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Facts
The assessee, a partnership firm, deposited ₹28.91 Lakh cash during the demonetization period but did not file an income tax return. The AO, based on bank statements showing ₹17.14 crores in credits, treated the demonetization cash deposit as unexplained under Section 69A and estimated business income at 8% from other credits, completing the assessment under Section 144. The CIT(A) had previously set aside the assessment for fresh adjudication due to new explanations from the assessee.
Held
The Tribunal set aside both the issue of the demonetization cash deposit and the estimation of business income to the AO for fresh adjudication. The AO is directed to verify the source of the cash deposit with reference to the cash book and explanations. For business income, the AO must recompute business receipts after excluding non-revenue credits and estimate profit using the assessee's average net profit rate from the preceding three assessment years, ensuring the assessee is given a proper opportunity.
Key Issues
Whether the cash deposit during demonetization was unexplained money under Section 69A and the correct methodology for estimating business income from various bank credits, particularly the applicability of Section 44AD.
Sections Cited
142(1), 133(6), 69A, 144, 44AD
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 18/12/2024 in DIN No. ITBA/NFAC/S/250/ 2024-25/1071325546(1) for the assessment year 2017-18.
The relevant facts are that the assessee is a partnership firm and engaged in the business of solar power plant. The assessee during the demonetization period deposited cash amounting to ₹28.91 Lakh in his bank account. However, the assessee did not file return of income. On the receipt of information regarding substantial cash deposit in the bank,
Page 2 of 7 a notice under section 142(1) of the Act was issued. However, no compliance was made.
Subsequently, the AO issued notice under section 133(6) of the Act to the bank of the assessee and got the copy of bank statement. On analysis of the same, it was found that during the year, the bank of the assessee was credited for Rs. 17.14 crores which includes cash deposit as well as other transfers. The details of the same stand as under: 1. Cash deposit during demonetization Rs. 28,91,000/- 2. Cash deposit other than demonetization Rs. 14,67,500/- 3. Other credits Rs. 16,70,42,420/-
There were several notices issued to the assessee to explain the nature and sources of cash deposit as well as the source and nature of the other credits in the bank.
The assessee in response to the notice submitted that non-filing of return was not intentional. As such due to suspension of ESCOM officials by the Power Ministry of Karnataka which resulted in cancellation of many orders received by the assessee firm. As such, the business became inactive and staff left job. Hence, the return was not filed due to the said reason.
5.1 The assessee further submitted that there were cash withdrawals of Rs. 25 lakhs in the month of August 2016 for the purpose of utilizing the same at various work site. However, due to announcements of suspension by the Government, the work was not carried out, and the . cash was kept as it is and after announcement of demonetization, the same was deposited back into the bank account.
5.2 The assessee also submitted that the other credits include advanced returned back of Rs. 7,19,95,000/-, FD of 14 days tenure of Rs. 80 lakh, RD Rs. 2,20,000.00 and interest of Rs. 33,224/- only. Nevertheless, the assessee also submitted two different balance sheet and profit and loss account for the year under consideration showing losses in both the financial statements.
However, the AO rejected the assessee’s claim that the cash withdrawn on 2nd August 2016 for Rs. 25 lakhs were redeposited during the demonetization period i.e. between 9th November 2016 to 31st December 2016. The AO found that the business of the assessee during the month of April to August 2016 was going well. Therefore, it is not possible that the cash withdrawn as on 2nd August 2016 was not utilized for site expenses and kept as it is till November 2016.
6.1 The AO also noted that assessee furnished 2 different balance sheet and profit and loss account, but they were not supported by the books of accounts neither audited by the independent accountant. Hence, the AO rejected the same.
6.2 The AO in view of the above treated the cash deposited during the demonetization period for Rs. 28.91 lakh as unexplained cash under section 69A of the Act.
6.3 Further the AO treated the remaining credits in the bank of the assessee for Rs. 16,84,76,696/- (except credit of interest of Rs. 33,224/- which treated as income from other sources) as turnover of the assessee and computed income on the same at the rate of 8% i.e. Rs. 1,34,78,136/- only.
6.4 Accordingly, the AO assessed the total income of assessee at Rs. 1,64,02,360/- comprising business income of Rs. 1,34,78,136/-, income from other sources of Rs. 33,224/- and income under section 69A of the Act of Rs. 28.91 lakh.
Begin aggrieved the assessee preferred an appeal before the NFAC/learned (CIT(A).
Before the learned CIT(A), the assessee made arguments at length about the legal tender of the specified banking note as well as estimation of the profit and the rate of 8% and treating the entire credit as turnover. The assessee also submitted a note clarifying the amount credits in the banks.
8.1 The learned CIT(A) after considering facts in totally found that the assessee during the assessment proceeding has not submitted proper explanation of the amount credited in its bank account. Accordingly, the assessment was framed as per section 144 of the Act. However, during the appellate proceedings, the assessee has furnished an annexure explaining the amount credited in the bank which requires re- examination by the AO. Hence the learned CIT(A) in the interest of . natural justice set aside the issue to the file of the AO for the fresh adjudication.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us reiterated that cash deposit of Rs. 28.91 lakh during the demonetization was made out of earlier cash withdrawal and cash available in the ordinary course of business which is evident from daily cash books maintained by the assessee. The reason for keeping cash withdrawn on earlier occasion was duly explained by the assessee before the lower authorities. Hence, in the given facts, the cash deposit cannot be treated as unexplained money under section 69A of the Act.
10.1 The learned AR further submitted the other credits in the bank account of the assessee includes maturity of deposit, loans & advances, realization from debtors. Therefore, these credits cannot be included in business receipt for the purpose of computation of income. The learned AR also argued that the AO without providing any reasoning estimated the business income @ 8% of gross receipt as provided under section 44AD of the Act. The learned AR argued that in the given case the provision of section 44AD of the Act cannot be applied. It was alternatively submitted that profit on business receipt shall be computed at an average rate of net profit declared by the assessee for immediate 3 preceding assessment years.
On the contrary, the learned DR vehemently supported the finding of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available on record. The assessee is a partnership firm engaged in the business-related to power and energy. During the demonetization period, the assessee deposited ₹28.91 lakh in cash into its bank account. The assessee claimed that this deposit was from earlier cash withdrawals made in the normal course of business, which were not used due to cancellation of contracts. The explanation was supported by the cash book. However, this issue requires proper verification. Therefore, we set aside the issue of the cash deposit to the file of the AO for fresh adjudication. The AO is directed to verify the source of the cash deposit with reference to the cash book and explanations submitted. If the source is not properly explained, then the cash deposit shall be treated as part of the business receipt because the assessee has only one source of income, which is the business.
12.1 Further, regarding the estimation of business income, we also set aside this issue to the AO with the direction that the AO shall compute the business receipts after excluding credits that are not revenue in nature, such as loan repayments or fixed deposit maturities, earlier year debtor realization. Thereafter, the AO shall estimate the profit by applying the average net profit rate declared by the assessee in the last three assessment years. The AO shall provide reasonable opportunity to the assessee to furnish details and supporting documents during the adjudication of the dispute in appeal. In view of the above, the ground of appeal of the assessee is hereby allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.