2025 (7) TMI 1048 - AT - Income Tax

Un-explained cash deposits - Eligibility of addition u/s. 69 v/s 69A - wrong application of provision of law - Addition made being 1/3 on account of cash deposited in the Oriental Bank of Commerce - HELD THAT - As noted that the AO had made addition u/s. 69 of the Act which refers to unexplained investment. In this case the assessee had neither purchased nor sold any moveable or immoveable property nor had invested in any such property. In fact the verification of facts as emanating from the assessment order as well as the findings of the CIT(A)/NFAC all pertains to and revolves on un-explained cash deposits by the assessee which resulted in addition of 1/3 of the total deposit since the account was in the name of three persons including the assessee so as per his share 1/3 of the said deposit was added as the assessee was unable to prove the nature and source of such cash deposit. In this periphery of investigation and addition made by the department the correct provision of law to have been applied is Section 69A of the Act which deals with unexplained money bullion jewelry or other valuable article for which the assessee offers no explanation about the nature and source of acquisition of such money bullion jewelry or other valuable article etc. The wrong application of provision of law to the facts and circumstances of the case regarding a particular assessee tantamount to non-application of mind by the AO. This itself vitiates and makes the addition void ab initio since there is no application of mind much less than any satisfaction arrived at by the AO. See Sanjeev Kumar c/o M/s Raj Kumar Associates 2023 (10) TMI 1027 - ITAT DELHI held that the addition made by the AO by mentioning incorrect and irrelevant charging section is not sustainable and valid being bad in law. Decided in favour of assessee.

Summary

The core legal questions considered in this appeal include:

1. Whether the addition of Rs. 11,59,670/- made under Section 69 read with Section 115BBE of the Income Tax Act, 1961, on account of unexplained cash deposits in a joint bank account, is justified, given the assessee's claim that the cash belonged to a partnership firm and was substantiated by documentary evidence.

2. Whether the denial of exemption of Rs. 9,600/- under the head "Income from Salary" on account of Transport Allowance, claimed under Section 10(14)(ii), was proper.

3. Whether the denial of exemption of Rs. 32,385/- under the head "Income from Salary" on account of House Rent Allowance (HRA), claimed under Section 10(13A), was correct.

4. Whether the disallowance of business loss of Rs. 2,77,735/- from travel agency business was justified.

5. Whether the disallowance of deductions under Chapter VI-A, Section 80C, amounting to Rs. 78,220/- on account of Life Insurance Premium and Tuition Fees, was proper (this ground being consequential).

Issue-wise Detailed Analysis:

Issue 1: Addition of Rs. 11,59,670/- on account of unexplained cash deposits under Section 69 read with Section 115BBE

Legal Framework and Precedents: Section 69 of the Income Tax Act pertains to unexplained investments, while Section 69A deals with unexplained money, bullion, jewelry or other valuable articles. Section 115BBE imposes a special rate of tax on income deemed to be unexplained. The Court emphasized that the correct provision applicable to unexplained cash deposits is Section 69A, not Section 69, as no investment in movable or immovable property was made by the assessee. The misapplication of Section 69 was held to amount to non-application of mind, rendering the addition void ab initio.

Precedents cited include a decision of the Coordinate Bench of Delhi and the Hon'ble High Court of Allahabad in the case of Smt. Sarika Jain, where it was held that additions made under incorrect charging sections are unsustainable and void in law.

Court's Interpretation and Reasoning: The AO found that the assessee, a joint holder of the bank account, deposited Rs. 34,79,000/- in cash, of which 1/3rd (Rs. 11,59,670/-) was attributed to the assessee as unexplained income since the assessee failed to provide satisfactory documentary evidence explaining the source of these cash deposits. The AO rejected the assessee's explanation that the cash deposits were withdrawals from the partnership firm, noting lack of date-wise withdrawal details, absence of evidence that withdrawals were in cash, and no proof of nexus between withdrawals and deposits. The AO also questioned why payments to BPCL for diesel and petrol were made individually by the assessee rather than by the firm.

The CIT(Appeals) upheld the AO's addition, concurring that the explanation was unsatisfactory and the source of the cash deposits remained unexplained.

However, the Tribunal observed that the AO applied Section 69 (unexplained investments) incorrectly since the issue involved unexplained cash deposits, which fall under Section 69A. The Tribunal held that such misapplication of law amounted to non-application of mind and vitiated the addition. The Tribunal relied on the Delhi Coordinate Bench decision and the Allahabad High Court ruling, which held that additions made under incorrect sections are invalid.

Key Evidence and Findings: The assessee submitted a partnership deed, audited balance sheets, profit and loss accounts, and Form 16 to substantiate the claim that cash deposits originated from the partnership firm and partners' own cash. However, the AO and CIT(A) found these insufficient, especially due to lack of evidence regarding cash withdrawals and the nexus to deposits.

The Tribunal noted that the AO's failure to apply the correct legal provision (Section 69A) was a fundamental error.

Application of Law to Facts: The Tribunal applied the principle that unexplained cash deposits should be treated under Section 69A, not Section 69. Since the AO failed to apply Section 69A, the addition was held invalid. The Tribunal directed the AO to delete the addition.

Treatment of Competing Arguments: The Revenue argued that the explanation was unsatisfactory and the addition was justified. The assessee argued that the cash deposits were from the partnership firm and supported by documentary evidence. The Tribunal found the Revenue's application of the wrong legal provision fatal to the case and ruled in favor of the assessee.

Conclusion: The addition of Rs. 11,59,670/- made under Section 69 read with Section 115BBE was quashed due to misapplication of law; the AO was directed to delete the addition.

Issue 2 and 3: Denial of exemption under Income from Salary for Transport Allowance and House Rent Allowance

Legal Framework: Section 10(14)(ii) exempts transport allowance to the extent prescribed, and Section 10(13A) exempts House Rent Allowance subject to conditions.

Court's Interpretation and Reasoning: The parties agreed to remit these issues to the AO for detailed factual verification and adjudication in accordance with law and principles of natural justice. No substantive ruling was made by the Tribunal on these grounds.

Key Evidence and Findings: The AO had disallowed the exemptions due to lack of documentary evidence. The assessee claimed to have submitted documentary evidence, but the AO and CIT(A) rejected the claims. The Tribunal did not examine the evidence but remanded the matter for fresh verification.

Application of Law to Facts: The Tribunal directed the AO to verify the claims and evidence afresh, ensuring compliance with natural justice.

Treatment of Competing Arguments: The assessee argued that the claims were within prescribed limits and supported by evidence. The Revenue disputed the sufficiency of evidence. The Tribunal avoided deciding on merits and remanded the matter.

Conclusion: Grounds relating to denial of exemption of Transport Allowance and House Rent Allowance were remanded for fresh adjudication.

Issue 4: Disallowance of business loss of Rs. 2,77,735/- from Travel Agency business

Legal Framework: Business losses are generally allowed to be set off against income if genuine and supported by books of accounts and relevant documents.

Court's Interpretation and Reasoning: The AO disallowed the loss due to lack of documentary evidence. The CIT(A) confirmed the disallowance. The Tribunal did not decide on the merits but remanded the matter to the AO for detailed verification in accordance with law and principles of natural justice.

Key Evidence and Findings: The assessee submitted books of accounts, computation of income, and other documents. The AO found these insufficient. The Tribunal ordered fresh verification.

Application of Law to Facts: The Tribunal emphasized the need for objective consideration of evidence and directed the AO to reconsider the claim.

Treatment of Competing Arguments: The assessee claimed the loss was genuine and supported by documents; the Revenue disputed the genuineness. The Tribunal remanded the issue.

Conclusion: The disallowance of business loss was remanded for fresh adjudication.

Issue 5: Disallowance of deductions under Section 80C

This ground was treated as consequential and general and was not separately analyzed by the Tribunal.

Significant Holdings:

"The wrong application of provision of law to the facts and circumstances of the case regarding a particular assessee tantamount to non-application of mind by the assessing officer. This itself vitiates and makes the addition void ab initio, since there is no application of mind, much less than any satisfaction arrived at by the AO."

"Considering the aforestated legal principles and on examination of the facts and circumstances, the addition made u/s 69 of the Act is uncalled for and void ab initio. The AO is directed to delete the said addition from the hands of the assessee."

"Ground Nos. 2 and 3 are remanded to the file of the AO for adjudication as per law complying with principles of natural justice."

Core principles established include:

• The necessity of applying the correct charging section under the Income Tax Act based on the nature of the unexplained amount (Section 69A for unexplained money/cash deposits, Section 69 for unexplained investments).
• Misapplication of law by the AO results in non-application of mind and invalidates the addition.
• The importance of documentary evidence to substantiate claims of source of cash deposits or business losses.
• Remand of issues for factual verification is appropriate where evidence is disputed or insufficiently considered.

Final determinations:

• The addition of Rs. 11,59,670/- on account of unexplained cash deposits was quashed and deleted.
• Denial of exemptions under Transport Allowance and House Rent Allowance were remanded for fresh adjudication.
• Disallowance of business loss was remanded for fresh adjudication.
• Other grounds were consequential or general and not separately adjudicated.