THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. SHITALBEN SAURABH VORA

This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot dated 20.09.2020 in ITA No. 651/RJT/2014 for A.Y. 2003-04. 2. The Revenue has proposed the following substantial question of law for the consideration of this Court:- “Whether on facts and in the circumstances of the case, the Appellate Tribunal was justified in restricting the addition of Rs. 7,78,35,500/- made by the Assessing Officer under section 68 of the Act to the extent of 2% of the total credits despite the fact that the assessee has failed to prove the source of credits, genuineness and creditworthiness of depositors? “

We have heard Mr. M.R. Bhatt, the learned Senior Counsel assisted by Ms. Mauna M. Bhatt, the learned Senior Standing Counsel appearing for the Revenue.

It appears that huge amount of cash credits was found in the bank account of the assessee. In such circumstances, the notice under Section 148 of the Act, 1961 was issued with a request to furnish the return of income for the A.Y. 2003-04. Thereafter, the notice under Section 143(1) of the Act, 1961 was also issued. However, the assessee neither filed any return of income nor complied with the notice. In such circumstances, a show cause notice dated 04.12.2009 came to be issued, whereby the assessee was asked to explain the source of cash deposits of Rs.2,72,89,000/- in the current bank account No. 3575 of Riddhi Impex with Nawanagar Co-operative Bank Ltd, Udyognagar, Jamnagar.

Ultimately, the Assessing Officer framed the assessment under Section 143(3) read with Section 147 of the Act, 1961 on 15.12.2009 determining the total income of Rs.7,78,35,500/- under Sections 68 and 69A respectively of the Act, 1961 for the huge cash deposits in the saving bank accounts.

The assessee being dissatisfied with the assessment order preferred appeal before the Commissioner of Income Tax (A) (for short “CIT(A)”). The CIT (A) called for the remand report and thereafter dismissed the appeal of the assessee vide order dated 25.02.2013. 7. The assessee being dissatisfied with the order passed by the CIT(A), preferred appeal before the Appellat Tribunal. The Appellate Tribunal condoned the delay in filing the appeal and directed the CIT(A) to dispose of the appeal on merits.

The CIT(A), vide order dated 08.08.2014 directed the Assessing Officer to delete the addition of Rs.7,78,35,500/- made under Section 68 of the Act, 1961 and considered the deposits as the turnover of the assessee. The CIT(A) also directed to adopt the net profit rate of 8% on the turnover.

The assessee being dissatisfied with the order passed by the CIT(A), preferred appeal before the Appellate Tribunal. The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue holding as under:- “9. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the amount deposited by the assessee in the form of cash/cheques represents the income of the assessee. Admittedly, there was huge deposit of cash/cheques in the bank account of the assessee. But on perusal of the bank statement, it is revealed that there were simultaneously withdrawals from the bank account leaving the negligible balance in the bank account of the assessee. Now 1st of all we have to see whether such deposit and withdrawal from the bank is representing the trading activities of the assessee. In this regard we find that the assessee has filed the evidences as under : i. Current bank account in the name of the assessee in the capacity of proper of M/s. Riddhi Impex. ii. Sale tax assessment order iii. Sales and purchase bills iv. Form 18G issued by the sales tax department

1 To our mind, the assessee has discharged her burden by furnishing the details stated above that she is engaged in the business activity and the transactions reflected in the bank statements are in connection with such business. As such, the onus shifted on the Revenue to negate the contentions of the assessee based on the documentary evidence. Therefore, the AO was to exercise the powers given under the statute to find out the veracity of the contentions of the assessee. The AO could have deputed the inspectors of the income tax to conduct the enquiries at the site of the parties fumished by the assessee. But he has not done so. Furthermore, the assessee cannot be penalized on account of non- response from the sales tax department.

2 We further note that, the Revenue has not brought anything on record suggesting that the assessee had so much of the income as computed by the AO. As such the AO was under the obligation to bring on record to demonstrate that the assessee has made some investment or incurred some expenses out of such income. But there is no such information available with the Revenue. Indeed, the assessee has certainly has violated the provisions of law by not maintaining the books of accounts, furnishing income tax return, providing sufficient details but that does not lead to reach the conclusion that the amount deposited in the bank represents the undisclosed income of the assessee. As such, the deposits in the bank cannot be treated as income on standalone basis without considering the withdrawal. Thus in the absence of any information demonstrating that the withdrawal from the bank has been utilized by the assessee either in the form of some investment or the same has been incurred as an expense, the deposits cannot be treated as income in the given facts and circumstances. Thus, in our considered view in such a situation the only option available to compute the income on some reasonable estimate.

4 We are also conscious to the fact that there is no standard jacket formula to work out the income of the assesse on estimated basis. One has to apply some guesswork based on some scientific method. In this regard we note that the assesses has made reference to certain orders of the ITAT where the income has been estimated with respect to the assessee engaged in the similar line of activities. Some of the orders for the sake of understanding are reproduced as under :

Your may kindly appreciate that in present case the appellant has sold goods by making URD purchases, in the similar case of URD purchases Hon. Rajkot bench of ITAT have held that profit rate of 1.25% is reasonable. We summaries gist of cases as under and enclose herewith copies of order for your honours ready reference. M/s. Balkrishnahna Dwarkadas Vs. ITO. ITA No.923/ RJT/2010 dated 01.01.2010, Rajkot Bench. The addition of unaccounted sales founded during the course of survey by Sales-Tax Department. ITAT Rajkot bench has held that that entire amount of sale cannot be added but only profit @ 5% of unaccounted sales can be added and hence 502 & 503/RJT/08 dated 28.08.2009 Rajkot Bench Ld. AO had made an addition by estimating of profit @5 % on sale of URD purchase. CIT(A), Jamnagar has restricted the said addition to 1.25%, which was upheld by hon. ITAT. Pushkar Raj J.Kabra Vs. ITO ITA No: 867/RJT/2009 dated 23.08.2010, Rajkot Bench L.d. AO had made an addition by estimating of profit @ 5% on sale of URD purchase. CIT(A), Jamnagar has restricted the said addition to 1.25%, which was upheld by Hon. ITAT by replacing addition on percentage basis to lumpsum addition of Rs.5,00,000 against Rs.22,24,031/- made by AO. CIT v. Balchand Ajit Kumar 2003 Tax Pub (DT) 1999 (MP-HC) : (2003) 263 ITR 0610 : (2004)1 86 CTR 0419 : (2004) 135 TAXMAN 0180 Income from undisclosed source-ADDITION UNDER SECTION 69 Non-reflection of credit sales. During the search, it was found that there were credit sales which were not reflected in the books of account. The assessing officer on scrutiny of the regular books of account maintained by the assessee being dissatisfied rejected the same and added total unrecorded sales as profit towards the sales profit of the assessee. The Commissioner (Appeals) came to the conclusion that the entire credit sales could not have been included in the total income of the assessee and accordingly followed the method of adding a net profit rate of five per cent, on these sales and accordingly included on that score. The total unrecorded sale cannot be regarded as the profit of the assessee. The net profit rate has to be adopted and once a net profit rate is adopted, it cannot be said that there is perversity of approach.

5 However, the learned CIT (A) while deciding the issue has not considered the case law relied upon by the assessee. In our considered view the learned CIT (A) was under the obligation to reject the contention of the assessee based on some cogent materials.

6 As such we are of the view that the learned CIT (A) was to bring some comparative materials to justify the profit computed by him at the rate of 8% of the turnover. Thus in the absence of any basis brought on record, we are not inclined to uphold the finding of the learned CIT (A).

7 At the time of hearing, we requested the learned DR to depute the inspector of the income tax to conduct the enquiry at the place of the assessee to find out his financial status so that a rational /informed basis could be found out to estimate the income. But no such information was fumished to us. Hence we left with no alternate except to accept the contention of the assessee after some modification suiting to us in the given facts and circumstances.

8 Thus after considering the case law cited by the assessee we feel that justice will be served to both the assessee and the Revenue if the income is estimated at the rate of 2% of the amount deposited with the bank. Hence, the ground of appeal of the Revenue is dismissed and the CO filed by the assessee is partly allowed. In the result, the appeal filed by the Revenue is dismissed and the CO filed by the assessee is partly allowed.”

The CIT(A) thought fit to compute the profit at the rate of 8% of the turnover. However, the Tribunal noticed that such computation was without any basis or materials on record. Ultimately, the Tribunal thought fit to estimate the income at the rate of 2% of the amount deposited with the bank. If such is the view of the Tribunal,, then, in our opinion, we should not disturb the same.

The question as proposed by the Revenue in the aforesaid set of circumstances cannot be termed as a substantial question of law.

In the result, this appeal fails and is hereby dismissed. (VIKRAM NATH, CJ) (J. B. PARDIWALA, J) NAIR SMITA V.