VINAYAGAM BALAMURUGAN,VIRUDHUNAGAR vs. ITO, WARD-1,, VIRUDHUNAGAR

Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A) with a delay of 2070 days, which was condoned by the ld.CIT(A) an dismissed the appeal of the assessee by confirming the additions made by the AO stating that the assessee has failed to substantiate the source of cash payments satisfactorily and passed an order dated 21.01.2026. 4. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us. The ld.AR for the assessee submitted that the assessee is a trader in goods and filing the returns of income regularly by opting to pay tax u/s.44AD of the Act under presumptive taxation meant for small business and professionals. The source for cash payments made towards credit card dues to the tune of :-3-:

Per contra, the ld.DR supported the orders of the authorities and submitted that the assessee has not proved by any supporting documents to state that the cash payments is already included in the gross receipts shown while declaring the income u/s.44AD of the Act, and hence, prayed for confirming the order of the ld.CIT(A).

We have heard the rival submissions and perused the material available on record and gone through the orders of the authorities along with the paper book filed by the assessee. The undisputed facts emerging from the record are that the assessee is engaged in the business of trading in goods and has been consistently declaring his income under the presumptive taxation scheme prescribed u/s.44AD of the Act. The assessment was completed u/s.144 of the Act on account of non-compliance with the statutory notices issued by the AO. During the assessment proceedings, the AO, on the basis of the information obtained from HDFC Bank, noticed that the assessee had made purchases aggregating to Rs.14,43,110/- through credit cards and had discharged part of the credit card dues by making cash payments amounting to Rs.6,57,010/-.

Before us, the ld.AR submitted that the impugned cash payments were not independent unexplained transactions but represented payments made towards credit card dues incurred for purchasing trading goods in the ordinary course of business. It was further submitted that the sales generated out of such purchases had already formed part of the gross turnover disclosed in the return of income and the assessee had offered the business income u/s.44AD of the Act. The assessee has also placed on record the details of income declared in the relevant assessment year to demonstrate that the profit declared works out to 20.2% of the gross turnover, which is substantially higher than the minimum presumptive rate prescribed u/s.44AD of the Act.

The Revenue, on the other hand, has contended that in the absence of supporting documentary evidence establishing the nexus between the cash payments and the disclosed business receipts, the authorities below were justified in treating the entire amount as unexplained money u/s.69A of the Act.

We find considerable force in the alternative contention advanced on behalf of the assessee. There is no dispute regarding the fact that the assessee is carrying on a trading business and has been consistently assessed under the presumptive taxation scheme u/s.44AD of the Act. It is also not the case of the Revenue that the credit cards were utilised for acquisition of any capital asset or for incurring personal expenditure. The material available on record indicates that the credit cards were used for making purchases, which, according to the assessee, constituted trading purchases forming part of the regular business activity.

The AO has invoked the provisions of section 69A solely on the ground that the assessee failed to explain the source of the cash payments during the assessment proceedings. However, once it is accepted that the cash payments were made towards settlement of credit card liabilities arising out of business purchases, it would not be justified to treat the entire amount of cash payments as the income of the assessee. At best, if the Revenue entertains a doubt regarding the source or proper recording of such business transactions, only the profit element embedded in such transactions can reasonably be brought to tax and not the entire turnover or business receipts.

It is a settled proposition of law that where the impugned transactions are intrinsically connected with the business activity of the assessee, the addition should ordinarily be confined to the profit element embedded therein, particularly when the corresponding turnover has not been rejected and the assessee has declared income under the presumptive provisions of the Act. Taxing the entire cash payment would amount to taxing the gross business receipts instead of the real income, which is contrary to the settled principles governing assessment of business income.

In the present case, the paper book filed before us reveals that the assessee has declared business income at 20.2% of the gross receipts, which is significantly higher than the presumptive rate contemplated u/s.44AD of the Act. The Revenue has not brought any material on record to demonstrate that the said rate of profit is either unreasonable or does not represent the true profitability of the assessee's business. In such circumstances, the profit rate already disclosed by the assessee provides a fair and reasonable basis for determining the taxable income attributable to the impugned cash payments.

Having regard to the entirety of the facts and circumstances of the case, we are of the considered opinion that the ends of justice would be adequately met if the addition is restricted to the profit element at 20.2% of the cash

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