HARISHKUMAR KHUSHALRAY BHATT,AHMEDABAD vs. THE ITO, WARD-3(3)(2) NOW WARD-3(3)(1), AHMEDABAD

The AO noted that the assessee had declared gross sales of Rs.5,58,93,655/- and shown a gross profit of Rs.70,96,459/-, resulting in a gross profit ratio of 12.70%. However, the net profit declared was only Rs.8,59,823/-, which worked out to a net profit ratio of approximately 1.54% on the turnover. The AO held this to be abnormally low considering the nature of business and absence of supporting records. In view of the rejection of books of account and non-submission of verifiable evidence, the AO proceeded to estimate the income. Applying a net profit rate of 25% on the total turnover of Rs.5,58,93,655/-, the AO computed an estimated profit of Rs.1,39,73,413/-. After setting off the net profit of Rs.11,57,940/- already declared by the assessee, the AO made an addition of Rs.1,28,15,473/- on account of underreported income.

The AO further noted that the assessee had claimed deduction of Rs.5,00,000/- under section 80G of the Act. The Assessing Officer recorded that the assessee failed to furnish any donation receipt or documentary evidence in support of the claim, and no certificate of approval of the donee organization under section 80G(5)(vi) was produced. In absence of any proof, the AO disallowed the entire amount of Rs.5,00,000/- claimed under section 80G and added the same to the total income.

In addition, the AO examined the balance sheet and observed that the closing balance of unsecured loans for the year under consideration stood at Rs.55,00,393/- as compared to Rs.36,89,850/- in the preceding year, resulting in an increase of Rs.18,10,543/-. The assessee was required to explain the identity, creditworthiness, and genuineness of these loans. However, the AO recorded that the assessee failed to furnish confirmations, PAN details, bank statements, or any supporting documents for the loan creditors. In the absence of such evidence, the AO treated the entire increase of Rs.18,10,543/- as unexplained cash credit under section 68 of the Act and made an addition accordingly.

The assessee filed an appeal against the assessment order passed under section 144 of the Act by the Assessing Officer, wherein the total income was assessed at Rs.1,95,45,456/- as against the returned income of Rs.11,57,940/- making above mentioned additions. In appeal before the CIT(A), the assessee challenged the additions made under sections 69A and 68, the estimation of net profit, and the disallowance of donation under section 80G. The CIT(A) confirmed the addition of Rs.32,61,500/- under section 69A, holding that the explanation for cash deposits was unsupported and the cash book was not reliable. In respect of the addition of Rs.1,28,15,473/- on account of estimated profit, the CIT(A) accepted the assessee’s past profit history and restricted the addition to Rs.66,502/-. The disallowance of Rs.5,00,000/- under section 80G was deleted on the basis of donation receipt and approval of the donee institution. As regards the addition of Rs.18,10,543/- under section 68, the CIT(A) granted partial relief and sustained the addition only to the extent of Rs.3,24,382/- in respect of three creditors whose creditworthiness remained unsubstantiated. Grounds challenging initiation of penalty proceedings were held to be premature. The appeal was thus partly allowed.

Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

During the course of hearing, the learned Authorised Representative (AR) of the assessee made ground-wise submissions.

In respect of Ground No.1, challenging the addition of Rs.32,61,500/- under section 69A of the Act, the AR submitted that the assessee had maintained two sets of cash books, namely, the main cash book and the petty cash book. The main cash book contained entries of cash sales, bank deposits and withdrawals, while the petty cash book recorded small day-to- day expenses. Both these books were duly produced before the Assessing Officer during assessment proceedings and also before the learned CIT(A), and copies were included in the paper book. Bank statements corresponding to the entries were also placed on record. The AR submitted that the cash deposits in question were fully recorded in the books of account and sourced from declared business activity, and hence no addition could be made under section 69A. The AR further contended that the basis on which the AO rejected the cash book was factually and arithmetically incorrect. The AO had alleged a discrepancy in the cash balance as on 01.04.2016 and 31.03.2017, stating that the cash balance was understated. In rebuttal, the AR submitted a reconciliation of the cash balance, showing that the closing balance of Rs.4,85,591/- as on 31.03.2017 (comprising cash book Rs.4,17,875/- and petty cash Rs.67,716/-) was fully consistent with the figures declared in the return of income. As regards the earlier year, the AR submitted that the opening cash balance as on 01.04.2016 was Rs.3,84,181.30, derived from the closing cash and petty cash as per ITR-4 for A.Y. 2016–17, and therefore the alleged discrepancy of Rs.1,36,516/- noted by the AO was factually incorrect. In fact, there was a reduction in cash balance of Rs.1,13,997/- from the preceding year, which could not give rise to any inference of undisclosed income.

The AR submitted that both section 68 and section 69A were invoked by the AO in the alternative, despite having rejected the books of account. It was argued that when books are rejected, no addition under section 68 can be made, as per settled judicial position. It was further submitted that even otherwise, there could not be an addition under section 69A for amounts duly entered in the books of account. The assessee had also submitted breakup of cash sales aggregating to Rs.18,30,920/- (Paper Book, Page 13-14) along with supporting sale bills (Pages 195–221), which clearly established the source of cash. The AO neither rejected these sales nor made any inquiry or verification, despite the assessee having personally appeared and offered to explain the accounts. It was contended that mere disbelief is not sufficient to invoke section 69A, especially in the absence of any material to prove that the entries were fictitious.

As regards Ground No.2, relating to the addition of Rs.66,502/- on account of estimated net profit, the learned Authorised Representative submitted that the assessee does not wish to press this ground. Accordingly, no arguments were advanced in respect of this ground during the course of hearing.

In respect of Ground No.3, pertaining to addition of Rs.3,24,382/- under section 68 in respect of three loan creditors, the AR submitted that the relevant parties were not responding to the assessee’s repeated requests for confirmation. In view of the limited nature of deficiency and in the interest of justice, it was prayed that this ground may be set aside to the file of the AO with a direction to issue summons under section 131 or notices under section 133(6) to the said parties and adjudicate the issue afresh after necessary verification.

The AR reiterated that the impugned additions suffered from multiple legal and factual infirmities and the AO had mechanically resorted to both section 68 and section 69A without proper analysis. It was submitted that the additions resulted in double taxation of the same amounts, and the rejection of the books was not justified in the absence of any cogent discrepancy. The AR accordingly prayed for deletion of the additions and granting of relief as prayed.

The learned Departmental Representative (DR) opposed the contentions of the assessee and supported the findings of the Assessing Officer as well as the order passed by the CIT(A). It was submitted that the impugned assessment was framed under section 144 of the Act due to persistent non-compliance by the assessee despite statutory notices being issued, and that the assessee had merely furnished the cash book at the stage of show cause reply, without supporting books of account or evidence to substantiate the sources of cash deposits.

As regards Ground No. 1, the DR submitted that the Assessing Officer had found cash deposits of Rs.32,61,500/- in two bank accounts of the assessee with Canara Bank (Rs.30,41,500/- in A/c No. 536 and Rs.2,20,000/- in A/c No. 328). The addition was made under section 69A of the Act after noting discrepancy in the opening cash balance, where the cash balance as per the return of income for A.Y. 2016–17 (i.e., as on 31.03.2016) was Rs.4,98,178/-, whereas the cash book showed Rs.3,61,661/- as the opening balance. Thus, there was an unexplained difference of Rs.1,36,517/-. It was further noted that the Assessing Officer had inadvertently referred to the date as 31.03.2017 instead of 31.03.2016. The DR also stated that the assessee had tried to justify the cash deposits by reflecting cash sales in the cash book, which appeared to be fictitious. A detailed analysis of these sales revealed that they were restricted to limited periods of the financial year and were not evenly spread.

The DR drew attention to the breakup of cash sales: Trading sales: Rs.4,83,025/- (02.04.2016 to 28.08.2016) i. Scrap sales: Rs.67,175/- (18.04.2016 to 20.07.2016) ii. Labour sales: Rs.3,29,400/- (07.05.2016 to 03.08.2016) iii. VAT sales: Rs.19,22,468/- (03.09.2016 to 07.11.2016) iv.

It was contended that such concentrated cash sales lacked commercial credibility. The DR emphasised that the trading and labour sales stopped from August 2016, just before the start of VAT sales in September 2016, indicating manipulation. The DR further stated that these sales were effected without VAT and without TDS and were not supported by verifiable buyer details and the major portion of VAT sales was shown after August 2016, despite the VAT return for August already being filed prior to the demonetisation event. The DR further submitted that perusal of the sales bills revealed that they were issued in common names like “Pravinbhai, Gandhinagar” or “Gunvanthbhai, Santej” with no address or PAN. This showed the sales were not genuine and were entered in the cash book to create a cover for cash deposits. Thus, the DR argued that the AO rightly rejected the cash book and treated the total cash deposits as unexplained money under section 69A. In the alternative, the DR submitted that since the assessee had routed the impugned cash through the books and shown it as sales, but failed to establish the genuineness thereof, the amount was also liable to be assessed under section 68 as unexplained cash credit. It was prayed that in light of these facts, the addition of Rs.32,61,500/- deserved to be upheld either under section 69A or under section 68, considering that the books were neither produced during assessment nor could be relied upon. It was submitted that the addition could not be deleted merely because the amount stood recorded in the books, since the books themselves were not found to be reliable, and the sale bills were self-generated. The DR also argued that there was no case for reducing sales or making any adjustment to profits under section 40A or otherwise, as the assessee had not offered the cash as income from other sources or sought to exclude the sales.

As regards Ground No. 3, the DR submitted that the assessee had shown unsecured loans aggregating to Rs.3,24,382/- from three persons, namely Shri Harsh Sharma (Rs.93,000/-), Shri Kishor P. Shankhedia (Rs.1,10,000/-), and Shri M.B. Pancholi (Rs.1,33,000/-). Though the assessee submitted confirmations during the appellate proceedings, it was found that two of the creditors, namely Shri Kishor Shankhedia and Shri M.B. Pancholi, were employees of the assessee, drawing salary of Rs.18,500/- only as per cash book (Page 110 of Paper Book). In the absence of any explanation of their financial capacity or supporting evidence such as bank statements or ITRs, the DR submitted that the assessee had failed to discharge the burden of proving the creditworthiness and genuineness of the transactions. The DR opposed the assessee’s request for remand on this issue, contending that the failure to establish the three-fold test under section 68 (i.e., identity, creditworthiness, and genuineness) was conclusive. It was therefore prayed that the addition of Rs.3,24,382/- under section 68 be confirmed.

We have considered the rival submissions, perused the materials available on record, including the assessment order passed under section 144 of the Act and the impugned appellate order, and examined the paper book filed by the assessee. The issue involved in Ground No. 1 pertains to the addition of Rs.32,61,500/- made by the Assessing Officer under section 69A of the Act on account of cash deposits in bank accounts, which was sustained by the CIT(A). Ground No. 3 relates to addition of Rs.3,24,382/- in respect of unsecured loans under section 68 of the Act.

It is noted from the assessment order that the assessment was completed ex parte under section 144, as the assessee failed to respond to the statutory notices issued under section 142(1). As recorded by the Assessing Officer, in response to the final show-cause notice, the assessee merely submitted a cash book without furnishing any supporting details, confirmations, or documentary evidence in respect of the queries raised regarding the source of cash deposits and the unsecured loans reflected in the balance sheet. In absence of any supporting evidence, the Assessing Officer proceeded to reject the book results and made the addition of Rs.32,61,500/- as unexplained money under section 69A, and alternatively under section 68, in order to safeguard the addition.

The CIT(A), while disposing of the appeal, confirmed the addition under section 69A, inter alia holding that the assessee failed to substantiate the source of cash deposits with any credible material or evidence. The CIT(A) also noted the discrepancy in the opening cash balance and found the cash book unreliable. As regards the unsecured loans of Rs.3,24,382/- , the CIT(A) observed that confirmation letters were filed during appellate proceedings, but two of the creditors were stated to be employees of the assessee, and no supporting documentary evidence such as PAN, bank statements, or income tax returns were submitted to demonstrate creditworthiness or genuineness of the transactions.

During the course of hearing before us, the learned Authorised Representative (AR) submitted that the cash deposits in bank accounts were duly recorded in the books of accounts and were sourced from regular cash sales. It was argued that the AO had erred in rejecting the cash book without pointing out any specific defects, and that the sales were duly supported by VAT invoices, which were produced before the CIT(A) along with the VAT returns and evidence of VAT payments. The DR drew our attention to the break-up of cash sales aggregating to Rs.19,22,468/- during the period September to November 2016, as per the chart furnished in the paper book. It was further submitted by the AR that the closing cash balance as on 31.03.2017 was Rs.4,85,591.30/- as per the audited balance sheet and cash books, and that the AO had incorrectly taken the figure as Rs.4,98,178/-. The AR submitted that the AO confused the figure of earlier year with that of the current year, leading to erroneous conclusions about discrepancies in opening cash balance. The scanned copies of the balance sheet and cash books corroborating the claim were placed in the paper book.

We find that these contentions require verification at the level of the Assessing Officer, as the assessment was framed under section 144 in absence of full compliance, and the AO did not have the benefit of examining the audited accounts, supporting invoices, VAT records, or confirmations which have now been produced. Further, the CIT(A) did not call for a remand report before confirming the additions, despite these documents having been submitted during appellate proceedings. The factual issue regarding correct cash balance as on 31.03.2016 (opening for the year under consideration) and as on 31.03.2017 (closing) also requires reconciliation with the audited financials and ITRs for A.Ys. 2016–17 and 2017–18. The assessee has placed on record the audited balance sheet showing closing cash-in-hand of Rs.4,85,591.30/- as on 31.03.2017, comprising cash book and petty cash balances of Rs.4,17,875.30/- and Rs.67,716/- respectively. Similarly, for 01.04.2016, the assessee has reconciled the opening cash-in-hand of Rs.3,84,181.30/- with the ITR and cash books, disputing the AO’s finding that the opening balance was Rs.4,98,178/-. The correctness of these figures can only be established by referring to the relevant assessment records and audited financials.

We also note that the assessee has placed reliance on a written submission dated 05.02.2021 (as reproduced before the CIT(A)), wherein it was categorically asserted that personal appearance was made before the Assessing Officer, and the following materials were duly furnished during the course of assessment proceedings:

In support of this, the assessee has also annexed scanned extracts evidencing physical attendance and production of records. It has been specifically argued that in view of these submissions, the resort to best judgment assessment under section 144 of the Act was unjustified.

Accordingly, in the interest of natural justice, and given the absence of any remand report from the AO at the stage of first appellate proceedings despite these serious factual assertions, we find it appropriate to restore the matter to the file of the Assessing Officer for fresh consideration. The Assessing Officer shall verify whether the materials claimed to have been submitted (cash book, audited financials, and sales bills) were indeed made available and if so, whether the cash deposits and unsecured loans are satisfactorily explained in the light of those records.

In light of the above, and considering the fact that the additions were made in absence of proper opportunity and the evidences placed on record have not been examined by the AO or the CIT(A), we are of the considered view that the issue relating to addition of Rs.32,61,500/- under section 69A and Rs.3,24,382/- under section 68 should be restored to the file of the Assessing Officer for de novo adjudication. The assessee shall be given adequate opportunity to explain the source of cash deposits with reference to audited books, supporting cash sales invoices, VAT records, and documentary evidence for unsecured loans. The AO shall verify the veracity of the entries, correctness of opening and closing balances, and admissibility of evidences in accordance with law, and thereafter frame a reasoned order.

We make it clear that we have not expressed any opinion on the merits of the additions and the AO shall decide the matter afresh in accordance with law after giving due opportunity to the assessee.

Accordingly, Ground Nos. 1 and 3 are allowed for statistical purposes. Ground No. 2 being not pressed is dismissed.

In the result the appeal of the assessee is partly allowed for statistical purposes.