2025 (6) TMI 301 - AT - Income Tax

Unexplained money u/s 69A and taxed the same u/s 115BBE - cash deposit made during the demonetization period in the bank account of the assessee firm - HELD THAT - We find that the balance sheets for A.Y. 2014-15 and subsequent years filed in support of the cash balance are not audited and not signed by all the partners of the firm. No corroborative evidence has been furnished by the assessee to demonstrate the existence of any inter-partner dispute nor has any communication resolution correspondence or affidavit from other partners been produced in support of such claim. The explanation that the cash was held back due to disputes and deposited later after resolution thus remains unsubstantiated by any reliable or verifiable documentary evidence. We find that the AO has also not made any effort to verify this claim by recording the statement of any of the partners or by calling for further clarification during assessment proceedings. Thus the matter appears to have been concluded on presumptive assumptions on both sides without full inquiry into the factual matrix. CIT(A) has primarily rejected the assessee s explanation based on non-filing of returns for A.Ys. 2014-15 to 2016-17 and the claim of cash retention being improbable. While non-filing of returns alone cannot render the earlier year s cash balance as unexplained it is equally true that reliance on unsigned and unaudited balance sheets not confirmed by all partners is insufficient to conclusively establish the availability and source of such cash. Where the assessee has failed to substantiate its explanation with adequate and credible evidence and at the same time the AO has not conducted proper inquiry or verification of the facts particularly in respect of the source of cash claimed to be from earlier years balances we are of the considered opinion that the issue requires re-examination. Thus restore the matter to the file of the AO for the limited purpose of verifying the claim of availability of cash as on 31.03.2014 and to examine whether such cash can reasonably be said to have been available and carried forward till the date of deposit during the demonetization period. Appeal is allowed for statistical purposes.

Summary

The core legal question considered in this appeal is whether the cash deposit of Rs. 13,03,738/- made during the demonetization period in the bank account of the assessee-firm can be treated as "explained" or "unexplained" within the meaning of section 69A of the Income-tax Act, 1961. This central issue encompasses subsidiary questions regarding the adequacy and credibility of the explanation offered by the assessee for the source of the cash, the evidentiary requirements to substantiate such explanation, and the procedural fairness in the inquiry conducted by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-wise detailed analysis:

Issue 1: Whether the cash deposit of Rs. 13,03,738/- during the demonetization period is "unexplained" under section 69A of the Act?

Relevant legal framework and precedents: Section 69A casts the burden on the assessee to satisfactorily explain the nature and source of any money found credited in the books or bank accounts. If the explanation is not satisfactory, the amount is treated as "unexplained money" and added to income. The explanation must be supported by credible and verifiable evidence. Precedents emphasize that mere assertions or self-serving documents without corroboration do not suffice to discharge the burden.

Court's interpretation and reasoning: The Court examined the explanation offered by the assessee, which was that the cash deposited during the demonetization period represented cash-in-hand as on 31.03.2014, retained by one partner due to disputes and closure of business. The assessee relied on an audited balance sheet for A.Y. 2013-14 showing a cash balance of Rs. 13,01,345/-, unaudited and unsigned accounts for subsequent years, and internal records such as cash books and statements of income.

The Court found that the balance sheets for the years after A.Y. 2013-14 were neither audited nor signed by all partners, thereby lacking reliability. Furthermore, there was no corroborative evidence such as partner affidavits, communications, or resolutions to substantiate the claim of disputes or the retention of cash by a custodian partner. The absence of such credible documentary evidence weakened the assessee's explanation.

Key evidence and findings: The AO relied on the lack of books of account and the absence of return filings for A.Ys. 2014-15 to 2016-17 to conclude that the cash deposit was unexplained. The CIT(A) upheld this view, emphasizing the improbability of holding such a large cash balance unutilized for over two years and the failure to file returns during the intervening period. The Court noted that while non-filing of returns alone does not render a cash balance unexplained, the reliance on unaudited, unsigned documents without corroboration was insufficient.

Application of law to facts: The Court applied the principle that an explanation under section 69A must be credible and supported by reliable evidence. The assessee's failure to provide corroborative proof or to have all partners confirm the explanation rendered the explanation inadequate. However, the Court also observed that the AO did not conduct a thorough inquiry by recording partner statements or seeking further clarifications, which was a procedural lapse.

Treatment of competing arguments: The assessee argued that the cash balance was duly disclosed in earlier audited accounts and that disputes prevented filing returns or final settlement of accounts. The Revenue contended that the explanation was self-serving, unverified, and contradicted by the non-filing of returns and lack of records. The Court found merit in both positions: the assessee's explanation lacked substantiation, but the Revenue's inquiry was incomplete and presumptive.

Conclusions: The Court concluded that the issue of whether the cash deposit was explained or unexplained could not be conclusively determined on the existing record. The lack of proper inquiry by the AO and absence of corroborative evidence from the assessee necessitated further examination.

Issue 2: Whether the CIT(A) erred in upholding the addition under section 69A without full inquiry and on the basis of non-filing of returns?

Relevant legal framework and precedents: The principles of natural justice and fair inquiry require that the AO and appellate authorities conduct a thorough investigation before making adverse findings. Non-filing of returns, while a relevant factor, cannot alone justify treating a cash deposit as unexplained if credible explanations and evidence exist.

Court's interpretation and reasoning: The Court observed that the CIT(A) primarily relied on the improbability of retaining such cash for a long period and the non-filing of returns to reject the explanation. However, the Court clarified that non-filing of returns is not conclusive proof of unexplained income. The CIT(A) did not critically analyze the evidence submitted by the assessee, such as the audited balance sheet for A.Y. 2013-14 and cash book entries.

Key evidence and findings: The CIT(A) did not seek further evidence or verification from the assessee or partners and upheld the addition on prima facie grounds. The Court found this approach inadequate and inconsistent with principles of fair adjudication.

Application of law to facts: The Court emphasized that the appellate authority must consider all evidence and provide an opportunity for the assessee to substantiate its claims before confirming additions under section 69A.

Treatment of competing arguments: The Revenue argued that the CIT(A) was justified in upholding the addition due to lack of returns and credible explanation. The assessee argued for acceptance of the explanation supported by earlier audited accounts and internal records. The Court balanced these views, noting procedural deficiencies on both sides.

Conclusions: The Court held that the CIT(A) erred in rejecting the explanation solely on the basis of non-filing of returns and improbability without further inquiry.

Issue 3: Whether the matter requires remand for further verification and inquiry?

Relevant legal framework and precedents: When the record is incomplete or the inquiry is inadequate, courts frequently remit matters to the AO for fresh consideration, ensuring that parties are given a fair opportunity to present evidence and explanations.

Court's interpretation and reasoning: Noting the absence of partner statements, lack of corroborative evidence, and the AO's failure to conduct a comprehensive inquiry, the Court found it appropriate to remit the matter for fresh verification. The AO was directed to verify the existence and continuity of the cash balance as on 31.03.2014 and examine the genuineness of the deposit during the demonetization period.

Key evidence and findings: The Court underscored the importance of examining all relevant documents, recording partner statements, and affording the assessee a full opportunity to produce evidence.

Application of law to facts: The Court applied the principle of fair procedure and thorough investigation to ensure just adjudication.

Treatment of competing arguments: The Court balanced the need for Revenue vigilance against the requirement of procedural fairness to the assessee.

Conclusions: The appeal was allowed for statistical purposes, and the matter was remanded to the AO for limited inquiry and verification.

Significant holdings:

"The explanation that the cash was held back due to disputes, and deposited later after resolution, thus remains unsubstantiated by any reliable or verifiable documentary evidence."

"While non-filing of returns alone cannot render the earlier year's cash balance as unexplained, reliance on unsigned and unaudited balance sheets, not confirmed by all partners, is insufficient to conclusively establish the availability and source of such cash."

"The AO has also not made any effort to verify this claim by recording the statement of any of the partners or by calling for further clarification during assessment proceedings. Thus, the matter appears to have been concluded on presumptive assumptions on both sides without full inquiry into the factual matrix."

"In view of the above, and in the interest of justice, we deem it appropriate to restore the matter to the file of the AO for the limited purpose of verifying the claim of availability of cash as on 31.03.2014 and to examine whether such cash can reasonably be said to have been available and carried forward till the date of deposit during the demonetization period."

The core principles established include the necessity for credible and corroborated evidence to explain cash deposits under section 69A, the insufficiency of non-filing of returns alone to treat deposits as unexplained, and the requirement for the AO and appellate authorities to conduct a thorough and fair inquiry before confirming additions.

Final determinations on each issue are that the addition under section 69A cannot be upheld conclusively on the existing record; the CIT(A) erred in confirming the addition without full inquiry; and the matter is remanded to the AO for fresh verification with due opportunity to the assessee to substantiate the explanation.