2025 (6) TMI 1832 - AT - Income Tax

Addition u/s 68 - cash deposits during demonetization period - assessee was not required to maintain any books of account having returned income on presumptive basis u/s. 44AD HELD THAT - Additions made by the AO and confirmed by the Ld. CIT(A) are in complete disregard of the facts on record before the AO and the pleadings made by the assessee to the CIT(A) that the assessee was not required to maintain any books of account having returned income on presumptive basis u/s. 44AD and therefore no question of making any addition of either cash found deposited in its bank account or disallowance of expenses incurred by it. Even on the aspect of unsecured loans added to its income u/s. 68 of the Act it has been pointed out that it was demonstrated to the authorities below that majority of the loan was taken in the preceding year. Clearly the order passed by the Ld. CIT(A) is not sustainable since there is no application of mind to the facts on record and the pleadings made by the Ld. Counsel for the assessee before him. We therefore consider it fit to restore the issue back to the AO to frame assessment de novo after considering all the facts on record - Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

- Whether the Assessing Officer (AO) was justified in rejecting the books of accounts maintained by the assessee, who claimed income on presumptive basis under Section 44AD of the Income Tax Act, 1961 (hereinafter "the Act").

- Whether the addition of Rs. 42,55,534/- made under Section 68 of the Act on account of unexplained cash deposits during the demonetization period was legally sustainable.

- Whether the addition of Rs. 35,00,590/- under Section 68 on account of unexplained unsecured loans was justified.

- Whether the disallowance of conveyance expenses amounting to Rs. 10,010/- under Section 37 of the Act was appropriate.

- Whether the disallowance of 25% of total purchases amounting to Rs. 10,04,732/- under Section 37 of the Act was warranted due to lack of supporting evidence.

- Whether the assessment order was valid and legal, especially in light of the additional ground raised but not pressed by the assessee regarding additions made beyond the scope of CASS (Computer Aided Scrutiny Selection).

2. ISSUE-WISE DETAILED ANALYSIS

Rejection of Books of Accounts and Presumptive Taxation under Section 44AD

Legal Framework and Precedents: Section 44AD of the Act permits certain eligible taxpayers to declare income on a presumptive basis at 8% (or 6% in case of digital transactions) of total turnover or gross receipts, without maintaining detailed books of accounts. The proviso to Section 44AD exempts such taxpayers from maintaining books under Section 44AA and from audit under Section 44AB, subject to conditions.

Court's Interpretation and Reasoning: The AO rejected the books of accounts maintained by the assessee despite the assessee declaring income on presumptive basis under Section 44AD. The AO relied on anomalies in cash deposits and turnover to disbelieve the declared income and books. However, the Tribunal observed that since the assessee had opted for presumptive taxation, there was no legal requirement to maintain books of accounts or substantiate expenses. The Tribunal noted that the AO and CIT(A) failed to consider this statutory exemption and the pleadings made by the assessee to that effect.

Key Evidence and Findings: The assessee declared income of Rs. 4,72,880/- on presumptive basis from a turnover of Rs. 49,89,283/-. The cash deposits in the bank account during the demonetization period amounted to Rs. 44,60,540/-, which the assessee attributed to sales turnover. The AO's rejection was based on computer-generated risk parameters and discrepancies in cash sales and cash in hand compared to previous years.

Application of Law to Facts: The Tribunal emphasized that the presumptive scheme under Section 44AD does not require the assessee to maintain books or substantiate cash deposits. Therefore, the rejection of books and consequent additions were not legally sustainable without considering the statutory scheme.

Treatment of Competing Arguments: While the AO and CIT(A) relied on anomalies and computer-generated selection criteria, the assessee's counsel highlighted the statutory exemption and submitted detailed written submissions which were ignored by the lower authorities.

Conclusion: The Tribunal found the rejection of books and additions based thereon to be unjustified and contrary to the provisions of Section 44AD.

Addition of Rs. 42,55,534/- under Section 68 on Unexplained Cash Deposits

Legal Framework and Precedents: Section 68 of the Act deals with unexplained cash credits. If the assessee fails to satisfactorily explain the nature and source of any cash credit found in the books or bank accounts, the amount is added to income as unexplained cash credit.

Court's Interpretation and Reasoning: The AO added the difference between cash sales in the pre-demonetization period for the impugned year and the preceding year (Rs. 42,55,534/-) as unexplained cash credit under Section 68, rejecting the assessee's explanation that the cash was from sales turnover. The Tribunal noted that the assessee had returned income under Section 44AD and that the entire cash deposited was attributable to sales turnover. The Tribunal also observed that the AO and CIT(A) did not consider the statutory presumptive taxation scheme and the submissions made by the assessee explaining the source of cash deposits.

Key Evidence and Findings: The AO relied on computer-generated risk parameters and discrepancies in cash sales and cash in hand. The assessee's explanation was that the cash deposits were from business sales, consistent with presumptive income declared.

Application of Law to Facts: Since the assessee was under presumptive taxation and not required to maintain books or substantiate income beyond the presumptive declaration, the addition under Section 68 without considering this statutory scheme was improper.

Treatment of Competing Arguments: The AO and CIT(A) relied on risk parameters and anomalies, but the assessee's counsel stressed the statutory protection under Section 44AD and the lack of requirement to explain cash deposits in such cases.

Conclusion: The addition under Section 68 on account of unexplained cash deposits was not sustainable without proper consideration of the presumptive taxation regime.

Addition of Rs. 35,00,590/- under Section 68 on Unexplained Unsecured Loans

Legal Framework and Precedents: Section 68 addition is also applicable to unexplained loans. If the assessee fails to prove the genuineness and source of loans, the amount is added to income.

Court's Interpretation and Reasoning: The AO added Rs. 35,00,590/- as unexplained loans. The assessee contended that majority of these loans were brought forward from preceding years and were not newly taken in the impugned year. The Tribunal noted that the assessee had submitted this explanation and that the lower authorities failed to consider these pleadings.

Key Evidence and Findings: The assessee's submissions showed that the loans were not fresh and were carried forward from earlier years. The AO and CIT(A) did not address these submissions.

Application of Law to Facts: Without considering the explanation and evidence on record, addition under Section 68 was premature and unsustainable.

Treatment of Competing Arguments: The AO and CIT(A) made the addition without addressing the explanation, whereas the assessee provided documentary and written submissions.

Conclusion: The addition under Section 68 on unsecured loans was not justified without proper consideration of the facts and submissions.

Disallowance of Conveyance Expenses of Rs. 10,010/- under Section 37

Legal Framework and Precedents: Section 37 permits deduction of expenses incurred wholly and exclusively for business purposes. Disallowance is justified if expenses are unsubstantiated or not incurred for business.

Court's Interpretation and Reasoning: The AO disallowed 50% of conveyance expenses claimed due to lack of substantiation. The Tribunal noted that since the assessee was under presumptive taxation, detailed expenses need not be maintained or substantiated.

Application of Law to Facts: The assessee was not required to maintain detailed books or prove expenses under Section 44AD. Therefore, disallowance of expenses was inconsistent with the presumptive scheme.

Conclusion: The disallowance of conveyance expenses was not sustainable.

Disallowance of 25% of Total Purchases Amounting to Rs. 10,04,732/- under Section 37

Legal Framework and Precedents: Similar to conveyance expenses, disallowance of purchases is justified if evidence is lacking.

Court's Interpretation and Reasoning: The AO disallowed 25% of purchases due to failure to file supporting evidence. The Tribunal reiterated that under presumptive taxation, such detailed scrutiny of expenses and purchases is not applicable.

Application of Law to Facts: The assessee's income was declared on presumptive basis, exempting it from maintaining detailed evidence on purchases.

Conclusion: The disallowance of purchases was not legally sustainable.

Validity of Assessment Order and Additional Ground Raised

The assessee raised an additional ground contending that the assessment order was void and illegal as additions were made beyond the scope of CASS. However, the assessee did not press this ground during hearing. The Tribunal accordingly did not consider this ground.

3. SIGNIFICANT HOLDINGS

- "Since the assessee had returned income on presumptive basis under Section 44AD of the Act, there was no requirement for maintaining books of accounts or substantiating expenses, and therefore, rejection of books and additions made thereon were not sustainable."

- "Additions under Section 68 on account of unexplained cash deposits and unsecured loans cannot be made without proper consideration of the statutory presumptive taxation scheme and the explanations furnished by the assessee."

- "The AO and CIT(A) failed to apply their mind to the facts on record and the pleadings made by the assessee, rendering their orders unsustainable."

- The Tribunal restored the matter to the AO for fresh assessment after considering all facts and pleadings in accordance with law.

- The appeal was allowed for statistical purposes, indicating that the Tribunal did not decide the merits finally but required reassessment consistent with the legal framework.