2025 (7) TMI 826 - AT - Income Tax

Scope of enquiry in limited scrutiny - Cash deposits during the period of demonetization - case was selected for limited scrutiny for the specific purpose of examining cash deposit during the year - HELD THAT - The case was only selected for scrutiny to examine the cash deposits made during the year. Since the ld. AO has himself recorded in his order that the cash deposits did not exceed Rs. 3, 92, 500/- he could not have expanded the scope of his enquiry and made consequent additions without taking the approval of the ld. PCIT after pointing out the specific information regarding tax evasion that had been received by him from some other agency. As he did not do so he was in violation of Instruction No.225/402/2018/ITA.II dated 28.11.2018 and therefore the addition made by him is bad in law. The addition is accordingly deleted. Addition u/s 68 - As observed that the assessee furnished an explanation by way of reconciliation of all the credits in his bank account before the ld. CIT(A) and the ld. CIT(A) has neither offered any comments on the same nor refuted as inaccurate any part of this reconciliation before rejecting the appeal of the assessee on the grounds that cash deposits have been made through RTGS proper evidences with books of accounts have not been filed to explain the source of cash deposit no comparative figure of RTGS deposits have been given in the last three years and address and PAN numbers of customers have not been given therefore the cash deposits made during the time of demonetization remained unexplained. With these arguments he has confirmed an addition of difference between amounts credited to the Bank account and the turnover of the assessee Rs. 1, 14, 43, 309/- whereas where the cash deposits during demonetization were only Rs. 1, 72, 500/-. It therefore appears that the order of the ld. CIT(A) has not considered the facts of the particular case. Hence his order is unsustainable on this account also. Assessee appeal allowed.

Summary

Issues Presented and Considered

1. Whether the Assessing Officer (AO) was justified in treating the entire credits of Rs. 3,35,18,807/- in the assessee's bank account as unexplained cash deposits during the demonetization period, when the assessee contended that actual cash deposits were only Rs. 3,92,500/- and the rest were non-cash credits duly reconciled with turnover and other receipts.

2. Whether the AO was empowered to expand the scope of limited scrutiny beyond examination of cash deposits to include all bank credits without prior approval from competent authority and without credible information of tax evasion from any agency, in violation of CBDT Instruction No. F No.225/402/2018/ITA.II dated 28.11.2018.

3. Whether the addition of Rs. 1,14,43,309/- under section 68 of the Income Tax Act, 1961, made by the AO and confirmed by the CIT(A), was sustainable where the assessee had furnished reconciliation statements and explanations for the bank credits.

4. Whether the CIT(A) was justified in rejecting the assessee's reconciliation and explanations on the ground of lack of evidences such as cash books, daily cash summaries, PAN and address of customers, and comparative RTGS data for previous years.

5. Whether the appeal orders passed by AO and CIT(A) were valid in light of procedural violations and failure to consider relevant evidence submitted by the assessee.

Issue-wise Detailed Analysis

Issue 1: Treatment of Entire Bank Credits as Cash Deposits During Demonetization

Legal Framework and Precedents: Section 68 of the Income Tax Act allows the AO to treat unexplained cash credits as income if the assessee fails to satisfactorily explain the nature and source of such credits. However, the AO must correctly identify the nature of credits, distinguishing between cash deposits and other receipts.

Court's Interpretation and Reasoning: The AO initially relied on SFT data indicating cash deposits of Rs. 3,35,18,807/- during FY 2016-17. The assessee clarified that actual cash deposits were only Rs. 3,92,500/-, supported by bank statements showing the majority of credits were non-cash in nature, including RTGS/NEFT receipts from Tata Motors Limited and other reconciled items.

The AO, however, treated the entire credits as cash deposits and further inflated the figure to Rs. 3,94,01,990/- by including opening bank balances erroneously. The AO's approach was factually incorrect and misrepresented the nature of bank credits.

Key Evidence and Findings: The assessee submitted detailed reconciliation, including audited financial statements, bank statements, Form 26AS, and a reconciliation chart illustrating the alignment of bank credits with turnover, service tax, debtors, TDS refunds, and other items. These documents demonstrated that the majority of credits were accounted for and not unexplained cash deposits.

Application of Law to Facts: The AO's failure to differentiate between cash deposits and other credits contravened the principle that unexplained cash credits must be specifically identified. The misclassification led to an erroneous addition under section 68.

Treatment of Competing Arguments: The Revenue contended that the SFT data constituted credible information justifying scrutiny of all credits. The assessee countered by clarifying the factual position with documentary evidence. The Court found the assessee's submissions credible and the AO's reliance on SFT data without verification misplaced.

Conclusion: The AO erred in treating all bank credits as cash deposits, and the addition based on this premise was unsustainable.

Issue 2: Jurisdiction and Scope of Limited Scrutiny under CBDT Instructions

Legal Framework and Precedents: CBDT Instruction No. F No.225/402/2018/ITA.II dated 28.11.2018 restricts the scope of limited scrutiny assessments selected under CASS cycles 2017 and 2018 to the specific issue for which the case was selected (here, cash deposits during the demonetization period). Expansion to complete scrutiny requires prior approval from the Pr. CIT and credible information from Law Enforcement/Intelligence/Regulatory agencies regarding tax evasion.

Court's Interpretation and Reasoning: The AO's initial mandate was to examine cash deposits during demonetization. Upon determining actual cash deposits were only Rs. 3,92,500/-, the AO expanded scrutiny to all bank credits without obtaining requisite approval or having credible information of tax evasion from any agency.

The Court rejected the Revenue's argument that information on the insight portal (SFT data) amounted to credible information from an agency. The portal data is merely uploaded information, not intelligence or evidence of tax evasion.

Key Evidence and Findings: The AO's order itself acknowledged the limited cash deposits, yet he proceeded beyond his jurisdiction. The assessee's submissions highlighted this procedural violation.

Application of Law to Facts: The AO's failure to comply with the CBDT instructions rendered the expansion of scrutiny and consequent additions beyond his jurisdiction and therefore invalid.

Treatment of Competing Arguments: The Revenue maintained the AO's actions were justified based on available data. The Court relied on judicial precedents emphasizing strict adherence to CBDT instructions and held that unauthorized expansion of scrutiny is impermissible.

Conclusion: The AO exceeded jurisdiction by expanding scrutiny without approval, violating CBDT instructions, rendering the additions bad in law.

Issue 3: Validity of Addition under Section 68 in Light of Reconciliation

Legal Framework and Precedents: Section 68 additions require that the assessee fails to satisfactorily explain the nature and source of cash credits. Where the assessee provides credible reconciliation and documentary evidence, additions are unwarranted.

Court's Interpretation and Reasoning: The assessee furnished a detailed reconciliation of bank credits with turnover, service tax, debtors, TDS refunds, salary cheque returns, overdraft credits, cash deposits, and unsecured loans. The CIT(A) did not dispute the accuracy of this reconciliation but rejected it on procedural grounds.

Key Evidence and Findings: The reconciliation chart and supporting documents were submitted before the CIT(A) and the Tribunal. The CIT(A) failed to comment on the correctness or veracity of the reconciliation.

Application of Law to Facts: The absence of any adverse finding on the reconciliation's correctness implies the addition was not justified. The CIT(A)'s dismissal based solely on alleged lack of supporting evidence without specifying deficiencies was improper.

Treatment of Competing Arguments: The Revenue argued that the assessee failed to produce adequate evidence such as cash books, daily cash summaries, PAN and addresses of customers, and comparative RTGS data. The Court noted that the AO had not sought or considered these documents during assessment, and the CIT(A) did not provide reasons why the reconciliation was insufficient.

Conclusion: The addition under section 68 was not sustainable as the assessee satisfactorily explained the bank credits.

Issue 4: Rejection of Reconciliation and Explanations by CIT(A)

Legal Framework and Precedents: Appellate authorities must consider all relevant evidence and provide reasoned orders. Rejection of explanations without addressing their merits or without giving the assessee an opportunity to furnish evidence is improper.

Court's Interpretation and Reasoning: The CIT(A) dismissed the appeal on grounds that the assessee did not produce books of accounts or evidences to explain cash deposits and did not furnish PAN and address of customers or comparative RTGS data, despite the assessee submitting bank statements, audited financials, Form 26AS, and reconciliation.

The Court observed that the CIT(A) did not specifically comment on the reconciliation's correctness or refute it. The dismissal was thus based on procedural grounds without proper evaluation of the submissions.

Key Evidence and Findings: The assessee had submitted additional evidence including TDS refund ledger, overdraft account statement, ledger of unsecured loans, bank book, cash book, and a notarized affidavit, which were not considered by CIT(A).

Application of Law to Facts: The CIT(A)'s failure to consider these evidences and to evaluate the reconciliation on merits rendered the order unsustainable.

Treatment of Competing Arguments: Revenue's insistence on non-filing of certain documents was not supported by record since the assessee had filed substantial documentary evidence. The Court emphasized the need for appellate authorities to examine evidence rather than dismiss on technical grounds.

Conclusion: CIT(A)'s rejection of the reconciliation and dismissal of appeal without considering the evidence was improper and unsustainable.

Issue 5: Validity of Assessment and Appellate Orders in Light of Procedural Violations

Legal Framework and Precedents: Assessments and appellate orders passed in violation of statutory procedures and CBDT instructions are liable to be quashed. Judicial precedents affirm that additions made beyond the scope of scrutiny or without following prescribed procedures are void.

Court's Interpretation and Reasoning: The AO expanded the scope of limited scrutiny without prior approval, contrary to CBDT instructions. The CIT(A) confirmed the addition without addressing the procedural irregularities or the reconciliation submitted by the assessee.

Key Evidence and Findings: The Court relied on multiple judicial precedents from various ITAT benches and High Courts which held that additions made beyond the scope of limited scrutiny without proper authorization are invalid.

Application of Law to Facts: Given the AO's and CIT(A)'s failure to comply with procedural mandates and to consider relevant evidence, the orders were held to be legally unsustainable.

Treatment of Competing Arguments: The Revenue's reliance on SFT data and non-compliance by the assessee was outweighed by the procedural lapses and substantive reconciliation provided by the assessee.

Conclusion: Both the assessment and appellate orders were quashed and the addition deleted.

Significant Holdings

"While the initial information with the ld. AO suggested that the cash deposited in Canara Bank A/c No.2170201000579 was Rs. 3,35,18,807/-, after examination of the said bank account, the ld. AO had satisfied himself that the total amount of cash deposited into the said account was only Rs. 3,92,500/-. Therefore, within the terms of the mandate given to him by virtue of the grounds on which the case was picked up for limited scrutiny, he could not have gone beyond examination of the sources of cash deposits to start enquiring into the entire credits of the assessee in the said bank account, without specific permission from the Pr. CIT and that too only if he had specific information from any agency regarding tax evasion by the assessee."

"Information placed on the insight portal is only information as uploaded by the SFT filer. It does not constitute information regarding tax evasion by an assessee."

"The AO's failure to comply with the CBDT instructions rendered the expansion of scrutiny and consequent additions beyond his jurisdiction and therefore invalid."

"Where the assessee furnishes a detailed reconciliation of bank credits with turnover and other receipts and the appellate authority does not refute the accuracy of such reconciliation, additions under section 68 are not sustainable."

"The CIT(A)'s dismissal of the appeal on procedural grounds without considering the reconciliation and evidence submitted by the assessee is unsustainable."

"Additions made beyond the scope of limited scrutiny without prior approval and in violation of CBDT instructions are void and liable to be quashed."p>

In final determination, the Tribunal allowed the appeal, deleted the addition of Rs. 1,14,43,309/-, and held that the AO and CIT(A) erred in expanding the scope of limited scrutiny without authorization and in ignoring the reconciliation and evidence submitted by the assessee.