VISHAL MAHENDRABHAI MODI (HUF),2ND FLOOR LAXMINIVAS APPARTMENT vs. INCOME TAX OFFICER, WARD 1(3), JAMNAGAR

The solitary grievance of the assessee in this appeal is that learned CIT(A) failed to properly consider and verify the detailed documentary evidences placed on record substantiating the source of cash deposit of Rs. 14,00,000/-. 3. The facts of the case which can be stated quite shortly are as follows: During the assessment proceedings, on verification of records, it was noticed by the assessing officer that the assessee has filed return of income, declaring business income of Rs. 1,92,300/-, u/s 44AD of the Act, showing gross receipts (other mode) at Rs.15,60,000/-, during the previous year wherein all the business receipts are received in modes other than banking channel which means business is carried out in cash. As per assessing officer, the cash credit of Rs. 14,00,000/- has not explained by the assessee. Therefore, during the assessment proceedings, the assessing officer issued a show cause notice to the assessee, to explain the source of cash deposit.

In response to the notice of the assessing officer, the assessee submitted that in respect of business of Rs.15,60,000/-, the assessee has made total business of Rs.15,60,000/- on credit basis. The assessee has claimed that the assessee has not received any amount either in cash or through banking channel during the year under consideration, however, received the said amount of Rs.15,60,000/-, during the Financial Year 2017-18, relevant to assessment year 2018–19, from its customers, through banking channel. In support, the assessee has submitted, the copy of customers in its books of account for the period from 01/04/2016 to 31/03/2018, and copy of bank statement showing receipt of Rs.15,60,000/-, for ready reference in Annexure-1 as an online submission dated 11/03/2024. Further, in respect of cash credit of Rs.14,00,000/- from its own, the assessee has submitted that the aforementioned amount of Rs.14,00,000/- in cash was transferred from Vishal Mahendrabhai Modi, Karta of Vishal Mahendrabhai Modi (HUF). Further assessee states that it is imperative to underscore that in conformity with legal definitions and provisions, the Karta of an HUF is unequivocally categorized as a Relative and therefore, pursuant to this classification, the Karta is duly authorized to effectuate cash transfers to the HUF. In support, the assessee has submitted copy of the cash book pertaining to Vishal Mahendrabhai Modi and Vishal Mahendrabhai Modi (HUF) for the month of April 2016, as Annexure- II, as an online submission dated 11/03/2024.

In response to the another notice of the Assessing Officer, the assessee submitted before the Assessing Officer, the following reply with documentary evidences, which is reproduced below:

However, the Assessing Officer rejected the above reply of the assessee and made the addition in the hands of the assessee to the tune of Rs.14,00,000/-

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal, before the CIT(A) who has confirmed the action of the assessing officer, therefore, assessee is in further appeal before this Tribunal.

Learned Counsel for the assessee, submitted that the assessee’s business was conducted on a credit basis and therefore cash receipts were not shown in the financial year 2016-17, relevant to assessment year 2017–18. Amount of Rs.14,00,000/- was transferred from Vishal Mahendrabhai Modi, Karta of HUF. The assessee submitted cash book pertaining to Vishal Mahendrabhai Modi and HUF and stated that said cash was earned out of business activities. The Assessing Officer incorrectly inferred fictitious business income, ignoring subsequent bank receipts and customer ledgers which proved the genuineness of the business activity and receipts, therefore, addition made by the assessing officer, may be deleted.

Ld. DR relied on the findings of the authorities below.

I have heard, both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. I find merit in the submissions of the learned Counsel for the assessee to the effect that assessee’s business was conducted on a credit basis and therefore cash receipts were not shown in the financial year 2016-17, relevant to assessment year 2017–18. The assessee received the amount from the customers through banking channel in next year. I have examined the bank statement and noticed that assessee has received the amount from the customer in next year. Hence, on accrual basis of accounting, the assessee has rightly shown the receipts in the assessment 2017– 18, and it is allowed in accrual basis of accounting. Besides, the amount of Rs.14,00,000/- is out of retail trading activities, which is received from customers by following accrual basis of accounting.

Therefore, I find that it is substantially correct in law, when the assessee is consistently following the mercantile/accrual system of accounting and the income had legally accrued during the relevant previous year. Under section 145 of the Act, income chargeable under the heads “Profits and gains of business or profession” and “Income from other sources” is computed according to either, mercantile system, or cash system, regularly employed by the assessee. Where the assessee follows the mercantile system, income is taxable when the right to receive accrues, and not merely on actual receipt. Therefore, if sales/services were completed during FY 2016–17, and invoices were raised or debt became due in that year, and the assessee follows mercantile accounting, then the income accrues in FY 2016–17 (AY 2017–18), even if actual realization through banking channel happened in the next year. Accordingly, mere postponement of receipt does not defer taxability. Therefore, I note that in the assessee’s case under consideration, the income had actually “accrued” during the relevant year, hence, no addition should be made in the hands of the assessee, just because the assessee has actually received the amount from the customers in the next year. It is settle principle of that income accrues when the right to receive becomes vested. That is, accrual takes place when there arises a debt owed to the assessee. Hence, I note that in the assessee’s case under consideration, the receipts shown in next year merely represent realization of earlier accrued income. I note that Assessing Officer incorrectly inferred fictitious business income, ignoring subsequent bank receipts and customer ledgers which proved the genuineness of the business activity and receipts. Besides, the assessee had explained the source of Rs.14,00,000/- with cogent evidences. Hence, based on this factual position, addition made by the assessing officer needs to be deleted accordingly, I delete the addition of Rs.14,00,000/-.

In the result, appeal filed by the assessee, is allowed.