2025 (5) TMI 346 - AT - Income Tax

Unexplained cash deposits u/s 68 - enhancement by NFAC to an amount u/s 251 - invocation of section 115BBE - HELD THAT - As concluded that no VAT was paid on cash scrap sales and also that veracity of accounts not beyond doubt. We do not find any significant force in the arguments propounded by the FAA. The hypothesis advanced has been found to be based upon mere principles of human probability and not backed by cogent demonstrative evidence. The assessee is a scrap dealer wherein cash dealings are of routine occurrence. Therefore it cannot be concluded that there was no element of cash sales. As regards the issue of enhancement of addition on account of cash deposits as noted that section 251(1)(a) empowers a CIT(A) to enhance the addition made by the AO however section 251(2) of the act mandates that while doing so he has to give a reasonable opportunity of being heard to the assessee. We have noted from order of the NFAC that no such opportunity was given. Accordingly we have no hesitation in concurring with the arguments of the assessee. The enhancement made by the Ld.CIT(A) from Rs. 52, 35, 500/- to Rs. 57, 25, 500/- is therefore deleted and the ground of appeal No. 4 raised by the assessee is allowed. As regards the issue of addition on account of unexplained cash deposits as indicated above the amounts seem to have a close nexus with sales of the assessee. Invocation of section 115BBE - We are of the considered opinion that provisions of section 115BBE would not be applicable in this case. As in S.M.I.L.E MICROFINANCE LIMITED 2024 (11) TMI 1444 - MADRAS HIGH COURT section 115BBE would be applicable for transactions undertaken w.e.f. 1/4/2017 and not of earlier period. In the present case undisputedly transaction were undertaken in FY 2016-17 and hence section115BBE could not have been invoked in this case. Be that as it may be we are of the view that interest of justice would be met if the addition is restricted to Rs. 5 lakhs being the estimated profit element in the impugned sales deposited in the bank accounts by way of cash. The Ld.AO is directed to restrict the addition to Rs. 5 lakhs and delete the balance. The assessee succeeds in respect of ground of appeal nos.1 and 5 also and the same are allowed. Addition u/s 40A(3) and its corresponding enhancement by Ld.NFAC - We have noted from the order of Ld.NFAC that as far as action of the NFAC qua enhancement of income is concerned no opportunity of being heard was accorded and hence the action of the NFACcannot be sustained and deserves to be quashed. Accordingly the action of Ld. NFAC in making the impugned enhancement is quashed. We have also found sufficient force in the argument of the assessee that without converting the case into complete scrutiny the Ld. AO was not authorized to make any addition in a limited scrutiny case on an issue which was not part of the CASS selection. We have seen the notice u/s 143(2) issued by the Ld.AO placed by the assesseethat it was limited scrutiny case for examination of cash deposits only. Accordingly we are of the considered view that there is no merit in the addition made by the Ld.AO u/s 40A(3) as well as its further enhancement by the Ld. NFAC. Appeal of the assessee is partly allowed.

Summary

The core legal questions considered by the Tribunal in this appeal include: (1) Whether the addition of unexplained cash deposits by the Assessing Officer (AO) and its subsequent enhancement by the National Faceless Assessment Centre (NFAC) was justified, including the applicability of procedural safeguards under section 251(1) and (2) of the Income Tax Act; (2) Whether the invocation of section 115BBE for imposing tax at a higher rate on the unexplained cash deposits was appropriate; (3) Whether the addition made under section 40A(3) for payments made to a third party without converting the limited scrutiny case into a complete scrutiny was valid; (4) Whether the NFAC was obliged to call for a remand report under Rule 46A of the Act; and (5) Whether the assessee was denied a reasonable opportunity of being heard by the NFAC.

Regarding the first issue on unexplained cash deposits, the relevant legal framework includes section 69A of the Income Tax Act which permits addition of unexplained cash credits, and section 251 which governs appellate powers and procedural fairness in enhancement of income by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO had made an addition of Rs. 52,35,500/- on the basis of cash deposits unexplained by the assessee, which was enhanced by NFAC to Rs. 57,25,500/-. The assessee contended that these deposits represented cash sales in the ordinary course of business, supported by VAT records. The Tribunal noted that the NFAC summarily rejected the VAT and CST returns on the basis that they were mere declarations and that no VAT was paid on cash scrap sales. However, the Tribunal found this reasoning to be based on mere human probability rather than cogent evidence, emphasizing that cash dealings are routine in the scrap business and hence the deposits could not be presumed unexplained.

On the procedural aspect, section 251(1)(a) empowers the CIT(A) to enhance the addition made by the AO, but section 251(2) mandates that the assessee must be given a reasonable opportunity of being heard before such enhancement. The Tribunal observed that NFAC did not provide such an opportunity before enhancing the addition from Rs. 52,35,500/- to Rs. 57,25,500/-, rendering the enhancement procedurally unsustainable. Consequently, the enhancement was deleted. The Tribunal further applied the principle of restricting the addition to the estimated profit element of Rs. 5 lakhs in the cash deposits, directing the AO to limit the addition accordingly.

The invocation of section 115BBE, which imposes a higher tax rate of 60% on undisclosed income, was also contested. The Tribunal relied on a recent judgment of the Madras High Court which held that the amendment to section 115BBE increasing the tax rate from 30% to 60% is applicable only to transactions occurring on or after 01.04.2017. Since the transactions in question pertained to the financial year 2016-17 (prior to 01.04.2017), the 60% rate was inapplicable and the AO erred in invoking this provision. This interpretation was supported by an analysis of the legislative intent behind the amendment, which was introduced in the context of demonetization and targeted future transactions to curb black money.

The Tribunal's treatment of competing arguments included a careful examination of the NFAC's rejection of VAT returns and the AO's reliance on unexplained cash deposits. It found the NFAC's approach to be conclusory and insufficiently evidentiary. The Tribunal also considered the assessee's submission that cash sales are inherent to the scrap business and supported by VAT records, which was accepted as a plausible explanation.

On the second major issue concerning the addition under section 40A(3) for payments of Rs. 36,93,132/- to M/s. Sage Metal Ltd., the Tribunal examined the procedural correctness of the AO's action in a limited scrutiny case. The AO made this addition on the premise that the payment was disallowed under section 40A(3) due to lack of compliance, and NFAC enhanced this addition further. The assessee argued that the case was selected for limited scrutiny specifically to verify cash deposits, and that making additions on unrelated issues without converting the case into a complete scrutiny (which requires supervisory approval) was impermissible. The Tribunal found merit in this argument, noting that the scrutiny notice under section 143(2) was limited in scope and did not authorize examination beyond cash deposits. Consequently, both the AO's addition and NFAC's enhancement under section 40A(3) were quashed. Additionally, the Tribunal held that NFAC's enhancement was invalid due to the absence of an opportunity of being heard, as mandated by section 251(2).

The third issue pertained to the NFAC's failure to call for a remand report under Rule 46A of the Income Tax Rules. The assessee contended that this was a procedural lapse. The Tribunal observed that the assessee had not invoked Rule 46A before the NFAC and that non-calling of a remand report is generally a procedural concern for the Revenue rather than the assessee. Therefore, this ground was dismissed.

The fourth issue related to the allegation that the NFAC did not provide a proper opportunity of being heard. The Tribunal reviewed the NFAC's order and found detailed recording of the assessee's submissions and their consideration. There was no evidence on record indicating denial of reasonable opportunity. Accordingly, this ground was also dismissed.

Significant holdings of the Tribunal include the following:

On the unexplained cash deposits, the Tribunal held: "The hypothesis advanced has been found to be based upon mere principles of human probability and not backed by cogent demonstrative evidence. The assessee is a scrap dealer wherein cash dealings are of routine occurrence. Therefore, it cannot be concluded that there was no element of cash sales."

Regarding procedural fairness in enhancement of income, the Tribunal emphasized: "Section 251(2) of the Act mandates that while enhancing the addition, the CIT(A) has to give a reasonable opportunity of being heard to the assessee. We have noted from the order of the NFAC that no such opportunity was given. Accordingly, the enhancement made by the CIT(A) is deleted."

On the applicability of section 115BBE, the Tribunal adopted the High Court's reasoning: "The revenue is empowered to impose 60% rate of tax for the transactions from 01.04.2017 onwards and not prior to the said cut-off date. And for prior transactions, the revenue is empowered to impose only 30% rate of tax."

On the scope of limited scrutiny, the Tribunal held: "Without converting the case into complete scrutiny, the AO was not authorized to make any addition on an issue which was not part of the CASS selection. Accordingly, there is no merit in the addition made by the AO u/s 40A(3) as well as its further enhancement by the NFAC."

On the procedural requirement of hearing before enhancement by NFAC: "No opportunity of being heard was accorded and hence the action of the NFAC cannot be sustained and deserves to be quashed."

On the remand report under Rule 46A: "Non-calling of remand report by the NFAC can be a cause of concern for the Revenue and not for the assessee."

On the opportunity of hearing by NFAC: "There is nothing on record to indicate that reasonable opportunity of being heard was not given to the assessee."

In conclusion, the Tribunal partly allowed the appeal by deleting the enhancement of unexplained cash deposits, restricting the addition to Rs. 5 lakhs as profit element, deleting the addition and enhancement under section 40A(3), and dismissing procedural grounds raised by the assessee regarding remand report and opportunity of hearing. The appeal was otherwise dismissed on grounds lacking merit.