2025 (7) TMI 432 - AT - Income Tax

Addition of cash deposits during demonetisation period - CIT(A) enhanced the addition - NP determination - Applying the doctrine of consistency the net profit on the gross turnover may be directed to be estimated at 0.47% - HELD THAT - Since neither the return of income was filed nor the details were furnished to the Ld. AO the Ld. AO was justified in making the assessment to the best of his judgement u/s 144 of the Act. However there is no justification for the Ld. CIT(A) to enhance the addition more so when no show cause notice in this regard was issued. Hence the order of the Ld. CIT(A) is hereby set aside. AO has also not given any basis for applying the net profit rate of 3% on the turnover estimated. It has been held in the case of Kachwala Gems 2006 (12) TMI 83 - SUPREME COURT that it is well-settled that in a best judgment assessment there is always a certain degree of guess work. No doubt the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily but there is necessarily some amount of guess work involved in a best judgment assessment and it is the assessee himself who is to blame as he did not submit proper accounts. There was no arbitrariness in the instant case on the part of the authorities. Thus there was no force in the instant appeal and the same was to be dismissed accordingly. Therefore considering past history of the assessee s own case we are of the view that the net profit rate of 0.5% on the total turnover may be applied. AO is directed to apply the net profit rate of 0.5% on the total turnover for the entire financial year estimated by him and delete the rest of the addition with consequential relief to the assessee. Appeal of the assessee is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the cash deposits made by the assessee during the demonetisation period and throughout the financial year are taxable as unexplained cash credits under section 68 of the Income Tax Act, 1961, or whether they represent legitimate business receipts from the sale of petroleum products.

- Whether the Commissioner of Income Tax (Appeals) was justified in enhancing the addition from the best judgment assessment income of Rs. 32,28,967 to the entire bank deposits amounting to Rs. 10,76,32,265 without issuing a valid show cause notice as mandated under section 251(2) of the Act.

- The correctness and reasonableness of applying a net profit rate of 3% on the estimated turnover of Rs. 10,76,32,265 for assessment under section 144 of the Act.

- Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) properly appreciated the evidence regarding the source of deposits and the nature of the assessee's business as an authorised retail distributor of petroleum products under an Explosive License.

- Whether the principles of natural justice were violated by the appellate order enhancing income without adequate opportunity or notice to the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Cash Deposits and Bank Credits under Section 68

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of such credits. Precedents emphasize that if the assessee can prove the credits are genuine business receipts, they cannot be taxed as unexplained credits. The burden lies on the assessee to establish the genuineness of the transactions.

Court's interpretation and reasoning: The Tribunal noted that the assessee was engaged in the business of petroleum products as an authorised dealer of Hindustan Petroleum Company Limited and operated under an Explosive License. The bank statements showed regular cash and banking channel credits, with payments made to HPCL, indicating business activity consistent with the dealership.

However, the Assessing Officer found that the assessee failed to file returns and did not produce books of account or detailed explanations for the deposits, especially the cash deposits during the demonetisation period (Rs. 1,75,23,300) and RTGS transactions of Rs. 25,00,000 which were returned. Consequently, a best judgment assessment was made applying a net profit rate of 3% on the estimated turnover of Rs. 10,76,32,265, resulting in income of Rs. 32,28,967.

The Commissioner of Income Tax (Appeals) disagreed with the AO's approach and enhanced the addition to the full amount of Rs. 10,76,32,265, treating the entire deposits as unexplained cash credits under section 68. The CIT(A) relied on the assessee's own written submissions during appellate proceedings, where it was stated that the deposits related entirely to cash deposits and not to sales, a statement which the assessee denied before the Tribunal.

Key evidence and findings: The Tribunal observed that the assessee had submitted dealership agreements, bank statements showing payments to HPCL, and comparative net profit rates of other dealers in the same business. The assessee's net profit rates in earlier years ranged between 0.36% and 0.47%, which were consistent with the industry standards of 0.62% to 0.75% in the locality.

Application of law to facts: The Tribunal held that the AO was justified in making a best judgment assessment due to the assessee's failure to file returns and furnish details. However, the CIT(A) was not justified in enhancing the addition to the entire bank deposits without issuing a valid show cause notice and without proper basis to treat all deposits as unexplained credits.

Treatment of competing arguments: The assessee argued that the deposits represented genuine business receipts from petroleum sales, supported by dealership agreements and payment records. The Department contended that the assessee failed to prove the source and that the deposits were suspicious, especially during demonetisation.

The Tribunal found the Department's reliance on the assessee's contradictory statement before the CIT(A) to be flawed and noted the absence of documentary evidence contradicting the assessee's claim that the deposits were from sales proceeds.

Conclusions: The Tribunal concluded that the entire deposits could not be taxed as unexplained cash credits under section 68 and that the CIT(A)'s order enhancing the addition to Rs. 10,76,32,265 was not sustainable.

Issue 2: Validity of Enhancement of Income by CIT(A) without Show Cause Notice

Relevant legal framework: Section 251(2) of the Income Tax Act mandates that before enhancing the income beyond that assessed by the AO, the appellate authority must issue a show cause notice to the assessee specifying the reasons for such enhancement.

Court's interpretation and reasoning: The Tribunal noted that the CIT(A) enhanced the addition from Rs. 32,28,967 to Rs. 10,76,32,265 without issuing a valid show cause notice as required under section 251(2). The absence of such notice violated principles of natural justice and statutory mandate.

Key evidence and findings: The assessee produced a copy of the show cause notice issued by the NFAC, which related to charging a profit rate of 15% on the turnover but did not pertain to enhancement of income by adding the entire bank deposits under section 68.

Application of law to facts: Since the CIT(A) enhanced the income without issuing a proper show cause notice, the enhancement was held to be invalid and liable to be set aside.

Conclusions: The Tribunal set aside the CIT(A)'s order on this ground.

Issue 3: Appropriateness of Net Profit Rate Applied by AO

Relevant legal framework and precedents: In best judgment assessments under section 144, some degree of guesswork is inevitable, but the AO must make a fair and honest estimate based on available data and comparable cases. The Supreme Court in Kachwala Gems v. JCIT held that while guesswork is permitted, arbitrariness is not.

Court's interpretation and reasoning: The Tribunal observed that the AO applied a net profit rate of 3% on the estimated turnover without providing any basis or justification for choosing this rate. The assessee submitted comparative data showing net profit rates of 0.36% to 0.47% in earlier years and 0.62% to 0.75% for other dealers.

Key evidence and findings: The Tribunal noted the estimated gross profit of 0.896% computed by the assessee based on turnover and purchases, which aligned with the comparative industry data.

Application of law to facts: The Tribunal held that the AO's application of 3% net profit rate was arbitrary and not supported by evidence. Considering the past history and comparative data, the Tribunal directed the AO to apply a net profit rate of 0.5% on the turnover for assessment purposes.

Conclusions: The Tribunal modified the assessment by directing application of a 0.5% net profit rate and deleting the rest of the addition.

Issue 4: Appreciation of Assessee's Business Status and Evidence

Court's interpretation and reasoning: The Tribunal emphasized that the assessee was an authorised dealer of Hindustan Petroleum Company Limited and held an Explosive License, which was supported by dealership agreements submitted. The bank statements showed payments to HPCL, indicating genuine business operations.

The Tribunal found no record in the AO's order contradicting the assessee's claim that deposits were from sale proceeds. The CIT(A)'s conclusion that deposits were not from sales was based on vague assumptions and the contradictory statement made during appellate proceedings, which the assessee denied before the Tribunal.

Conclusions: The Tribunal held that the authorities failed to properly appreciate the evidence and the nature of the business, leading to erroneous conclusions.

Issue 5: Natural Justice and Procedural Fairness

Court's interpretation and reasoning: The Tribunal found that the CIT(A) enhanced the addition without issuing a valid show cause notice, thereby violating principles of natural justice. The assessee was not given an opportunity to respond to the proposed enhancement, rendering the order bad in law.

Conclusions: The Tribunal set aside the CIT(A) order on this ground as well.

3. SIGNIFICANT HOLDINGS

"The Ld. AO was justified in making the assessment to the best of his judgement under section 144 of the Act. However, there is no justification for the Ld. CIT(A) to enhance the addition to Rs. 10,76,32,265/-, more so when no show cause notice in this regard was issued."

"It has been held in the case of Kachwala Gems v. Joint Commissioner of Income-tax, Jaipur [2007] 158 Taxman 71 (SC) that it is well-settled that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts."

"Considering the totality of facts of the case and the past history of the assessee's own case, we are of the view that the net profit rate of 0.5% on the total turnover of Rs. 10,76,32,265/- may be applied."

"The entire deposits during the year at Rs. 10,76,32,265/- were held to be added under section 68 of the Act by the Ld. CIT(A). However, this addition was set aside for lack of proper show cause notice and on appreciation of evidence."

Core principles established include:

- The necessity of issuing a valid show cause notice before enhancing income beyond the AO's assessment under section 251(2).

- The requirement that best judgment assessments under section 144 must be based on a fair and reasonable estimate, avoiding arbitrariness.

- The burden on the assessee to explain cash credits under section 68, but also the requirement on the Department to consider all evidence and not rely on vague assumptions or contradictory statements made during appellate proceedings.

- The importance of consistency and comparative data in determining net profit rates for assessment.

Final determinations:

- The CIT(A)'s order enhancing income to Rs. 10,76,32,265 was set aside for lack of show cause notice and improper appreciation of evidence.

- The AO's best judgment assessment under section 144 was upheld but modified by directing application of a net profit rate of 0.5% instead of 3% on the estimated turnover.

- The appeal was partly allowed accordingly.