MOHAN MAMBALLI KANTHARAJU ,CHAMARAJANAGARA vs. ACIT, CIRCLE-1(1) & TPS, MYSURU

PER KESHAV DUBEY, JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 12.02.2025 vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1073203251(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 2 of 10

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 3 of 10 accordingly the assessee was unable to concentrate on any of the matters including his business affairs. In support of his claim the assessee has also produced medical certificates & record.

3.1 Perused the record and having heard ld. Counsel for the assessee as well as the ld. D.R., it is perceived that explanation offered in the condonation application is plausible and sufficient cause been shown by the assessee, which prevented him from filing the appeal within the prescribed period and accordingly, we inclined to condone the short delay of 40 days and admit the appeal for adjudication on merits.

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 4 of 10 accounts, cash deposits during demonetization, proof of unsecured loans, proof for some of the expenses claimed and such other details in support of the claims made in the return of income. In response to detailed questionnaire the assessee furnished all the documents.

(i) Cash deposits during the demonetization period:-

4.1 During the course of assessment proceedings, as per SFT reporting, bank account statements of the assessee were collected by issuance of notice u/s 133(6) of the Act. During the demonetization period, the total cash deposits made by the assessee into his bank accounts are as under:-

Sl Name of Account No. Cash deposited Cash Deposited in No. the Bank in old currency new currency 1. State 64119173951 15,04,000 37,56,000 Bank of India 2. State 32722156519 11,05,000 38,06,000 Bank of India 3. State 64197196772 7,20,000 36,29,000 Bank of India 4. State 64197216009 13,41,000 70,75,000 Bank of India 5. DCB Bank 22412500000532 49,000 - Ltd. Total 47,19,000 1,82,66,000

The assessee was asked to furnish sources of cash deposits during the demonetization period. In support of the same, assessee

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 5 of 10 produced cash book and cash in hand position on the date of deposit and other details for verification.

4.2 On perusal of the details furnished, the AO observed that total cash deposits during the demonetization period in SBNs was Rs.47,19,000/-, whereas as seen from the cash book and cash in hand position as on 8.11.2016 and as per the submission made by the assessee, the cash balance available at the midnight of 8.11.2016 was Rs.25,90,376/-. As such, the excess cash deposits made in SBNs during the demonetization was Rs.21,28,624/-. The AO held that in respect of excess cash deposits, the assessee could not explain the sources and also did not offer any explanation for the same and hence Rs. 21,28,624/- was treated as unexplained money u/s 69A of the Act r.w.s 115BBE of the Act.

(ii) Disallowance of Expenses claimed u/s 37:-

4.3 Further, the AO had made a disallowance of Rs.1,21,931/- u/s 37 of the Act being the 10% of the expenses claimed in respect of the Travelling and conveyance of Rs. 4,15,353/-, Vehicle maintenance of Rs. 4,57,980/-, Miscellaneous expenses of Rs. 1,32,132/- and Business development expenses of Rs.2,13,851/- on the ground of lack of proof and considering the nature of business.

(iii) Disallowance of depreciation claimed u/s 32:-

4.4 Further considering the nature of business, 1/4th of depreciation claimed i.e. Rs.2,69,996/- was disallowed on account of use of vehicle for personal purposes and added back to the total income of the assessee.

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 6 of 10 Thus, the AO concluded the assessment proceedings on a total assessed income of Rs. 75,92,851/- vide order passed u/s 143(3) of the Act dated 24/12/2019.

6.1 Further, with regard to disallowance of 10% of vehicle expenses and 25% of depreciation, the ld. CIT(A)/NFAC held that use of vehicles for personal purposes cannot be ruled out. 10% is a reasonable figure too. However, in the same ratio, the depreciation should also be disallowed @10% only. Thus, the ld. CIT(A)/NFAC partly allowed the appeal of the assessee.

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8.1 Further, with regard to adhoc disallowance, the ld. AR of the assessee submitted that the assessee had not incurred any expenses of personal in nature. The personal expenses are already considered as drawings of the proprietor and accordingly submitted that an adhoc disallowance were based on guess & surmises only.

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 8 of 10 during the course of assessment proceedings, the AO himself admitted that the assessee was asked to furnish audited financial statements, note on business activities, sales and purchase register, details of bank accounts, cash deposits during demonetization, proof of unsecured loans, proof for some of the expenses claimed and such other details in support of the claims made in the return of income and in response to detailed questionnaire the assessee furnished all the documents. Further, the assessee had also produced cash book and cash in hand position on the date of deposit and other details for verification. Further, the assessee had also furnished the detail breakup of opening cash in hand as on 01/04/2014, closing cash in hand as on 31/03/2015, closing cash in hand as on 31/03/2016 as well as closing cash in hand at the midnight of 08/11/2016. We also observed that the assessee maintained books of accounts such as Cash book, ledgers, Sales & Purchase Registers etc which were produced before the AO during the course of assessment proceedings. The Books of Accounts were also audited by a Chartered Accountant & neither the Chartered Accountant nor the AO could point out any defects in the books of Accounts. We also observed that the ld. CIT(A)/NFAC had categorically given findings that the AO had not touched all the cash deposits meaning thereby that he had indeed accepted them as Sales. In fact, we are of the considered opinion that both the Authorities below inspite of having accepted the cash sales has grossly erred in making addition as unexplained money u/s 69A of the Act especially when the assessee from the very inception is submitting that the source of cash deposits are from the daily sales which were reflected in the books of account. Therefore, the observations by both the Authorities below that in respect of alleged excess cash deposits made, the assessee could not explain the sources and also did not offer any explanation is completely baseless & absurd. The AO although

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 9 of 10 accepted the Sales, cash book, cash in hand position on the date of deposit and other details for verification produced before him, however completely ignored the daily cash sales post 08/11/2016 in holding the alleged excess cash deposits amounting to Rs. 21,28,624/- as unexplained money u/s 69A of the Act. We find that the ld. CIT(A)/NFAC himself held that given the financial status of the assessee and largely cash business that the assessee is pursuing, a sum of Rs. 10 lakhs was further treated as explained. We are of the considered opinion that having accepted that the assessee is pursuing largely cash business & also having accepted the sales Register, cash book & other details produced during the course of assessment proceedings, the contention of the assessee is completely acceptable that the excess cash deposits amounting to Rs. 21,28,624/- were from daily cash sales which were properly reflected in the Sales Register & cash book. In view of the above, we have no hesitation to delete the entire amount of Rs. 11,28,624/- added as unexplained money u/s 69A of the Act as confirmed by the ld. CIT(A)/NFAC. Accordingly, this ground of appeal of the assessee is allowed.

10.1 Now coming to the adhoc disallowance of 10% on certain expenses amounting to Rs.1,21,931/- in the absence of proof & adhoc 25 % disallowance of depreciation on the ground of probable use of vehicle for personal purposes, we are of the considered opinion that these disallowances are made by the AO purely based on guess, surmises & conjunctures. The ld. CIT(A)/NFAC reduced the rate from 25% to 10% by applying the same rule of thumb. We are of the considered opinion that before making disallowances on adhoc basis, the assessee must be given full opportunity to place any relevant material. Both the Authorities below also grossly erred in not disclosing the basis of estimating i.e. on what material these estimates are based. Both the Authorities below also could not

ITA No.1329/Bang/2025 Mohan MamballiKantharaju, Chamarajanagara Page 10 of 10 point out single instances where the assessee had used the vehicle for the personal purposes or which are the exact amount of expenses the assessee could not produced the proof. The contention of the assessee is that he had not incurred any expenses of personal in nature & the personal expenses are already considered as drawings of the proprietor appears to be correct. We are of the considered opinion that the AO should in fairness disclose to the assessee the material on which he is going to found that estimate. The Apex Court in the case of Dhakeswari Cotton Mills Ltd vs. CIT reported in 1955 AIR 65 | 1955 SCR (1) 941 vide judgment dated 29/10/1954 has held as under- “the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment” In view of the above, we delete the entire disallowances made by the AO on adhoc basis and accordingly this ground of appeal of the assessee is also allowed. 11. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 19th June, 2026

Sd/- Sd/- (Prashant Maharishi) (Keshav Dubey) Vice President Judicial Member

Bangalore, Dated 19th June, 2026. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file

By order

Asst. Registrar, ITAT, Bangalore.