HANUMAIAH RANJAN ,BANGALORE vs. INCOME TAX OFFICER, WARD-3(3)(1), BANGALORE

Ground Nos. 4 to 9 are interconnected and pertain to the addition made by the AO u/s 69A of the Act.

The relevant facts are that the assessee filed its ROI for the subjected AY by offering an income of Rs. 2,98,000 only which was comprising of salary income and income from other sources. During the course of the assessment proceedings, the assessee explained that the cash deposited in the bank comprised Rs. 7,00,000 received from contractual/ trading receipts which was stated to have been offered to tax in the relevant assessment year, and a further sum of Rs. 3,45,000 representing family savings deposited into the bank account. However, the AO observed that the assessee had not reported any business income from the alleged trading activity and therefore held that there was no real income arising from such business. The AO further noticed the bank deposits in the manner detailed below:

1 However, the AO treated the cash deposits during demonetization period amounting to Rs. 10,70,000.00 as unexplained money under section 69A of the Act. The AO finally determined the total income at Rs. 13,68,400 and made an addition of Rs. 10,70,000, treating the same as unexplained cash u/s 69A read with section 115BBE of the Act.

Aggrieved, assessee preferred an appeal before the Ld. CIT(A). Before Ld. CIT(A), the assessee submitted that he is into business of trading clothes. For the period under consideration, the business income was not shown by the consultants who filed ROI on behalf of assessee. Now, the assessee has revised its ROI and offered a sum of Rs. 1,54,444 as business income u/s 44AD of the Act. The assessee also submitted that the cash deposited in the bank account was on account of this trading business of clothes only.

1 However, Ld. CIT(A) rejected the plea of the assessee by holding that the assessee could not satisfactorily explain the nature and source of cash of Rs. 10,70,000 and upheld the finding of AO.

Aggrieved by the order of the ld. CIT-A, the assessee preferred an appeal before me.

The Ld. AR before me has filed a paper book running from pages 1 to 40 and submitted that both the AO and the Ld. CIT(A) erred in invoking the provisions of section 69A of the Act. Referring to the said provision, the Ld. AR submitted that three essential conditions must be satisfied for applying the provisions of section 69A of the Act. The conditions are as follows. First, the assessee must be found to be the owner of any money, bullion, jewellery, or other valuable article. Second, such money or valuable article should not be recorded in the books of account, if any, maintained by the assessee for the relevant source of income. Third, the assessee must either fail to offer an explanation about the nature and source of such money or the explanation offered should be found unsatisfactory by the AO. According to the assessee, these conditions are not fulfilled in the present case.

1 The assessee further submitted that in the years preceding the year under appeal, the business income had been duly disclosed in the returns of income filed by him. In support of this contention, the assessee has placed on record screenshots of the ITRs at page 15 of the paper book.

2 The Ld. AR further submitted that the provisions of section 69A of the Act cannot be invoked merely on the basis of suspicion or presumptions. In support of this contention, reliance was placed on certain judicial precedents to contend that the addition made by the AO is not sustainable in law.

The Ld. DR, on the other hand, vehemently supported the orders of the AO and the Ld. CIT(A). He submitted that the assessee deposited substantial cash during the demonetization period but failed to produce any documentary evidence to substantiate the claim that the deposits were out of contractual receipts or family savings.

1 The Ld. DR further pointed out that the assessee had not declared any business income in the return of income. Therefore, the explanation given by the assessee cannot be accepted. In these circumstances, the AO was justified in invoking the provisions of section 69A of the Act and treating the cash deposits as unexplained money. Accordingly, the addition made by the AO and sustained by the Ld. CIT(A) deserves to be upheld.

I have heard the rival submissions of both the parties and perused the materials available on record. The short issue before me is whether the cash deposits made by the assessee during the demonetization period can be treated as unexplained money u/s 69A of the Act. From the assessment order, I notice that the AO has accepted the other bank transactions of the assessee for the entire year and has only doubted the deposits made during the demonetization period. In my considered view, when the nature of the bank account and the surrounding transactions are otherwise accepted, it would not be proper to isolate only the deposits made during the demonetization period and treat the same as unexplained without examining the overall pattern of the account.

1 On perusal of the bank statements placed before me, it is seen that there is a consistent pattern of cash deposits and withdrawals throughout the year. This pattern indicates that the assessee was regularly carrying on small scale business activities involving cash transactions. The assessee has also explained that the business carried on by him is informal and cash based in nature, which is not uncommon in small contractual or trading activities.

2 The assessee has further clarified that the receipts from such activity were mistakenly not shown under the head “business income” in the return originally filed for the year under consideration. However, it is brought to my notice that in earlier years the assessee had consistently declared business income in the returns filed. To substantiate this claim, the assessee has placed screenshots of the earlier years ITRs on record. Thus, the omission in the year under appeal appears to be a mistake rather than a deliberate attempt to conceal income.

3 I also take note of the fact that the assessee has himself offered receipts of Rs. 19,30,550 under the presumptive provisions of section 44AD of the Act. The assessee has even included a portion representing family savings while offering the receipts to tax, merely to avoid prolonged litigation. Such conduct, in my view, supports the bona fides of the assessee rather than suggesting any intention to introduce unexplained money.

4 Considering the totality of the facts and circumstances of the case, I am of the view that the provisions of section 69A have been incorrectly invoked by AO. Accordingly, the addition made towards alleged unexplained cash deposits cannot be sustained and the same is directed to be deleted. The grounds raised by the assessee are therefore allowed.

The Grounds Nos. 2 and 3 relate to validity of notice issued u/s 143(2) of the Act. In this regard, I note that since I have decided the appeal of assessee on merits in his favour in the preceding paragraph, I am not inclined to adjudicate the impugned grounds of appeal. As such, these grounds become infructuous and therefore, the same are dismissed.

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

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file