2025 (6) TMI 1922 - AT - Income Tax

Addition u/s 69A - cash deposited in bank account as unexplained - Onus to prove - quantum cash deposited by the assesse during the different periods of the year i.e. pre- demonetization and post demonetization - assessee did not maintain any books of accounts and filed return of income as per the presumptive scheme of taxation provided u/s.44AD - HELD THAT - Assesse was a small trader in kirana items with its customers mainly being small hawkers to whom undoubtedly all sales are made in cash the preponderance of probability undoubtedly in the present case is that the majority sales made by the assessee or in fact entire sales made by the assesse during the impugned year was in cash. The assessee we have noted also explained that the entire sales made during the year was out of the old stock remaining since the business was originally run by her husband who had since deceased and she had taken over the business which ultimately was wound up in succeeding years Having accepted the fact that the assesse was not required to maintain books of accounts as per law that and having accepted the turnover on which profits were returned by the assesse as per law and the facts demonstrating that the assessee s business was small and entirely done in cash and the cash deposited by the assesse in the bank account was less than the turnover of the assesse there could not have been any adverse inference reached on the basis of the above facts so as to treat the cash deposits as being out of unexplained sources. On the contrary the only reasonable conclusion that could have been drawn was that the cash deposits were out of the business receipts of the assessee. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and applicability of additions made under Section 69A of the Income Tax Act, 1961, specifically:

1. Whether the addition of Rs. 53,27,000/- on account of cash deposited in the bank account can be sustained under Section 69A of the Act when the assessee has not maintained any books of account and has declared income under the presumptive taxation scheme of Section 44AD.

2. Whether bank statements can be treated as books of account for invoking Section 69A.

3. Whether the addition leads to double taxation, given that the amount was already offered as cash sales under Section 44AD.

4. Whether the invoking of Section 69A was appropriate in the facts of the case, considering the nature of the business and the absence of any unexplained income.

5. Whether the addition should be limited to the peak credit amount, as an alternative relief.

6. Whether the principles of natural justice were violated by the authorities in not considering all supporting documents and submissions of the assessee.

7. Whether interest under Sections 234A/B/C/D and penalty under Section 271AAC were correctly levied.

Issue-wise detailed analysis:

1. Applicability of Section 69A Addition on Cash Deposits When Income Declared Under Section 44AD

The legal framework involves Section 69A of the Income Tax Act, which empowers the Assessing Officer (AO) to make additions to income where cash credits appearing in the books or bank accounts are unexplained. Section 44AD provides a presumptive taxation scheme for small businesses, exempting them from maintaining detailed books of accounts and allowing income declaration as a fixed percentage of turnover.

The Court noted that the assessee, engaged in retail/semi-retail of kirana items and raw herbs, filed returns under Section 44AD without maintaining books of accounts. The turnover declared was Rs. 68,28,565/- with income declared at 8% thereof. The AO accepted the return and the presumptive income declared.

The key evidence included the bank statements showing cash deposits of Rs. 53,27,000/-, which was less than the declared turnover. The assessee explained that the business was predominantly cash-based, selling to small hawkers and traders, and that the cash deposits were from business proceeds. Purchases amounting to Rs. 10,81,587/- were made through banking channels, supported by bank statements.

The Court reasoned that since the assessee was not required to maintain books under Section 44AD, and since the declared turnover exceeded the cash deposits, the cash deposits could not be treated as unexplained. The onus to explain the source of cash deposits was discharged by the assessee.

Competing arguments from the Revenue relied on the timing and volume of cash deposits, especially during the demonetization period, suggesting unexplained cash credits. The Court rejected this, emphasizing that the nature of the business and the presumptive taxation scheme precluded adverse inference solely based on bank deposits.

Conclusion: The addition under Section 69A was not justified and was directed to be deleted.

2. Treatment of Bank Statements as Books of Account for Invoking Section 69A

Section 69A requires the existence of cash credits in books of account or bank statements to trigger addition. However, the assessee did not maintain books of account as per Section 44AD, which exempts such maintenance for small taxpayers.

The Court held that bank statements alone cannot be treated as books of account for the purpose of invoking Section 69A when the assessee is under the presumptive scheme. The AO and CIT(A) erred in relying solely on bank statements for addition.

Conclusion: Bank statements are not equivalent to books of account for Section 69A invocation under the facts.

3. Double Taxation on Cash Sales Already Offered Under Section 44AD

The assessee argued that the cash deposits represented sales already declared under Section 44AD, and addition under Section 69A would amount to double taxation.

The Court agreed, noting that the presumptive income declaration was accepted by the AO, and no separate unexplained income arose from the cash deposits. The addition was therefore impermissible duplication of tax liability.

Conclusion: Addition under Section 69A on declared cash sales is impermissible double taxation.

4. Appropriateness of Invoking Section 69A Given Business Nature and Absence of Chargeable Income

The Court accepted that the assessee's business was small scale, cash-driven, and that income was declared under the presumptive scheme. There was no evidence of undisclosed income or unexplained cash sources.

The AO and CIT(A) failed to appreciate the business context and presumptive taxation framework, leading to erroneous invocation of Section 69A.

Conclusion: Section 69A was wrongly invoked in the facts.

5. Limitation of Addition to Peak Credit Amount

The assessee sought alternative relief limiting addition to peak credit. The Court did not find it necessary to address this as the primary addition itself was held unsustainable.

6. Violation of Principles of Natural Justice and Non-Consideration of Supporting Documents

The assessee contended that the AO and CIT(A) did not consider all supporting documents and submissions, violating natural justice.

The Court observed that the authorities relied on limited information and did not provide adequate opportunity for the assessee to substantiate claims. This was a procedural lapse.

Conclusion: The addition was confirmed without proper appreciation of evidence, breaching natural justice principles.

7. Levy of Interest under Sections 234A/B/C/D and Penalty under Section 271AAC

The Court did not find merit in confirming interest and penalty levied, as these were consequential to the unsustainable addition under Section 69A.

Conclusion: Interest and penalty confirmed by CIT(A) were not justified.

Significant holdings include the following verbatim legal reasoning:

"Undisputedly, the assessee had filed return of income declaring income on presumptive basis @ 8% of her turnover in terms of the provisions of Section 44AD of the Act. The same stood accepted by the AO also. There is no dispute with regards the provision of law that no books of accounts are required to be maintained by assesses filing returns u/s 44AD of the Act."

"The onus on the assessee to explain the source of cash deposited in bank, we hold, was duly discharged and there was no reason absolutely for making any addition of the cash deposit as being out of unexplained sources."

"Having accepted the fact that the assessee was not required to maintain books of accounts as per law... and the cash deposited by the assessee in the bank account was less than the turnover of the assessee, there could not have been any adverse inference reached so as to treat the cash deposits as being out of unexplained sources."

Core principles established include:

- Section 69A additions cannot be sustained where the assessee declares income under Section 44AD and does not maintain books of accounts.

- Bank statements alone are insufficient to treat cash deposits as unexplained credits under Section 69A in presumptive taxation cases.

- Double taxation is impermissible where the same cash sales are already declared under presumptive income.

- The nature of the business and accepted turnover must be considered before drawing adverse inferences on cash deposits.

- Principles of natural justice require authorities to consider all relevant documents and provide opportunity to the assessee.

- Interest and penalty levied consequentially to unsustainable additions are liable to be quashed.

Final determinations:

The addition of Rs. 53,27,000/- under Section 69A was deleted. The levy of interest and penalty was also set aside. The appeal was allowed in entirety.