MOHAMMED HAMEED BABU,NELLORE vs. ITO., WARD-2, NELLORE

During the course of the assessment proceedings, the AO issued notices under Section 142(1) of the Act, but the assessee failed to furnish the requisite details and did not produce the books of account and supporting records as were called for by the AO.

On verification of the information available on record, the AO observed that the assessee had during the demonetization period, i.e., 09/11/2016 to 31/12/2016 deposited cash aggregating to Rs. 39,10,500/- in his two bank accounts held with Central Bank of India, as under:

The AO further observed that the aggregate credits reflected in the assessee’s bank accounts during the subject year amounted to Rs. 3,70,86,504/-. After excluding the aforesaid cash deposits of Rs. 39,10,500/- (supra), which had separately been brought to tax under Section 69A of the Act, the balance amount of Rs. 3,31,76,004/- was treated by the AO as the assessee’s business turnover. The AO estimated the business income of the assessee by applying a net profit rate of 8% thereon, resulting in business income of Rs. 26,54,080/-. Accordingly, the AO vide his order passed under Section 143(3) of the Act, dated 13/12/2019, determined the income of the assessee at Rs. 65,64,580/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee submitted before the CIT(A) that the cash deposits in his bank accounts were the receipts generated in the ordinary course of business and, therefore, no addition under Section 69A of the Act was called for. It was further submitted that the accounts of the assessee had been audited under Section 44AB of the Act and the subject cash deposits formed part of the receipts generated from his business activities carried on during the relevant previous year.

The CIT(A), after considering the submissions and the material available on record, observed that now when the AO has accepted the cash deposits in the assessee’s bank account of Rs. 3,31,76,004/-, as his turnover, therefore, the monthly sales figure on an average would be Rs. 28 lacs (approx.). The CIT(A) observed that it would be unreasonable to assume that the business of the assessee which was being done in cash would be zero during the demonetization period. Accordingly, the CIT(A), holding a conviction that some part of the assessee’s sales during the demonetization period would be in cash, thus adopted the cash sales of the assessee during the demonetization period at Rs. 28 lacs (supra) and held that the cash deposits in the assessee’s bank account to the said extent were sourced out of his business receipts. However, the explanation in respect of the balance cash deposits of Rs. 11 lacs (approx.) was not accepted, and the addition to that extent was sustained under Section 69A of the Act.

Consequent upon treating Rs. 28,00,000/- as business turnover, the CIT(A) enhanced the business turnover from Rs. 3,31,76,004/- to Rs. 3,59,76,004/- and directed the AO to recompute the business income by applying the same net profit rate of 8%. However, the assessee's claim for adoption of a lower profit rate was rejected. The AO was also directed to verify the assessee’s claim for deduction under Chapter VI-A amounting to Rs. 1,98,897/- and allow the same, if otherwise found admissible.

The assessee, aggrieved with the CIT(A) order, has carried the matter in appeal before us.

Shri M Madhusudan, CA, Ld. Authorized Representative (for short, “AR”) for the assessee, submitted that the CIT(A) was not justified in sustaining the addition of Rs. 11 lacs under Section 69A of the Act. It was submitted that the entire cash deposits made in the bank accounts during the demonetization period constituted business receipts and that the impugned addition made by the AO had been sustained without appreciating the true nature of the transactions. It was further submitted that although the books of account could not be produced during the assessment proceedings, the audited financial statements, tax audit report under Section 44AB of the Act were available before the AO, as well as the nature of the business and the surrounding circumstances sufficiently established the assessee’s explanation.

Per contra, the Ld. Departmental Representative (for short, “DR”) relied upon the orders of the authorities below and submitted that the assessee had failed to discharge the onus cast upon him under law by producing the primary books of account and supporting evidence despite repeated opportunities. It was, therefore, submitted that the CIT(A) was justified in sustaining the addition of Rs. 11 lacs (supra) under Section 69A of the Act.

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by them.

Before proceeding further, we may herein observe that the present appeal involves a delay of 44 days. Shri M Madhusudan, CA, the Ld. Authorized Representative (for short, “AR”) has taken us through an “affidavit” of the assessee explaining the reasons leading to the delay in filing of the present appeal. The assessee-appellant has deposed in the affidavit that the delay had crept in for the reasons, viz. (i). that after receipt of the CIT(A) order considerable time was involved in collecting and organizing the relevant documents, financial records, and papers necessary to file the appeal; and (ii). that some time was involved in engaging a counsel for filing the appeal. The Ld. AR submitted that as the delay in filing the appeal was for bona fide reasons, the same, in all fairness and in the interest of justice, be condoned.

Per Contra, Shri K Prasad, the Ld. Senior Departmental Representative (for short, “Ld. Sr-DR”) objected to the seeking of condonation of the delay in filing the present appeal.

We have given thoughtful consideration and are of the view that the assessee has fairly come up with the reasons leading to the delay in filing the present appeal before us. Although the assessee appellant ought to have been vigilant in filing the appeal within the prescribed time period, but considering the fact that the same is not inordinate and has crept in for bona fide reasons, we condone the same. Our view that a liberal and justice-oriented approach should be taken while considering an application of an appellant seeking condonation of the delay in filing the appeal is supported by the judgment of the Hon’ble Supreme Court in Vidya Shankar Jaiswal Vs. CIT (2025) 305 Taxman 83 (SC).

Coming to the merits of the case, we find that the core issue involved in the present appeal lies in a narrow compass, i.e., whether, on the facts and in the circumstances of the case, the CIT(A) was justified in sustaining the addition of Rs. 11 lacs under Section 69A of the Act.

Admittedly, it is an undisputed fact that the assessee was carrying on business during the relevant previous year and had filed his return of income declaring business income. Also, it is an admitted position that the assessee's accounts were subjected to audit under Section 44AB of the Act. Apart from that, we are of the view that as the AO, while treating the impugned cash deposits separately under Section 69A of the Act, had simultaneously estimated the business income by applying a net profit rate of 8% on the business turnover determined from the bank credits, thus, the said fact established the existence of business activities carried on by the assessee during the year under consideration.

At the same time, it is a matter of fact borne from record that the assessee did not produce the books of account and supporting records before the AO despite specific requisitions made during the course of assessment proceedings. In our view, such failure undoubtedly weakened the evidentiary value of the explanation offered by the assessee and justified a detailed verification by the AO. However, the issue does not end there, and the question that arises is whether, in the facts obtaining in the present case, the addition sustained under Section 69A of the Act can be allowed to stand without a comprehensive examination of the assessee’s explanation regarding the source of the disputed cash deposits of Rs. 11 lacs. In our considered view, the answer has to be in the negative. We say so, for the reason that an addition under Section 69A of the Act, particularly in a case involving cash deposits made during the demonetisation period, necessarily requires an objective evaluation of the explanation furnished by the assessee in the light of the surrounding facts, the nature of the business carried on, the documentary evidence produced, the past conduct of the business and such other relevant material as may have a bearing on the issue, and the ultimate conclusion must emerge from a holistic appreciation of the entire factual matrix. 8

In the present case before us, the assessee has consistently maintained that the impugned cash deposits were sourced from his business receipts. Although such explanation of the assessee was not fully substantiated before the AO by production of the books of account, we are of the considered view that the interests of justice would be adequately served if one effective opportunity is afforded to the assessee to substantiate his explanation by placing the relevant material on record.

We are also of the view that while undertaking such examination, the AO shall keep in view CBDT Instruction No. 03/2017 dated 21.02.2017 prescribing the Standard Operating Procedure (SOP) for verification of cash transactions relating to demonetization. The said Instruction emphasizes an objective examination of the explanation offered by the assessee with reference to the books of account, supporting documentary evidence, business profile and other surrounding circumstances before arriving at any conclusion. We are of the view that though the Instruction cannot override the statutory provisions of the Act, it provides a useful framework for ensuring a fair and comprehensive verification of claims arising out of cash deposits made during the demonetization period.

We thus, having regard to the totality of the facts and circumstances of the case, are of the considered view that the issue relating to the addition of Rs. 11 lacs under Section 69A of the Act requires a fresh examination at the end of the AO. We are persuaded to adopt this course not because the explanation furnished by the assessee merits acceptance at this stage, nor because the addition necessarily deserves to be sustained, but because the matter, in our considered view, has not attained the degree of factual verification that is necessary for a just and proper adjudication of the controversy.

Accordingly, in the interest of justice, we set aside the impugned order of the CIT(A), insofar as he has sustained the addition of Rs. 11 lac under Section 69A of the Act, and restore the matter to the file of the AO for fresh adjudication. Needless to say, the AO shall afford the assessee a reasonable opportunity of being heard and permit him to place on record such books of account, documentary evidence and other material as he may be advised to rely upon in support of his explanation regarding the impugned cash deposits.

The AO shall examine the explanation furnished by the assessee independently and in accordance with law, having due regard to the material that may be brought on record, the nature of the assessee’s business, the surrounding facts and circumstances, and the applicability of CBDT Instruction No. 03/2017 dated 21.02.2017. Thereafter, the AO shall pass a reasoned and speaking order, uninfluenced by any observation contained either in the assessment order or the impugned appellate order, except to the extent of the directions contained herein.

Before parting, we clarify that we have not expressed any opinion on the merits of the case, and the addition under Section 69A of the Act is left open to be adjudicated by the AO on the basis of the evidence that may be produced by the assessee and after considering the submissions of both the parties in

In the result, the appeal filed by the assessee is allowed for statistical