treatment of Competing Arguments: The department argued that the cash deposits were unexplained due to the nature of the business and the improbability of holding such cash. The Tribunal found this argument unsubstantiated and emphasized the need for concrete evidence to disprove the assessee's claim.

Conclusion: The addition of Rs. 76.50 lakhs as unexplained money under Section 69A was vacated.

2. Disallowance of Rs. 17,90,629 on adhoc basis at 10% of claimed expenses

Legal Framework and Precedents: Section 37(1) of the Act allows deduction of expenses incurred wholly and exclusively for business purposes. The burden is on the assessee to prove genuineness and correctness of claimed expenses.

Court's Interpretation and Reasoning: The A.O. disallowed 10% of the claimed expenses (employees cost, business promotion, travelling) on the ground that the assessee failed to provide ledger extracts and supporting documents. The CIT(A) sustained the disallowance, noting the absence of bills and vouchers, although the A.O. never specifically asked for these supporting documents during assessment proceedings.

The Tribunal noted that the assessee had uploaded the ledger extracts and other details during the assessment proceedings, which the A.O. failed to consider. Since the details filed were not clearly discernible in the record before the Tribunal, the matter was restored to the A.O. for fresh adjudication. The A.O. was directed to verify the genuineness of the expenses in light of Section 37(1) and afford the assessee a reasonable opportunity to be heard.

Key Evidence and Findings: The assessee's reply dated 11.10.2019 containing ledger extracts and other details was pivotal. The absence of a specific request for bills and vouchers by the A.O. was also significant.

Application of Law to Facts: The Tribunal emphasized procedural fairness and the need to consider all material on record before making disallowances. The principle of natural justice and the statutory mandate under Section 37(1) were underscored.

Treatment of Competing Arguments: The department maintained that the assessee failed to substantiate expenses. The Tribunal found this contention untenable given the documents filed and the procedural lapses.

Conclusion: The disallowance was set aside for fresh adjudication; the ground was allowed for statistical purposes.

3. Disallowance of 10% of sundry creditors amounting to Rs. 38,29,272

Legal Framework and Precedents: Verification of creditors and outstanding liabilities is essential to establish the genuineness of purchases and liabilities. Disallowances on an ad hoc basis require justification.

Court's Interpretation and Reasoning: The A.O. disallowed 10% of sundry creditors and other liabilities due to lack of confirmation and details. The CIT(A) sustained this disallowance but failed to consider the confirmation of a major creditor (M/s. DHR Holdings India Pvt. Ltd.) filed by the assessee during appellate proceedings.

The Tribunal held that the disallowance of 10% of "other liabilities" (government dues, statutory payables) was unjustified and vacated it. Regarding sundry creditors, the Tribunal noted that except for two fresh creditors, the rest were opening balances from the preceding year, which could not be disallowed in the current year. The confirmation of the major creditor filed during appellate proceedings was not considered by the CIT(A), which was a significant omission.

The matter was restored to the A.O. for reconsideration after taking into account the confirmations filed and for any further verification deemed necessary. The A.O. was directed to afford the assessee a reasonable opportunity of hearing.

Key Evidence and Findings: Confirmation letters of creditors, nature of liabilities (statutory vs. trade creditors), and ledger details.

Application of Law to Facts: The Tribunal applied principles that ad hoc disallowances without basis are impermissible and that opening balances cannot be disallowed in the current year without cogent reasons.

Treatment of Competing Arguments: The department contended lack of confirmations justified disallowance. The Tribunal found the department's approach arbitrary and incomplete.

Conclusion: Disallowance of 10% of other liabilities and opening balances vacated; sundry creditors disallowance set aside for fresh adjudication.

4. Liability to interest under Section 234B

This ground was not pressed by the assessee and was dismissed accordingly.

5. General Grounds

General grounds challenging the orders on grounds of law, facts, natural justice, and probabilities were dismissed as not pressed.

Significant Holdings

"The mere inconsistency with past cash patterns was insufficient to reject the explanation of the assessee regarding the source of cash deposits, especially in absence of any material disproving the availability of cash balance."

"The burden lies on the department to produce evidence disproving the assessee's claim once a plausible source of cash deposits is demonstrated."

"Ad hoc disallowances without any basis or justification cannot be sustained."

"Opening balances of sundry creditors brought forward from the preceding year cannot be disallowed in the year under consideration without cogent reasons."

"Procedural fairness requires that the Assessing Officer consider all material filed by the assessee and afford a reasonable opportunity of hearing before making disallowances."

Final Determinations

- The addition of Rs. 76.50 lakhs as unexplained money under Section 69A was vacated.

- The disallowance of Rs. 17,90,629 on account of expenses was set aside for fresh adjudication after considering documents filed by the assessee.

- The disallowance of 10% of sundry creditors and other liabilities was partly vacated and partly set aside for fresh adjudication, directing the A.O. to consider confirmations and other evidence.

- Grounds relating to interest under Section 234B and general grounds were dismissed as not pressed.

- The appeal was partly allowed/allowed for statistical purposes accordingly.