BHARAT P LAKHAPATWALA,GHATKOPAR WEST, MUMBAI vs. INCOME TAX OFFICER, WARD 27(1)(1), VASHI, NAVI MUMBAI

The facts, as emanating from the assessment order, are that the assessee filed his return of income on 30.03.2018 declaring total income of Rs.2,89,230/-. The case was selected for limited scrutiny, inter alia, on account of large cash payments made towards credit card purchases. During the assessment proceedings, the Assessing Officer noticed that the assessee had made cash payments towards credit card bills aggregating to Rs.5,36,500/-, comprising Rs.1,62,600/- towards the HSBC Bank credit card, Rs.1,30,900/- towards the Standard Chartered Bank credit card and Rs.2,43,000/- towards the State Bank of India credit card. The Assessing Officer called upon the assessee to explain the source of these payments. The assessee stated that the credit card repayments were generally made in cash or from withdrawals from other credit cards and receipts from family members. However, since the Assessing Officer was not satisfied with the explanation and considered the supporting documentary evidence inadequate, the entire amount of Rs.5,36,500/- was treated as unexplained expenditure under section 69C of the Act. The total income was accordingly assessed at Rs.8,25,730/-.

The assessee carried the matter in appeal before the learned CIT(A). During the appellate proceedings, the assessee explained that he was engaged in the business of astrology and preparation of kundalis and that the receipts from this activity were predominantly in cash. It was further submitted that the cash available with the assessee included the opening cash balance as well as cash generated from the business and amounts withdrawn from other credit card accounts, which were utilised towards payment of the credit card bills. The learned CIT(A), on examining the cash book and bank statements, noticed that the assessee had shown an opening cash balance of Rs.3,87,525/- as on 01.04.2016, cash receipts of Rs.1,24,100/- from astrology and Rs.98,850/- from brokerage, besides cash withdrawals from bank accounts. The learned CIT(A), however, was not satisfied with the explanation regarding the opening cash balance and the nature of the receipts, particularly in the absence of supporting details and documentary evidence. He also observed that the direct linkage between cash withdrawals and payments towards credit card bills had not been established. On these considerations, the learned CIT(A) upheld the addition of Rs.5,36,500/- under section 69C of the Act and also sustained the application of section 115BBE.

During the course of hearing before us, the learned Authorised Representative (ld.AR) submitted that the nature of the assessee's business was such that receipts from astrology and preparation of kundalis were ordinarily received in cash. It was contended that the assessee had explained the source of the payments from the cash generated through his business and from amounts drawn from one credit card account and utilised towards payment of another credit card account. The ld.AR submitted that the opening cash balance of Rs.3,87,525/- had also been reflected in the cash book, although independent evidence establishing the availability of the entire opening balance was not available. It was further submitted that the Assessing Officer had treated the entire amount paid towards credit card bills as unexplained expenditure without appreciating that the payments themselves did not represent income and that the same amount could not be treated as income merely because the payments were made in cash. The ld.AR accordingly submitted that the addition deserved to be substantially reduced by estimating a reasonable income from the business activity of the assessee.

We have considered the submissions of the ld.AR and perused the material available on record, including the assessment order and the order of the learned CIT(A). The material on record shows that the assessee was engaged in the activity of astrology and preparation of kundalis. Having regard to the nature of such activity, it cannot be ruled out that the receipts were generated in cash. The explanation furnished by the assessee is that the payments towards credit card bills were met from the cash receipts of this activity and from amounts drawn from other credit card accounts. The Assessing Officer, however, treated the entire amount of Rs.5,36,500/- paid towards the credit card bills as unexplained expenditure, principally on the ground that the assessee had not furnished satisfactory documentary evidence establishing the source of each payment.

At the same time, the explanation furnished by the assessee cannot be accepted in its entirety without scrutiny. The opening cash balance of Rs.3,87,525/- has been reflected in the cash book, but the record does not contain independent evidence establishing the availability and source of the entire opening balance. Similarly, although the assessee has stated that he earned cash receipts from astrology and preparation of kundalis, the supporting details identifying the persons from whom the receipts were obtained and the amounts received from each person have not been fully furnished. The claim regarding brokerage receipts has also not been substantiated by complete supporting particulars. These deficiencies prevent us from accepting the entire explanation of the assessee as conclusively established. However, they do not, in our view, justify treating the entire amount paid towards credit card bills as income.

The material available on record indicates that the assessee was carrying on an activity capable of generating cash receipts and that the payments towards credit card bills were stated to have been made from such receipts as well as from funds drawn from other credit card accounts. In these circumstances, the more reasonable approach is to estimate the income attributable to the activity rather than treating the entire amount of the credit card payments as unexplained expenditure. The estimate must take into account the nature of the activity, the explanation furnished by the assessee and the deficiencies in the supporting evidence. It must also avoid treating the same funds as income merely because they were transferred between credit card accounts and subsequently utilised for making payments.

Having regard to the totality of the facts and circumstances, we consider it reasonable to estimate the income of the assessee at 8% of the aggregate amount of Rs.5,36,500/- involved in the cash payments towards credit card bills. Such estimation takes into account the nature of the assessee's stated business activity and the possibility that the payments were funded, at least in part, from cash receipts generated through that activity, while also recognising that the assessee has not satisfactorily established the source of the entire amount. The income so estimated works out to Rs.42,920/-. We accordingly direct the Assessing Officer to restrict the addition to Rs.42,920/- and delete the balance addition of Rs.4,93,580/-.

In view of the above findings, the addition sustained by the learned CIT(A) cannot be upheld to the extent of the entire credit card payments of Rs.5,36,500/-. The addition is accordingly restricted to Rs.42,920/- as income estimated at 8% of the aforesaid amount. The Assessing Officer shall recompute the total income and consequential tax liability in accordance with law, giving effect to this order. The grounds relating to the addition under section 69C and the consequential application of section 115BBE are partly allowed to the extent indicated above.

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