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Facts
The assessee, engaged in tour operations, declared income under the presumptive scheme of Section 44AD for AY 2016-17. The Assessing Officer (AO) initiated assessment under Section 144 due to unexplained cash deposits aggregating to Rs. 25,54,242, which far exceeded the declared turnover. Despite opportunities, the assessee failed to provide satisfactory explanation or evidence.
Held
The Tribunal held that while the CIT(A) correctly noted the discrepancy between the declared turnover and cash deposits, the verification of the adjustment of these advances to revenue in the subsequent year was inadequate. Considering the nature of the business and partial confirmation of advances, the Tribunal directed an estimation of income at 8% of the disputed amount, reduced by income already offered in the subsequent year, to avoid double taxation.
Key Issues
Whether the cash deposits in the bank accounts are explained as advance receipts for future tours, and if so, whether they were duly offered to tax in the relevant year of accrual to avoid double taxation.
Sections Cited
143(1), 143(2), 142(1), 144, 69A, 271(1)(b), 271(1)(c), 46A, 133(6), 44AD
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: MS.SUCHITRA R. KAMBLE & SHRI MAKARAND V.MAHADEOKAR
Navbharat Holidays ITO, Ward-1(3)(1) 6,7-Ganesh Plaza Building Vs. Ahmedabad. Opp: Navrangpura Bus Stop Navrangpura Ahmedabad 380 009. PAN : AAMFN 3543 K (Applicant) (Responent) : Shri Mehul Thakkar, AR Assessee by : Shri Amit Pratap Singh, Sr.DR Revenue by सुनवाई क� तारीख/Date of Hearing : 28/07/2025 घोषणा क� तारीख /Date of Pronouncement: 31/07/2025 आदेश आदेश/O R D E R आदेश आदेश PER MAKARAND V.MAHADEOKAR, AM: This appeal by the assessee is directed against the order dated 06.08.2024 passed under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] for the Assessment Year 2016–17, arising out of the assessment order dated 30.11.2018 passed by the Income Tax Officer, Ward 5(2)(5), Ahmedabad [hereinafter referred to as “Assessing Officer or AO”], under section 144 of the Act.
Facts of the Case 2.1 The brief facts of the case, as emerging from the assessment and appellate records, are that the assessee is engaged in the business of operating package tours and travel-related services under the proprietorship concern Navbharat Holidays. The assessee filed its return of income for A.Y. 2016–17 on 31.03.2017, declaring total income of Rs.43,320/-, which was processed under section 143(1) of the Act. The case was thereafter selected for limited scrutiny under Computer Assisted Scrutiny Selection (CASS), the specific reason being that "cash deposit during demonetization period (9th November to 30th December 2016) is reported as per SFT reporting, no return was filed for the preceding assessment year and current year return filed after 07.11.2016".
2.2 In the course of assessment proceedings, statutory notices were issued under sections 143(2) and 142(1) of the Act. The Assessing Officer has noted that the first notice under section 143(2) was issued through ITBA Module on 19.09.2017. Thereafter, notices under section 142(1) along with questionnaire were issued on 18.07.2018, 08.10.2018, 27.10.2018, and 15.11.2018, requiring the assessee to furnish explanation regarding cash deposits aggregating to Rs.25,54,242/- made in two bank accounts, namely:
Bank Account No. Amount State Bank of India, Navrangpura 00000035352519594 Rs. 23,62,242/- Branch Corporation Bank, Navrangpura 33501601000433 Rs. 1,92,000/- Branch Total – Rs. 25,54,242/- 2.3 The AO observed that the assessee had declared gross receipts of Rs.5,41,474/- under the presumptive taxation scheme of section 44AD and had offered income at 8% amounting to Rs.43,320/-. According to the AO, the quantum of cash deposits in the bank accounts far exceeded the reported turnover, and no satisfactory explanation was furnished to reconcile the same. Despite multiple opportunities, the assessee failed to furnish any material explanation or documentary evidence to substantiate the nature and source of such cash deposits. Accordingly, invoking the provisions of section 144 of the Act, the AO concluded that the cash deposits represented unexplained income, and brought to tax the entire amount of Rs.25,54,242/- as unexplained money under section 69A, while initiating penalty proceedings under sections 271(1)(b) and 271(1)(c) separately.
3. Aggrieved by the said assessment, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), which was originally filed before the jurisdictional CIT(A)-5, Ahmedabad and later migrated to NFAC, Delhi. In appellate proceedings, the assessee filed an application under Rule 46A of the Income Tax Rules, 1962, seeking admission of additional evidence including customer-wise details of tour advances, confirmations, profit and loss account for A.Y. 2017–18, and ledger extracts. The Ld. CIT(A), upon being satisfied with the reasons for non-submission of such documents at the time of assessment, admitted the additional evidence under Rule 46A, and called for a remand report from the Assessing Officer.
3.1 In the remand proceedings, the AO issued notices under section 133(6) to 25 customers, from whom cash advances exceeding Rs.20,000/- were allegedly received. Out of these, 13 customers submitted written confirmations, affirming the advance cash payments made for tour bookings. However, 10 persons did not respond, and 2 notices returned unserved. The AO, in the remand report, contended that the assessee had not provided full reconciliation to establish that the impugned cash deposits were subsequently offered to tax in the succeeding year, and opposed full relief.
3.2 The assessee, in response, submitted a detailed rejoinder along with the Profit and Loss Account for the year ending 31.03.2018 (A.Y. 2017–18), showing tour receipts of Rs.27,19,537/- and contended that the entire amount of cash advances had been duly offered to tax on mercantile basis in the year of rendering service. It was submitted that the assessee maintains books of account on mercantile system, and the advances received in cash during FY 2015–16 (A.Y. 2016–17) were duly credited to sales in FY 2016–17 (A.Y. 2017–18), thereby negating any inference of concealment or suppression.
3.4 The Ld. CIT(A), after considering the submissions of the assessee, remand report and rejoinder, accepted that the assessee was engaged in the business of tour operation, and had declared receipts of Rs.5,41,474/- for A.Y. 2016–17. However, the CIT(A) noted a contradiction in the assessee’s stand who on the one hand claiming total turnover of Rs.5,41,474/-, and on the other, seeking to explain cash deposits of Rs.25,54,242/- as advance receipts for future tours. It was held that the assessee had not brought sufficient evidence on record to establish the precise reconciliation of how and when the advances were adjusted, and whether these were offered to tax in a time-linked manner. Accordingly, taking a liberal view, the CIT(A) accepted cash deposits to the extent of Rs.5,41,474/- as forming part of declared turnover and sustained the balance addition of Rs.20,12,768/-.
The assessee is in further appeal before us and has raised the following grounds:
1. Ld. Commissioner of Income Tax (Appeals) accepted an application under rule 46A for assessment year 2016-17, forwarded to Ld. Assessing Officer for remand report. The Ld. Assessing Officer submitted remand report, after of detailed inquiry and forwarded to the Appellant firm and Appellant firm submitted rejoinder reply, in these circumstances he has grievously erred in confirming Rs.20,12,768 advance receipts for tour deposited in bank ignoring all evidences submitted in an application, remand report and rejoinder reply submitted by the Appellant.
2. Ld. Commissioner of Income Tax (Appeals) has grievously erred in mentioning that no evidences were produced that advance tour receipts in cash was taxed in assessment year 2017-18 ignoring profit and loss account for year ending 31.03.2018(assessment year 2017-18) submitted in rejoinder reply.
The Ld. Commissioner of Income Tax (Appeals) is not justified in substantially confirming order passed under section 144 of Income Tax Act.
4. The Appellant prays to add, alter or delete any of ground at time of hearing. 4.1 The Ld. Authorised Representative (AR) appearing on behalf of the assessee contended that the entire sum of Rs.25,54,242/- deposited in cash in the assessee’s bank accounts during the relevant financial year was fully explained and traceable to verifiable sources. The AR submitted that the assessee, a newly constituted partnership firm, commenced its business operations during the year under appeal, and had deposited the following amounts in its bank accounts:
- Rs.9,00,000/- being capital contributions from three partners on 16.11.2015 and 01.01.2016 - Rs.50,000/- being cash withdrawn from bank account on 19.12.2015 - Rs.17,77,670/- received in cash from customers towards advance bookings for tour packages scheduled for the next financial year. 4.2 The Ld. AR pointed out that detailed explanation supported by documentary evidence was placed before the Ld. CIT(A) through an application dated 09.04.2019 seeking admission of additional evidence under Rule 46A. These included:
- Cash receipts and collection register (PB Pages 35–38) - Copies of receipts issued to customers (PB Pages 59–68) - Customer-wise list of advances and taxable receipts in F.Y. 2016–17 (PB Pages 39–40) - Profit & Loss Account for F.Y. 2016–17 showing service income of Rs.25,47,401/- (PB Page 53) - Partners’ capital accounts, ITRs, and confirmations (PB Pages 78–90) - Bank book evidencing deposit trail (PB Pages 44–52).
4.3 It was further contended that in the remand proceedings, the Ld. Assessing Officer had independently examined 25 customers (out of 75) by issuing notices under section 133(6) of the Act, and in response, 13 customers furnished confirmations of having made cash payments to the assessee firm for advance booking of tours. None of the parties denied the transactions, and the confirmations included necessary particulars such as amount paid, purpose of payment, and PAN details. Two notices returned unserved and ten parties did not respond, but no adverse inference can be drawn in absence of any contrary material.
4.4 The Ld. AR further submitted that the advances so received from customers were duly reflected as liabilities in the books of the assessee at the close of the financial year 2015–16 and were subsequently recognised as revenue in the Profit and Loss Account for F.Y. 2016–17 when the tours were actually conducted. The corresponding income was thus offered to tax in A.Y. 2017–18 under the mercantile system of accounting, in accordance with established accounting principles.
4.5 It was specifically pointed out that the Profit and Loss Account (PB Page 53) for F.Y. 2016–17 shows gross income from operations at Rs.25,47,401/-, which includes the advance receipts booked in earlier year. Further, the Audit Report and audited financials (PB Pages 113 and 117) categorically disclose “advance from customers” under current liabilities as on 31.03.2016, which stands adjusted against income in the subsequent year. Hence, the same amount has already been taxed in A.Y. 2017–18.
4.6 The AR argued that the action of the CIT(A) in ignoring such cogent evidences and upholding the addition of Rs.20,12,768/- leads to manifest double taxation of the same receipt, once in the year of receipt and again in the year of accrual. Such double taxation is impermissible in law and violates settled principles of real income and matching concept under mercantile accounting. The AR also submitted that the accounting treatment consistently followed by the assessee has been accepted by the Department in subsequent years, and that the classification of customer advances under "current liabilities" in the audited balance sheet was never disputed. Thus, the genuineness of the advances, the consistency of accounting, and the offer of tax in subsequent year all point to the bona fide nature of transactions.
On the other hand, the Ld. Departmental Representative appearing for the Revenue strongly supported the order of the Assessing Officer and the findings of the Learned CIT(A).
We have carefully considered the rival submissions, perused the material placed on record including the Paper Book filed by the assessee, and examined the orders of the authorities below. The limited issue for our consideration is whether the cash deposits of Rs.25,54,242/- made in the bank accounts of the assessee during the previous year relevant to A.Y.2016–17 are properly explained by the assessee as being advance receipts from customers for tours conducted in the subsequent year, and further, whether the corresponding receipts were duly offered to tax in the relevant year of accrual.
6.1 The Assessing Officer had made a total addition of Rs.25,54,242/- under section 69A of the Act on account of unexplained cash deposits, as the assessment was completed ex-parte under section 144 of the Act. Before the CIT(A), the assessee filed an application under Rule 46A along with detailed evidences including bank book, receipt registers, confirmations from customers, and financial statements of subsequent year, which were forwarded to the Assessing Officer for remand report. The Assessing Officer, in the remand proceedings, issued notices under section 133(6) to 25 customers (out of 75) and obtained confirmations from 13 parties. The CIT(A), after considering the additional evidences and remand report, granted partial relief by reducing Rs.5,41,474/-, being the turnover declared by the assessee in its return of income under section 44AD for A.Y. 2016–17 and confirmed the balance addition of Rs.20,12,768/- for want of sufficient evidence of adjustment in the subsequent year.
6.2 On careful scrutiny of the order of the CIT(A) and the remand report, we observe that the crucial aspect regarding verification of the assessee’s contention that the advances received during F.Y. 2015–16 were accounted as revenue in F.Y. 2016–17 has not been specifically verified or addressed by the Assessing Officer in the remand report. The remand report primarily deals with the confirmations of customers but remains silent on reconciliation between advance receipts and subsequent revenue recognition.
6.3 During the course of hearing, the Ld. AR drew our attention to Schedule G of the audited financial statements for F.Y. 2016–17 (PB Page 113), which discloses “Sales” (Schedule G)” amounting to Rs.5,39,83,007/- and asserted that this figure includes the advances received in the preceding year, as specifically disclosed in the said schedule. It is also pointed out that the said audited financials, along with the tax audit report for A.Y. 2017–18, are on record, which demonstrate that the assessee had switched to mercantile system of accounting ( PB Page 123) and offered the revenue only in the year when the tours were actually conducted.
6.4 At the same time, it is not in dispute that in A.Y. 2016–17 the assessee had opted for presumptive taxation under section 44AD of the Act and declared gross receipts of Rs.5,41,474/-, offering 8% thereof, i.e., Rs.43,318/- as income. To that extent, the CIT(A) has rightly granted relief by reducing this amount from the total deposits.
6.5 However, in our considered opinion, the CIT(A) has not fully appreciated the implications of section 44AD and the change in method of accounting in the subsequent year. Under section 44AD, the assessee is taxed on presumptive basis on its gross receipts, without maintenance of regular books of account, and the income computed under this section is deemed to be the final income. However, in the next year, the assessee has switched over to mercantile system and declared only 1.39% net profit on gross receipts of Rs.5,39,83,007/- (as certified in the audit report at PB Page 135). This results in a differential of 6.61%, which prima facie indicates potential understatement of income vis-à-vis the presumptive rate of 8% applicable under section 44AD. This differential has not been examined by the Assessing Officer or by the CIT(A) from the standpoint of revenue leakage or adjustment of advance receipts.
6.6 Further, we note that while the CIT(A) recorded that "the assessee has not brought anything on record to show as to how and when these advances were adjusted in the subsequent years", no specific verification appears to have been carried out either by the CIT(A) or the Assessing Officer to examine the claim that the said advances were duly accounted as revenue in the following financial year and offered to tax. The absence of such verification is material and weakens the conclusiveness of the addition sustained. Be that as it may, having regard to the nature of the business, the pattern of cash deposits, the fact that a substantial portion of these deposits stands confirmed as tour advances by third parties in remand proceedings, and considering the overall explanation furnished, we are of the view that a reasonable estimate of income is required to be drawn in line with the scheme of section 44AD. Under section 44AD, the presumptive income is computed at 8% of the gross receipts. The assessee, having opted for presumptive taxation in A.Y. 2016–17, cannot now claim that the same receipts be assessed differently without producing complete reconciliation. 6.7 At the same time, we also find merit in the submission of the assessee that such advances were carried forward and offered to tax in A.Y. 2017–18 under mercantile system of accounting, and that net profit of 1.39% on total receipts was already admitted in that year. In order to avoid double taxation of the same income, we are inclined to grant relief to that extent. 6.8 Accordingly, we direct that out of the total cash deposits of Rs.20,12,768/- (sustained by the CIT(A)), an amount equal to 8% thereof, i.e. Rs.1,60,997/-, shall be treated as estimated income in accordance with the spirit of section 44AD. However, since the assessee has already offered 1.39% of these receipts, i.e. Rs. 27,570/-, as part of its revenue for A.Y. 2017–18, the same shall be reduced from the above estimate to avoid double taxation. Thus, the balance amount of Rs.1,33,427/- (i.e. Rs.1,60,997/- minus Rs.27,570/-) shall be sustained as the addition to be retained. 6.9 We accordingly modify the order of the CIT(A) and confirm the addition only to the extent of Rs.1,33,427/-.