2025 (5) TMI 1873 - AT - Income Tax

Unexplained deposits during the demonetization period - Addition u/s 69A - HELD THAT - Admittedly there is a difference between the gross total income shown by the Assessee and the gross income as appears in the profit loss account. Assessee during the AY under consideration in the profit loss account has shown the purchase and sale amounts at Rs. 1, 17, 89, 133/- Rs. 1, 26, 99, 332/- respectively as it clearly appears from profit loss account. Thus considering the peculiar facts and circumstances of the case in totality this Court observe that the Assessee s business of trading of eggs is almost on the cash basis and therefore it would be more appropriate to apply the provisions of section 44AD of the Act for determining the total income of the Assessee. Additions made by the AO and affirmed by Commissioner are deleted and the AO is directed while estimating the profit to apply the provisions of section 44AD to the gross receipts/sale made by the Assessee and to re-compute the profit and the tax liability accordingly. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the cash deposits amounting to Rs. 38,17,000/- made during the demonetization period in the assessee's bank account can be treated as unexplained cash under section 69A of the Income Tax Act, 1961, in the absence of satisfactory explanation or evidence of known source.

(b) Whether the addition of Rs. 12,04,445/- on account of estimated profit, based on turnover excluding the demonetization period cash deposits, is justified given the discrepancy between declared income and bank credits.

(c) Whether the assessee's failure to maintain audited books of account and reconcile turnover declared in the return of income with bank credits justifies the additions made by the Assessing Officer (AO) and affirmed by the Commissioner of Income Tax (Appeals) (CIT(A)).

(d) Whether the provisions of section 44AD of the Act, related to presumptive taxation for small businesses, are applicable to the assessee's business and should be applied for computing income in the facts and circumstances of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Treatment of Cash Deposits During Demonetization Period under Section 69A

Relevant legal framework and precedents: Section 69A of the Income Tax Act empowers the AO to treat any money found deposited in a bank account as income of the assessee if the source of such money is unexplained. The burden lies on the assessee to prove the cash deposits are from a known and lawful source.

Court's interpretation and reasoning: The AO observed that the assessee deposited Rs. 38,17,000/- in cash during the demonetization period, which was significantly higher than prior cash deposits (Rs. 4,92,000/-). The AO found the explanation and evidence provided by the assessee insufficient to establish the source of these deposits. The AO therefore invoked section 69A and treated the amount as unexplained cash, adding it to the income and taxing it under section 115BBE.

Key evidence and findings: The assessee submitted purchase and sales details, bank statements, cash books, and other documents to prove the genuineness of transactions. However, the AO noted that purchase and sales during the demonetization period were disproportionately higher compared to the rest of the year, and the accounts were not audited as required under section 44AB.

Application of law to facts: The AO relied on the unexplained nature of the cash deposits and lack of compliance with audit provisions to disbelieve the assessee's explanation. The CIT(A) upheld the AO's findings.

Treatment of competing arguments: The assessee argued that the cash deposits were generated from his business of egg trading, which is predominantly cash-based, and that he had offered the income to tax in the return of income, making any addition tantamount to double taxation. The department refuted this, emphasizing the lack of proper books and reconciliation.

Conclusions: The Tribunal found that the assessee had filed relevant documents and that the business was cash-based. It held that the cash deposits during demonetization could not be outrightly treated as unexplained money. Instead, the amount should be considered part of the total turnover for profit estimation purposes, and not added separately as unexplained income under section 69A.

Issue (b): Addition of Rs. 12,04,445/- on Account of Estimated Profit

Relevant legal framework and precedents: The AO estimated profit based on turnover excluding demonetization period cash deposits, applying an average profit margin of 18% derived from previous years' data. The difference between estimated profit and declared income was added to the assessee's income.

Court's interpretation and reasoning: The AO observed a mismatch between turnover declared in the return (Rs. 21,81,513/-) and bank credits (Rs. 1,24,68,432/-), excluding demonetization cash deposits. The AO treated Rs. 86,51,432/- as the true turnover and estimated profit accordingly, adding the difference to income.

Key evidence and findings: The assessee's profit and loss account showed purchases and sales exceeding Rs. 1 crore, but the return understated turnover. The AO noted the absence of audited accounts and failure to reconcile discrepancies.

Application of law to facts: The AO's approach was to rely on bank credits as a proxy for turnover and estimate profit using past profit margins. The CIT(A) upheld this addition.

Treatment of competing arguments: The assessee attributed the discrepancy to an error by his accountant and submitted books and registers to substantiate turnover. The Tribunal noted these submissions but emphasized the absence of audit and reconciliation.

Conclusions: The Tribunal held that the business being cash-based and the turnover including demonetization cash deposits should be considered as a whole. It directed the AO to apply presumptive taxation under section 44AD on total turnover of Rs. 1,24,68,432/-, thereby deleting the addition of Rs. 12,04,445/- and recomputing income accordingly.

Issue (c): Failure to Maintain Audited Books and Reconciliation

Relevant legal framework and precedents: Under section 44AB, assessees with turnover exceeding prescribed limits must get accounts audited. Failure to do so may lead to adverse inference.

Court's interpretation and reasoning: The AO criticized the assessee for not maintaining audited accounts and not reconciling bank credits with declared turnover, which raised doubts about the correctness of declared income.

Key evidence and findings: The assessee admitted an error in declaring turnover in the return but submitted various books and registers during assessment proceedings.

Application of law to facts: Despite procedural lapses, the Tribunal recognized the cash-based nature of the business and the documents filed by the assessee as sufficient to establish the genuineness of transactions.

Treatment of competing arguments: The department stressed non-compliance with audit provisions and lack of reconciliation, while the assessee emphasized the business nature and documents filed.

Conclusions: The Tribunal directed the AO to apply presumptive taxation under section 44AD, which does not require audit, thus mitigating the impact of procedural lapses and avoiding arbitrary additions.

Issue (d): Applicability of Section 44AD for Income Computation

Relevant legal framework and precedents: Section 44AD provides for presumptive taxation of eligible small businesses, allowing income computation at a prescribed percentage of turnover without requiring detailed books or audit.

Court's interpretation and reasoning: The Tribunal observed that the assessee's business was primarily cash-based egg trading, with turnover exceeding the threshold for audit but no audit conducted. Given the nature of the business and the documents filed, the Tribunal found it appropriate to apply section 44AD for income computation.

Key evidence and findings: The assessee's turnover was Rs. 1,24,68,432/-, and the business was cash-based. The Tribunal noted that the assessee had disclosed income and paid tax accordingly.

Application of law to facts: The Tribunal held that applying section 44AD would provide a fair and reasonable method to compute income, avoiding penal additions and double taxation.

Treatment of competing arguments: The department did not contest the applicability of section 44AD but relied on the absence of audit and discrepancies to justify additions.

Conclusions: The Tribunal set aside the additions and directed the AO to recompute income using section 44AD on the total turnover including demonetization period deposits.

3. SIGNIFICANT HOLDINGS

"Admittedly the Assessee had filed the relevant documents, as not disputed by the department and offered a reasonable explanation qua amount of Rs. 38,17,000/- deposited during the demonetization period in his account. Further the Assessee is not doing any other business, except of eggs trading on the cash basis mainly and during the AY under consideration has shown total turnover to the tune of Rs. 1,24,68,432/- and therefore availability of cash amount of Rs. 38,17,000/- which was deposited by the Assessee in his bank account on declaration of demonization period, cannot be ruled out. Thus the amount Rs. 38,17,000/- cannot termed as unexplained and/or alternatively at max can be subjected to the estimation of profit by adding the same in gross turnover shown by the Assessee."

"Considering the peculiar facts and circumstances of the case in totality, this Court observe that the Assessee's business of trading of eggs is almost on the cash basis and therefore it would be more appropriate to apply the provisions of section 44AD of the Act for determining the total income of the Assessee. Consequently, the additions made by the AO and affirmed by the Ld. Commissioner are deleted and the AO is directed while estimating the profit, to apply the provisions of section 44AD of the Act to the gross receipts/sale of Rs. 1,24,68,432/- made by the Assessee and to re-compute the profit and the tax liability accordingly."

Core principles established include:

- Cash deposits during demonetization period cannot be treated as unexplained merely due to their magnitude if supported by business turnover and explanation.

- In cash-based businesses, presumptive taxation under section 44AD is an appropriate method for income computation, especially where books are not audited and discrepancies exist.

- Additions based on estimated profits excluding certain cash deposits are not justified if those deposits form part of genuine business turnover.

Final determinations:

(i) The addition of Rs. 38,17,000/- as unexplained cash under section 69A is deleted and the amount is to be treated as part of total turnover.

(ii) The addition of Rs. 12,04,445/- on account of estimated profit excluding demonetization deposits is deleted.

(iii) The AO is directed to recompute income applying section 44AD on total turnover of Rs. 1,24,68,432/- and tax the income accordingly.