SHIKHA SIDDHARTH SINGHI,MUMBAI, MAHARASHTRA vs. ASST. CIT, CIRCLE-31(1)/MUMBAI, MUMBAI, MAHARASHTRA

The solitary effective grievance raised by the assessee in this appeal relates to the confirmation of an addition of Rs. 35,20,000/- made on account of cash deposits during the demonetization period, treated by the AO as unexplained cash credit under Section 68 read with Section 115BBE of the Act.

The brief facts of the case are that the assessee is an individual and proprietor engaged in the business of retail trading in textiles at Surat. For the assessment year under consideration, the assessee e-filed her return of income declaring total income of Rs. 21,06,790/-. The income was computed and offered to tax under the presumptive taxation provisions of Section 44AD of the Act on total turnover of Rs. 1,92,83,450/-. The return of income was subsequently selected for scrutiny assessment under CASS.

During the course of assessment proceedings, the AO observed that the assessee had deposited substantial amounts of cash in her bank accounts during the relevant financial year. Focusing on the demonetization period, the AO noted cash deposits which he quantified at Rs. 49,00,000/-. When called upon to explain the nature and source of the said deposits, the assessee submitted that the cash deposits represented funds realized from routine cash sales of textile goods.

The AO was not satisfied with the quantum of deposits made during the demonetization period. He proceeded to compare the sales and cash deposit trends of the year under consideration with those of the immediately preceding assessment year, i.e. A.Y. 2016-17. In A.Y. 2016-17, the assessee had reported turnover of Rs. 60,75,821/- and bank cash deposits of Rs. 4,03,000/-. Applying a proportionate ratio of the preceding year’s deposits to sales, the AO worked out the reasonable cash deposits for the year under consideration at Rs. 12,79,042/-. After adding opening cash in hand of Rs. 47,675/-, the AO determined the reasonable cash deposits at Rs. 13,26,716/- for the entire year. The balance amount of Rs. 35,73,284/- out of the cash deposits of Rs. 49,00,000/- was treated as unexplained cash credit under Section 68 read with Section 115BBE of the Act.

Before us, the learned Authorised Representative (Ld. AR) submitted that the AO had committed a factual error in adopting Rs. 49,00,000/- as the cash deposited during the demonetization period. It was submitted that, as per the bank statements placed on record, the actual cash deposited during the demonetization period was Rs. 46,00,000/-, comprising Rs. 15,00,000/- deposited on 24/11/2016 in The Surat People’s Co-op Bank Ltd. and Rs. 31,00,000/- deposited on 30/11/2016 in HDFC Bank, and that the remaining deposits pertained to other periods.

The Ld. AR further submitted that the assessee had filed her return of income under the presumptive taxation provisions of Section 44AD of the Act and had declared net profit of more than 10.92% on the disclosed turnover. It was submitted that Section 44AD contains a non obstante clause overriding Sections 28 to 43C of the Act and an eligible assessee is not required to maintain regular books of account in the manner contemplated under Section 44AA. Therefore, according to the Ld. AR, Section 68 could not be invoked in the absence of books of account maintained by the assessee. Reliance was placed upon the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Surinder Pal Anand [2010] 192 Taxman 264 (P&H) and the decision of the Cochin Bench of the Tribunal in the case of Thomas Eapen v. ITO [2020] 180 ITD 741 (Cochin Trib.).

It was further submitted that, in response to the show-cause notice, the assessee had furnished month-wise details of sales, purchases and stock, along with copies of sale bills for September and October 2016. It was submitted that the sales for October 2016 amounted to Rs. 42,13,983/- on account of the Diwali season and the commencement of the wedding season. According to the Ld. AR, the cash generated from the business sales remained available with the assessee and was deposited in the bank after demonetization was announced.

The Ld. AR also submitted that the AO had neither rejected the sales declared by the assessee nor recorded any adverse finding with regard to purchases or opening and closing stock. Therefore, once the sales receipts had already been included in the turnover declared by the assessee and income therefrom had been offered to tax under Section 44AD, treating the same receipts again as unexplained cash credits would result in taxation of the same receipts twice. Reliance was placed upon the decisions in the cases of PCIT v. Agson Global Pvt. Ltd. [2022] 441 ITR 550 (Delhi) and CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC).

It was also submitted that the comparative basis adopted by the AO was arbitrary, since A.Y. 2016-17 represented the first year of business operations of the assessee and the turnover in that year was substantially lower. It was pointed out that the assessee had deposited Rs. 24,00,000/- in cash in April 2016 itself, which, according to the Ld. AR, demonstrated that cash deposits were a regular feature of the assessee’s business.

Without prejudice to the above submissions, the Ld. AR submitted that, in any event, the entire amount of cash deposits could not be treated as income and, at the most, only the profit element embedded in the corresponding sales could be considered for taxation. Reliance was placed upon the decisions of the Hon’ble Gujarat High Court in CIT v. President Industries [2002] 258 ITR 654 (Guj.) and Samir Synthetics Mills [2010] 326 ITR 410 (Guj.). The Ld. AR further submitted that the enhanced rate of tax under Section 115BBE could not be applied to genuine business receipts arising from trading activity.

On the other hand, the learned Senior Departmental Representative (Ld. Sr. DR) relied upon the orders of the lower authorities. It was submitted that the 5 assessee had deposited an abnormally high amount of cash during the demonetization period in comparison with the past history of the case. It was further submitted that the assessee had failed to produce continuous day-to-day stock records and customers to substantiate the genuineness of the retail cash sales. Accordingly, the Ld. Sr. DR supported the action of the AO in determining the reasonable cash generation capacity of the business on the basis of the preceding year and treating the excess amount as unexplained cash credit under Section 68 read with Section 115BBE of the Act.

We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities as well as the case laws relied upon by both the parties.

The undisputed position emerging from the record is that the assessee is engaged in the business of retail trading in textiles and has offered her income under the presumptive taxation provisions of Section 44AD of the Act. The assessee declared turnover of Rs. 1,92,83,450/- and total income of Rs. 21,06,790/-.

The first issue which arises for our consideration is whether the addition under Section 68 of the Act can be sustained in the facts of the present case, where the assessee has offered income under the presumptive provisions of Section 44AD. Section 68 applies where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no satisfactory explanation regarding the nature and source thereof. In the present case, the assessee was assessed under the presumptive provisions of Section 44AD and was not required to maintain regular books of account in the manner contemplated under Section 44AA. Further, the deposits in question are reflected in the bank statements.

The Hon’ble Punjab & Haryana High Court in the case of CIT v. Surinder Pal Anand [2010] 192 Taxman 264 (P&H), while considering the applicability of Section 68 in the case of an assessee assessed under the presumptive provisions, held that where the assessee is not required to maintain books of account and the income is determined on a presumptive basis, individual cash deposits in the bank cannot, merely on that account, be treated as unexplained unless the Revenue establishes that such deposits have no nexus with the disclosed business receipts.

In the present case, the AO has not brought any material on record to establish that the cash deposits were from any undisclosed source unrelated to the assessee’s textile business. The assessee had explained that the deposits represented cash generated from the business. The assessee had also furnished details of sales, purchases and stock, along with sale bills for the relevant period. Therefore, in the facts and circumstances of the present case, the invocation of Section 68 merely on the basis of the cash deposits reflected in the bank statements, without establishing an independent undisclosed source, cannot be sustained.

We further find that the AO has not rejected the turnover declared by the assessee. No adverse finding has been recorded with regard to the purchases or the stock position so as to establish that the corresponding sales were fictitious or unrelated to the assessee’s business. The assessee had declared turnover of Rs. 1,92,83,450/- and had offered the resultant income to tax under Section 44AD of the Act.

The assessee has specifically demonstrated that the sales during the period preceding demonetization were substantial, with sales in October 2016 amounting to Rs. 42,13,983/-. The explanation that cash generated from the business sales was subsequently deposited in the bank account during the demonetization period, therefore, cannot be rejected merely on the basis of a comparison with the cash deposits made in the immediately preceding year.

The method adopted by the AO for determining the permissible cash deposits by applying the ratio of the preceding year’s cash deposits to turnover also does not find any specific statutory basis. The cash generation and deposit pattern of a business may vary from year to year depending upon its turnover and the nature and circumstances of the business. In the present case, it is also on record that the assessee had deposited Rs. 24,00,000/- in cash in April 2016 itself. This fact was relevant while examining the assessee’s explanation regarding the pattern of cash deposits during the year under consideration.

We also take note of the discrepancy pointed out by the assessee with regard to the quantum of cash deposits during the demonetization period. As per the bank statements, the assessee had deposited Rs. 46,00,000/- during the relevant period, comprising Rs. 31,00,000/- in HDFC Bank and Rs. 15,00,000/- in The Surat People’s Co-op Bank Ltd., whereas the AO had adopted the figure of Rs. 49,00,000/-. The discrepancy further warrants a careful examination of the actual bank deposits before drawing an adverse inference against the assessee.

Considering the totality of the facts and circumstances of the case, particularly the fact that the assessee was assessed under Section 44AD, the turnover declared by the assessee was not rejected, the cash deposits were explained as business receipts, and the AO has not brought any independent material to establish that the deposits represented income from an undisclosed source, we are of the considered view that the addition sustained by the Ld. CIT(A) under Section 68 of the Act cannot be upheld.

Accordingly, the addition of Rs. 35,20,000/- sustained by the Ld. CIT(A) is deleted.

Since the substantive addition itself has been deleted, the grounds relating to the applicability of Section 115BBE and the alternative contention regarding estimation of the profit element do not require separate adjudication and are rendered academic.

In the result, the appeal of the assessee is allowed.