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Income Tax Appellate Tribunal, JABALPUR BENCH, JABALPUR
Before: SHRI SANJAY ARORA, HON’BLE & SHRI MANOMOHAN DAS, HONBLE
O R D E R
Per Sanjay Arora, AM:
This is an Appeal by the Assessee challenging the revision Order u/s. 263 of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 23/03/2021, in respect of the assessee’s assessment u/s. 143(3) of the Act, dated 31/10/2018 for the Assessment Year (AY) 2016-17.
The appeal is delayed by a period of 10 days. The delay is though satisfactorily explained in terms of sufficient cause; Jabalpur being under lock down during the relevant period. The appeal was accordingly admitted and parties heard. 3.1 The brief facts of the case are that the assessee’s, an individual, return of income for the relevant year, e-filed on 03/03/2017 at an income of Rs. 5,18,700, 1 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT was, as for the preceding years (AYs. 2013-14 to 2015-16), declared on presumptive basis u/s. 44AD of the Act in respect of the assessee’s business, stated to be of sale of books, copies and uniforms (PB pgs. 69-77). For the relevant year, the turnover and profit were disclosed at Rs. 19.75 lacs and Rs. 6.91 lacs respectively. The said return was subject to verification proceedings under the Act, wherein the examination, in terms of notice u/s. 143(2) dated 19/09/2017 (stated in the assessment order as ‘22/09/2017’), was restricted to verifying whether the cash deposits made by the assessee in his bank accounts were from disclosed sources or not (PB pgs.9-10). The assessee did not reply to the notices u/s. 142(1) dated 09/05/2018, 26/06/2018, 21/08/2018, 10/09/2018 & 20/09/2018. In all these notices, copies of some of which are on record (PB pgs.11-14), the assessee was required to furnish, inter alia, the copies of his bank accounts (for the period 01/04/2015 to 31/03/2016), along with reconciliation, if any. This was as, on the basis of the data available with the Revenue, the assessee had deposited cash at Rs. 110.71 lacs in his savings bank accounts, while his admitted turnover was at Rs. 19.75 lacs only. In view of the said non-compliance, notice u/s. 144 was issued on 01/10/2018 (for 08/10/2018), detailing the cash deposits in the assessee’s bank accounts with Bank of Maharashtra (BoM) (three) and Bank of Baroda (BoB), aggregating to Rs. 110.71 lacs, as under (PB pgs. 15-18): (Amount in Rs. lacs) Sr.No. Bank Name Account No. Amount I BoM - 1 xx235 56.50 lacs Ii BoM - 2 xx089 19.00 lacs Iii BoM - 3 xx557 19.11 lacs Iv BoB xx422 16.09 lacs The assessee, with a view to pre-empt a best assessment judgment u/s. 144, furnished, in his words, ‘a short reply’ on 12/10/2018 (PB pg.41), explaining that the bank account BoM-1 belonged to Central Academy School, which was being run by a Society by the name “Padmavati Sewa Sansthan”, of which he is the ‘only’ Secretary. The cash deposits in the said account related to the fees deposited 2 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT by the students, and thus belonged, not to the assessee, but to the said Society, whose accounts were audited. The balance cash deposit in the other three bank accounts (i.e., at Rs. 54.20 lacs) was explained to be his personal savings and agricultural income (without mention of any details). A final opportunity was prayed for to explain the same. In view thereof another opportunity was allowed by the Assessing Officer (AO) vide notice u/s. 142(1) dated 16/10/2018 for 18/10/2018, calling specific information and, besides, clarification on whether the three bank accounts with BoM had been declared in the tax return for the current year. The assessee responded on 24/10/2018, explaining the cash deposit to the extent of Rs. 10.68 lacs as by way of redeposit of the cash withdrawals made from the said bank accounts. Turnover having been disclosed at Rs. 19.75 lacs, only a cash deposit of Rs. 23.77 lacs, it was submitted, thus remained to be explained, which was stated as infact disclosed inasmuch as, as against a profit rate of 12.75% for the relevant year (on a turnover of Rs. 54.20 lacs), a profit rate of 35% had been applied by mistake (PB pgs.42-47). That is, both the profit rate and turnover had been, by mistake, stated incorrectly, though yielding the same profit and, thus, to the same effect. The AO, in view of the said submissions, found the assessee’s explanation as regards the cash deposit in BoM-1 as belonging to the Society, a separate entity running a school, as acceptable. The claim of ‘mistakes’, being wholly unsubstantiated, was, however, not. Accordingly, while the bank account with BoB (cash deposit: rs. 16.09 lacs) was regarded as disclosed, the two bank accounts with BoM (# 2 & # 3) were not. The combined cash deposit therein, at Rs. 38.11 lacs, was, accepting the assessee’s explanation to that extent, regarded by him as the assessee’s undisclosed turnover, on which the disclosed profit rate of 35%, i.e., on the disclosed turnover of Rs. 19.75 lacs, was applied, determining the undisclosed profit at Rs. 13.34 lacs (i.e., Rs. 38,11,450 @ 35%). 3.2 The assessee appealed there-against before the first appellate authority, raising Grounds challenging the non-acceptance of his contention as regards the 3 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT disclosure of a profit rate of 35% in his return as being by way of a mistake, as well as the non-consideration of the opening cash-in-hand (as on 01/04/2015) at Rs. 3,67,860 (which was also utilized toward the impugned cash deposits), by the AO. Impending the hearing of his appeal, filed on 16/03/2020, notice u/s. 263 was issued on 09/02/2021. After hearing the assessee, the ld. Pr. CIT was of the view that the assessee’s entire case before the AO was sans any evidence. He, therefore, questioned the AO’s acceptance of the cash deposit in the two bank accounts with BoM, regarded undisclosed, as the turnover of the assessee’s business of the sale of books, copies and uniforms to school students. Further, by own admission (before the ld. Pr. CIT), a sum of Rs. 21 lacs had been paid as advance (from the two bank accounts with BoM, regarded undisclosed by the AO), which therefore had not been considered by him. No verification or enquiry, much less proper, had been made by the AO in the matter and, thus, about the rotation of unaccounted money in the bank accounts. The entire cash deposit of Rs. 38.11 lacs, in his view, remained unexplained, liable to be added u/s. 69A (para 6.1 - 6.3 of his order). He, accordingly, in view of the settled law in the matter regarding the assessment so made as being erroneous and prejudicial to the interests of the Revenue, for non- application of mind as well as non-application of law, relying on several decisions, including by the Hon'ble jurisdictional High Court in CIT vs. Deepak Kumar Garg [2008] 299 ITR 435 (MP), set aside the assessment for a de novo consideration. 3.3 Aggrieved, the assessee is in appeal, raising the following grounds:- (1) The order passed by the Ld. PCIT is illegal and bad in law and hence be set aside. (2) The Ld. PCIT has erred in passing the order u/s. 263 on the ground that the order passed by the Ld. AO is erroneous and prejudicial to the interest of the Revenue. (3) The Ld Pr.CIT has erred in passing the order u/s 263 on which Ld AO issued detailed queries in notice u/s 143(2) and 142(1). The assessee submitted replies to specific queries. It was proved before the Ld. PCIT that the assessment was framed after due scrutiny of facts and after verification of the details as per limited scrutiny points. 4 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT (4) The Ld. Pr. CIT has erred in passing the order u/s 263 as Ld AO treated the money deposit in the bank of Maharashtra Accounts as arising out of sale proceeds of business. The Ld. AO on examination of bank statement, noticed that out of money deposited in the bank a/c, payments are made for purchase of books and school material. He therefore estimated the business profit @35% of the sales. Now the Pr. CIT order to treat the entire money as deposit from undeclared sources is change of opinion. (5) The assessee reserves the right to add, delete and alter any ground of appeal
4. We have heard the parties, and perused the material on record. 4.1 We find no merit whatsoever in the assessee’s case objecting to the exercise of revisionary power in respect of the assessee’s assessment for the relevant year. The assessee’s return was subject to limited scrutiny to verify the source of cash deposits in his bank accounts. The assessee, even when he finally responds, i.e., after several notices, does not specify any source thereof. All he says is that the same represents the turnover of his business of sale of books, copies and uniforms, on which he had in fact earned a profit of 12.75%, i.e., as against the declared rate of 35%. How, in the admitted absence of maintenance of accounts, one wonders, the assessee determines the profit rate? To no explanation at any stage. The disclosed profit rate for the preceding three (four) years is at an average of 23.03 (24.95) %, which is clearly not ‘mistaken’ (see PB pgs. 69-77). What factors, then, led to the decline in the profit rate for the current year by 10.28 (12.20)%, and which works to an abnormal 44.64 (49) % of the said average. This could only be where the sale price declines by over 10 (12) % or, correspondingly, the cost increases by over 13 (16)%, or the said decline is the combined effect of the two phenomenon, both unevidenced, by lower than the said % ages. There is no explanation, much less substantiated. We are conscious, when we say so, that it is not necessary for us to dwell on this aspect; the AO having not accepted the assessee’s said, bald statement, and adopted the assessee’s disclosed profit rate. Further, equally importantly, the AO 5 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT did not apply the disclosed profit rate on the now admitted additional turnover of Rs. 34.45 lacs, but restricts it to that referable to the unexplained cash deposits (Rs. 38.11 lacs). We, nevertheless, state so only to demonstrate the assessee’s case as wholly unexplained. The only basis of the profit rate of 12.75%, as now arrived at, is, as apparent, the cash deposit that remains unexplained! That is, the profit rate declines in the same ratio (35/12.75) as would justify the increased ratio of sales (54.20/19.75), or 2.75, attributed by the assessee to a compensating mistake. There is, needless to add, no explanation for the quantum decline in the profit rate, as indeed for a like-wise, albeit compensating (qua profit) increase in sales. For example, whether the increase in sales is due to an increase in price or quantum or both. Has the assessee during the relevant year added ‘new’ schools or expanded the product range, or both? How, further, has the assessee, to the extent the increase is in quantum, financed the same? The same is also not accompanied by the cash reconciliation statement, repeatedly called for, and not produced. The assessee’s case of a mistake is wholly unproved; nay, disproved. The assessee, in fact, in working the increased turnover (rs. 54.20 lacs), even omits to factor in the stated redeposit of the cash withdrawal of rs. 10.68 lacs, as apparent from the working of the increased sales: (Amt. in Rs. lacs) - Admitted turnover 19.75 - Unexplained cash deposit in BoM 38.11 - Opening cash deposit as on 01/4/2015 (3.68) (*) (*) (figure in bracket is to be deducted) 4.2 Be that as it may, what is lost sight of by the AO while framing the assessment is that the addition to the returned income shall arise to the extent the source (of cash deposit) is unexplained. Profit, it may be appreciated, explains the source of cash deposit only to extent of the profit component of the sale receipt. Assuming a profit rate at 30% (say), the assessee is yet to explain the source of the balance 70% (or, Rs. 70, i.e., given a sale of Rs. 100 (say)). There was no enquiry 6 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT by the AO with regard to the balance, being cost of sales, which thus remains unexplained to that extent, and is liable to be added u/s. 69A/69C. This is the principal flaw in the assessment order, which is what the Pr. CIT, in effect, states. That is, the assessee disputing the profit rate, without basis though, may not be of much consequence as he would yet be required to explain the source of the balance, which would stand correspondingly increased. For example, a decline in the profit rate to 20% (say), would result in the assessee being liable to explain the balance 80%, representing cost. The second aspect on which the ld. Pr. CIT finds the assessment order as infirm is the acceptance of the assessee’s claim of the cash deposit in his two bank accounts as representing the turnover of his business. In the absence of the AO making any enquiry in the matter, the stand of the ld. Pr. CIT cannot be faulted with; it being trite law that an absence of enquiry, where due and warranted, and which therefore ought to have been made, would render an order per se erroneous and prejudicial to the interests of the Revenue, liable for revision u/s.
263. In the context of the instant case, this may not be of much consequence as, as explained hereinbefore, the entire cash deposit is to be explained even if the same is regarded as turnover, and irrespective of the proportion of profit therein inasmuch as the acceptance of the same as turnover only explains the same to the extent of the profit embedded therein. The AO, however, having not considered the cost (i.e., other than the profit) component, thus becomes a valid ground for set aside by the ld. Pr. CIT, which thus becomes a different manner of stating the same thing. Two, turnover implies rotation of funds, which may not hold to the extent of cash diversion for investment, as the same becomes unavailable for being recycled, validating the stand of ld. Pr. CIT. We are conscious that the AO was constrained for want of information/ explanation, having afforded several opportunities to the assessee, as well as, needless to add, time and, accordingly, proceeded on the basis of information/ material on record. This, we may hasten to add, though furnishes no ground for non-invocation or non-exercise of the power of revision by the competent 7 | P a g e (AY: 2016-17) Dharmendra Kumar Shukla v. Pr. CIT authority. Rather, in the context of the case, we cannot help observing that the revision enables the assessee to present his case, which he may otherwise be legally constrained not to. We say so as in view of the mandatory character of rule 46A of the Income Tax Rules, 1962 and rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, as well as the settled legal position that an appellate authority cannot, by affording an opportunity to substantiate his claims, convert, in effect, a best judgment assessment into a section 143(3) assessment (CIT v. Rayala Corporation (P.) Ltd. [1995] 215 ITR 883 (SC)).
5. We, in view of the foregoing, uphold the impugned order on both the aspects on which the AO, in the view of the ld. Pr. CIT, has not made proper inquiry. We may, though, state our observations in the matter, deemed relevant in the framing the fresh assessment as directed by the revisionary authority, as under: i) The sale of books, copies and uniforms to school students is, by definition, episodic, concentrated as it is primarily at the beginning of the academic season, while the cash deposits are, as apparent, fairly uniform during the year. This aspect needs to be explained, also comparing it with the cash deposit profile in the two disclosed bank accounts, i.e., BoB and Union Bank of India (UBI), assuming the latter to be also included in the disclosed turnover of Rs. 19.75 lacs. ii) The assessee having diverted cash deposits to investment in property (rs. 21 lacs), which may well be in continuation of a past commitment, as well as claimed benefit of opening cash-in-hand, stated to be at rs. 3.68 lacs, the cash reconciliation, persistently sought by the AO, would have to be prepared, justifying the opening cash-in-hand as well, for which, to the extent found, credit though has to be allowed for being either deposited or otherwise used in business. Needless to add, the same would only be on the basis of his disclosed transactions, i.e., in the two disclosed bank accounts with BoB (and UBI), and by making adjustment/s for personal expenses and personal investments inasmuch as the same would obtain for earlier years as well, as indeed could be for the investment in 8 | P a g e