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Income Tax Appellate Tribunal, LUCKNOW BENCH B, LUCKNOW
Before: SHRI SUBHASH MALGURIA & SHRI NIKHIL CHOUDHARY
These cross appeals have been filed by the assessee and by the Revenue, pertaining to assessment year 2017-18, against the order of learned CIT(A) dated 23/09/2020, partly allowing the appeal of the assessee against the order of the Assessing Officer passed u/s 143(3) of the Act on 28/12/2019. The grounds of appeal are as under:
& 430/Lkw/2020 Assessment Year:2017-18 2
I.T.A. No.390/Lkw/2020 (Assessee’s Appeal)
Because the Ld. Commissioner of Income Tax (Appeals)-2 [herein after called as Ld. CIT(A)] was erred on facts and law while sustaining the addition of Rs.17,22,831/- being transaction value in aggregate with sundry debtors (09 parties), who have not confirmed transactions with Appellant during the assessment proceedings.
2. Because Ld. CIT(A) was erred on facts and law while sustaining the addition of Rs.17,22,831/- without appreciating the facts, sales to these debtors were already accounted for as income and part of trading transaction and assessed to tax. Therefore, such alleged additions having roots of business trading transactions has resulted double addition in the hands of assessee.
3. Because Ld. CIT(A) was erred on facts and law while sustaining the addition of Rs.17,22,831/- when initial onus was shifted by appellant to Revenue by way of providing requisite information and addition was made solely on enquiry on the back of assessee.
Because Ld. CIT(A) was erred on facts and law and against the law of natural justice while sustaining the addition of Rs.17,22,831/- relating to nine parties, out of which notice was served to six parties and notice to 03 sundry debtors unserved, however appellant was not provided any opportunity have it say.
5. Because Ld. CIT(A) was erred on facts and law while sustaining the / addition whereas assessment order is itself bad in law, being without jurisdiction since alleged notice u/s 143(2) is time barred and also bad in law being issued by Officer without any territorial jurisdiction.”
“1. The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.80,01,949/- made by the Assessing Officer on & 430/Lkw/2020 Assessment Year:2017-18 3 account of cash deposits during demonetization period on account of failure on the part of the assessee to prove genuineness of the cash credits transactions in his books of account to his satisfaction.
2. The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.80,01,949/- made by the Assessing Officer u/s 68 of the Act on account of unexplained cash deposits during demonetization period due to sales credited to its books of account to the extent unsupported by past trend.”
As both these appeals arise out of the same assessment order and appeal order, they are being taken up together for the sake of convenience.
The facts of the case, in brief, are that in the assessment year 2017- 18, the assessee filed a return of income of Rs.1,42,84,390/-. The Assessing Officer noted that the assessee had made a cash deposit of Rs.1,35,00,000/- on 12/11/2016 in his bank account maintained with Bank of Baroda, Aliganj Branch. He asked the assessee to furnish the nature and source of this cash deposit. In response, it was submitted by the assessee that the entire deposit has been made out of cash in hand of Rs.1,41,05,328/-. This cash in hand was sought to be explained from the month-wise cash sales and cash deposits from 01/04/2015 to 08/11/2016. The Assessing Officer observed that total cash receipts and cash deposits made in the bank during the year 2016-17 had increased vis-à-vis immediate previous year and there was drastic increase in cash receipts immediately before the demonetization. She noted that the assessee had claimed a high jump in his cash receipts from sundry debtors particularly in between 01/10/2016 to 01/11/2016. The Assessing Officer pointed out that the assessee has received Rs.1,33,75,882/- from sundry debtors during this period. She therefore, asked the assessee to furnish the original books of account for verification but noticed that no written submissions, detail/documents were furnished by the assessee in response to the & 430/Lkw/2020 Assessment Year:2017-18 4 aforesaid notice. Accordingly, she issued a notice u/s 142(1) of the Act asking the assessee to explain the huge increase in percentage of cash received from debtors for sale, in financial year 2016-17 as compared to financial year 2015-16 and why it should not be presumed that the assessee had inflated his cash receipts so as to account for the cash deposits in SBNs into his bank account. It is stated in the assessment order that subsequently, the assessee provided a list containing names and addresses of 867 debtors, from whom he had realized the debt in cash during financial year 2016-17. The Assessing Officer issued summons u/s 131 of the Act to 14 of these debtors, to check the creditworthiness of the party and genuineness of the transactions. She noted that out of the above, only five parties had confirmed the transactions, three summons had returned unserved and no response had been received in response to six summons that had been served. From the same, the Assessing Officer concluded that the cash receipts from debtors, as claimed by the assessee, were fictitious, inflated and not reliable. She observed that wrong information about the debtors and other cash receipts had been provided by the assessee, the assessee had not produced his books of account for verification, there had been abnormal increase in realization of cash from debtors during the period 01/10/2016 onwards as compared to previous months and previous financial year and that most of these cash had been realized from individual debtors and not the Government organizations or big corporate parties who were also mentioned as debtors in the balance sheet. The Assessing Officer pointed out that the cash in hand of the assessee as on 01/04/2016 was only Rs.1,53,500/- and on 01/10/2016 was Rs.4,75,978/- which had risen upto Rs.1,42,84,628/- on 08/11/2016. She further pointed out that the total amount of cash deposited into the bank in July, August and September, 2016 amounted to Rs.50,00,000/-, but no deposit had been made in October despite high cash receipts made from cash sale debtors. The & 430/Lkw/2020 Assessment Year:2017-18 5 assessee had therefore, not justified the purpose of such high cash in hand when it did not need such high cash balance. The Assessing Officer also observed that the assessee had not made any cash withdrawals from his bank account after demonetization. She also observed that since all the debtors were newly created debtors of this year only and were of small amounts, there was doubt with regard to identity, genuineness and creditworthiness and the onus was on the assessee to provide the details of these customers to whom cash sales had been effected. Thereafter, relying on various case laws, the Assessing Officer held that he was not satisfied with the explanation furnished by the assessee. She, therefore, added back a sum of Rs.97,24,780/- as unexplained cash credit in the hands of the assessee and brought the same to tax u/s 115BBE of the Act. She also initiated penalty proceedings u/s 271AAC of the Act.
4. Aggrieved with the said order, the assessee went in appeal before the learned CIT(A). The learned CIT(A) observed that a perusal of the assessment order showed that the assessee had submitted a list of 867 debtors along with names, addresses and other details to the Assessing Officer. Therefore, it was incumbent upon the Assessing Officer to make independent inquiries regarding the veracity and truthfulness of the same. The learned CIT(A) held that when the assessee had submitted comprehensive details regarding the persons who were his debtors and had paid the money, which was deposited by him, the Assessing Officer was bound to verify such information before drawing any adverse view on the same. If the Assessing Officer was not satisfied with the information or the evidences provided by the assessee, she should have recorded her dissatisfaction in the order. She further pointed out that the addition on unconfirmed creditors or debtors cannot be made if books of account are audited and sales and purchase are not doubted. Reliance was placed on & 430/Lkw/2020 Assessment Year:2017-18 6 the judgment of Amritsar Bench of the Tribunal in the case of Asian Cements Pathankot vs. Addl. CIT, in which it was held that addition cannot be made on unconfirmed sundry debtors if the books of account are audited and the trading results are not disturbed by the Assessing Officer because in any case the assessee will be the loser in case of the denial of the debtor. The learned CIT(A) held that the doubts raised by the Assessing Officer for making credit sales to the customers was fallacious argument as it is purely a business decision of the assessee. She held that the addition made on the basis of average of cash realization was not a cogent basis, as the average derived by the Assessing Officer pertained to the normal business environment and time. However deposits were made in demonetization times and these were no ordinary or normal time. The learned CIT(A) held that there can be various reasons for the mismatch in the alleged average. Further she noted that the assessee had claimed that these deposits were made out of the realization from the debtors. These debtors were the assessee’s regular customers who had running ledger account and were supported by the relevant details in most cases. The learned CIT(A) observed that, while doubting the veracity of the debtors, the Assessing Officer had not doubted the sales and purchases disclosed by the assessee. The Assessing Officer had not recorded any adverse inference with regard to credit sales made by the assessee or that the assessee did not have the stock to make the sales. Thus to disbelieve the realization of debtors without questioning the sale and the purchases as well as the stock position, was incorrect. She noted that the assessee had filed his VAT return and also observed that the Assessing Officer had not rejected the book results of the assessee under section 145(3) of the Act. She held that a perusal of the ledger account and details submitted by the assessee showed that all these ledger accounts of debtors were running accounts in which regular sales has been made and cash has been received.
& 430/Lkw/2020 Assessment Year:2017-18 7 She held that the Assessing Officer had analyzed the approach of the assessee on the basis of circumstantial evidences and preponderance of probabilities backed by certain case laws. However, those case laws have been passed in different circumstances. In the instant case, the Assessing Officer had made verification with regard to certain debtors and nine debtors had either not responded or the summons issued to them had returned unserved. Therefore, she ordered that addition made in the case of nine debtors should be upheld and rest be deleted as there was no basis for the addition.
Both the assessee and the Revenue are aggrieved with this order of learned CIT(A) and have accordingly come before us.
Shri Mahendra Kumar, FCA (hereinafter known as “learned A.R.”), representing the assessee, pointed out that the assessee had deposited a sum of Rs.1,35,00,000/- in specified bank notes on one day i.e. 12/11/2016 and this represented the proceeds of debts realized from 867 sundry debtors, the details of which had been submitted before the Assessing Officer. The Assessing Officer had taken up 14 cases on a sample basis (amounting to a debt of Rs.22,20,000/-) and upon failure to serve summons on three of these debtors and no response from six of these debtors, had proceeded to add back the entire amount of Rs.1,35,00,000/- deposited by the assessee by extrapolating his results on to the entire sundry debtors. It was submitted that the same was patently unjustified and the failure on the part of the nine persons to respond to summons could not be a justification to add back the entire amounts deposited in the bank account on account of the proceeds received from 867 debtors. The learned A.R. further submitted that even this fact of enquiry had not been informed to the assessee in the show cause of 17/12/2019 and the Assessing Officer did not inform the assessee as to why he was taking adverse inference. It was & 430/Lkw/2020 Assessment Year:2017-18 8 submitted that the Assessing Officer had not rejected the books of account. The learned A.R. also invited our attention to Instruction No. 20 of 2015 of the CBDT and drew our attention to para 4 of the same, wherein it was stated that where the Assessing Officer proposes to make additions or disallowance, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principles of natural justice. It was submitted that the Assessing Officer had violated this instruction by not issuing a transparent show cause notice. It was also submitted that after receipt of this show cause notice, the assessee offered to file confirmation and requested time up till 27th December, 2019 to file them. While the assessee was in the process of managing the confirmation, the order against him had been passed on 28/12/2019. Learned A.R. thereafter, drew our attention to page 66 of his paper book which contained the details of month-wise cash sales and cash deposits from 01/04/2016 to 31/03/2017. It was pointed out that perusal of the same would show that prior to October, 2016, the assessee had deposited Rs.50 lacs in cash into his bank account on account of cash received from debtors. Thus, the claim of the Assessing Officer that he had created a bogus list of debtors only to make deposits of SBNs, was not true. Learned A.R. pointed out that he had received cash of Rs.1,23,53,793/- from debtors and made cash sales of Rs.4,40,520/- during the month of October, 2016 but not deposited in cash in the bank during this period or uptill 08/11/2016, where he had further received Rs.10,22,089/- from debtors. Therefore, it was submitted that he had necessary cash in hand to make the deposit of Rs.1,35,00,000/- into the said account. Learned A.R. also invited our attention to page 97 of his paper book which showed the stock position of the assessee as on 01/04/2016 and the purchase and sales made. He sought to demonstrate that he had the necessary stock to affect the purchases which he claimed to have made. Furthermore, the learned A.R.
& 430/Lkw/2020 Assessment Year:2017-18 9 pointed out that the assessee had been submitting the VAT returns showing these sales on a regular basis from time to time. He invited our attention to page 72 of his paper book which contained his reply submitted to the DCIT and showed that these VAT returns, filed during financial year 2015-16 and 2016-17, had been submitted before the Assessing Officer also. Learned A.R. thereafter, invited our attention to pages 73 to 96 of the paper book which contained the VAT return to show that all the sales were duly reflected in the VAT return. Learned A.R. submitted that the sales made to him had never been doubted and books had not been rejected. In the circumstances learned A.R. submitted that the learned CIT(A) was justified in deleting the additions made by the Assessing Officer. However, the learned A.R. pointed out that having relied on the judgment of ITAT, Amritsar Bench in the case of Asian Cement, Pathankot vs. Addl. CIT, the learned CIT(A) was not justified in sustaining the addition relating to nine debtors. The learned A.R. submitted that in the case of Asian Cement (supra), the Tribunal had held that in that case, the books of account were audited and sales and purchases were not doubted. Even if the sundry debtors had not confirmed the balance in their account, then also the assessee would only be loser. Therefore, in their opinion, the addition could not be sustained on account of sundry debtors.
Responding to the arguments of learned A.R., learned Departmental Representative Shri Amit Kumar, (hereinafter known as “learned D.R.”) pointed out that the assessee had only provided the details of 867 debtors at the fag end of the assessment period and Assessing Officer had taken a sample for verification. The Assessing Officer had clearly pointed out that the debtors were newly created debtors during the year. He invited our attention to page 20 of the assessment order where the Assessing Officer had pointed out that there was no opening balance in the case of any of the & 430/Lkw/2020 Assessment Year:2017-18 10 debtors at the beginning of the financial year and he had also given a screen shot of the same to demonstrate. The learned D.R. thereafter invited our attention to page 13 of the assessment order in which the Assessing Officer had pointed out that despite having huge amount of debts due from Government and large corporate bodies, the assessee had only shown cash from only small individual debtors and not from these large organizations from where verification could be done. He also invited our attention to page 17 of the assessment order wherein the Assessing Officer had demonstrated how the cash in hand of the assessee had risen in October, 2016. The learned D.R. pointed out that the learned CIT(A) had been unjustified in deleting the addition, because the Assessing Officer had only done verification in respect of 14 of the debtors, stating that the Assessing Officer had constraint of time. He therefore, prayed that if the Tribunal was of the opinion that further verification was required to be done in respect of other debtors before any disallowance could be made, then in view of the circumstances narrated by him, the matter could be restored to the file of the Assessing Officer for further verification, rather than to delete the addition.
Responding to the arguments advanced by learned D.R., learned A.R. submitted again that the assessee had provided all the receipts and the sales had been verified with relevant cash memos, stock statement and VAT statement. On this enquiry had also been conducted and no adverse material had been found. Learned A.R. further pointed out that the entire cash had been deposited on 12/11/2016, in a single installment so it showed the availability of cash. It was submitted that there was nothing abnormal about the realization of debts by the assessee because in the previous year also, around Rs.2.3 crores of debts had been realized. He concluded his arguments and submitted that when the books of account had not been & 430/Lkw/2020 Assessment Year:2017-18 11 rejected, then no addition could be made under section 68 of the Act. He refuted the arguments made by the Assessing Officer saying that credit was given to various customers to effect purchases and there was no reason to draw any adverse inference from the same. Learned A.R. placed reliance on the judgment of Hon'ble Allahabad High Court in the case of CIT vs Pashupati Nath Agro Food Products Pvt. Ltd., of 2010 and CIT vs. Pancham Dass Jain [2006] 205 CTR (All) 444.
We have considered the rival arguments and the facts of the case. It is seen that in the assessment year 2016-17, the assessee had a gross profit of Rs.5,48,88,256/- on total turnover of Rs.30,97,02,605/- while in the assessment year 2017-18, the assessee had a gross profit of Rs.6,16,45,728/- on turnover/sales of Rs.27,37,49,748/-. Thus, the gross profit rate for the present assessment year was more than the gross profit rate of the previous assessment year. We also observe from the charts reproduced in the assessment order, that the practice of making sales on credit and subsequent realization from debtors, is something that has been followed by the assessee over the entire period of the last two years. In financial year 2015-16, the assessee realized a sum of Rs.2,78,23,547/- by way of cash from debtors, whereas in the financial year 2016-17, the assessee realized a sum of Rs.3,73,80,499/- from debtors in cash. We also find that in the assessment year 2016-17, the assessee made cash deposits of Rs.88,95,500/- whereas in the assessment year 2017-18, the assessee made cash deposits of Rs.1,85,00,000/-. Thus, it appears from perusal of these charts, which form part of the assessment order, that the practice of cash sales and credit sales followed by realization of debts in cash, from sundry debtors is a regular occurance in the assessee’s business. We find that even prior to 01/10/2016, the assessee had realized money from sundry debtors and deposited cash in the bank amounting to Rs.50,00,000/- & 430/Lkw/2020 Assessment Year:2017-18 12 over the months July 2016 to September 2016. This was deposited into the bank account well before the announcement of demonetization. Therefore, considering the business trends of the assessee over the financial year 2015-16 and 2016-17, it cannot be accepted that the deposits of Rs.1,35,00,000/- on 12/11/2016 were only made with a view to depositing unaccounted money by showing it as realization from sundry debtors. We observe that the assessee has submitted its stock details, sales register, party-wise sales summary and VAT returns for the assessment year 2015-16 and 2016-17 before the Assessing Officer along with month-wise sales and purchase summary and cash deposit summary and the Assessing Officer has not found any discrepancy with regard to these. It is apparent from the stock statement furnished before us that the assessee had sufficient stocks in his possession to make the sales. It is also seen by way of comparison of the month-wise cash sales with the VAT, that the assessee had disclosed the amount of sales made by it before the VAT authorities and that the said sales were sufficient to explain the amount of cash in hand. It is also seen that the assessee furnished a list of 867 debtors to the Assessing Officer, from whom it had realized the amounts which had subsequently been deposited in the bank account on 12/11/2016. We also find that out of 14 customers, to whom the Assessing Officer sent summons, five have responded confirming the fact of purchase on credit and subsequently clearing of debt. We cannot subscribe to the view that the failure of some sundry debtors to reply to the summon or the failure to serve the summon upon a few sundry debtors, gives the Assessing Officer a license to disbelieve the entire amount realized from sundry debtors, without affording the assessee an opportunity to demonstrate that the said debts were genuine. It appears that the Assessing Officer did not offer this opportunity. Hence, the failure to serve the summons upon some sundry debtors and failure to obtain reply from other sundry debtors, cannot in itself be the & 430/Lkw/2020 Assessment Year:2017-18 13 basis to disallow the debt due from them, let alone extrapolating these results to the entire population of sundry debtors to disallow all the debts stated to be received from them, without making any enquiries into them and particularly when five of the debtors had confirmed the credit purchases and repayment of debt. The Assessing Officer has submitted that the assessee did not produced the books of account before him, but we observe that the assessee had produced sufficient documentation to enable the Assessing Officer to conduct further inquiry with regard to the veracity of the sundry debtors and that the Assessing Officer did not conduct these enquiries. Therefore, the Assessing Officer could not have disallowed the sundry debtors on the basis of tax sample study without calling into question the purchases, sales or stock of the assessee – details of which were produced before him. The Assessing Officer does not appear to have made any inquiries in this regard. We also observe that the accounts of the assessee are audited and the audit report has been presented before the Assessing Officer. The Assessing Officer has not found any flaw with the audit report or rejected the accounts u/s 145(3) of the Act. Therefore, in the absence of any question to the purchases, sales or stock which explained the source of the cash in hand, we hold that the Assessing Officer was unjustified in classifying the deposits made by the assessee out of such sales and realization of debt from sales on credit, to be unexplained and adding them back under section 68 or section 69 of the Act. We are in complete agreement with the view of learned CIT(A) when she holds that addition on unconfirmed creditors or debtors cannot be made if the books of account are audited and sales and purchases are not doubted because the amounts due from sundry debtors have already been reflected under sales and to add them back without disturbing the book results, would amount to taxing the same amount again. We also agree that the addition made on the basis of average of cash realization was not a scientific basis to make & 430/Lkw/2020 Assessment Year:2017-18 14 addition, as the demonetization was a special event, requiring all businesses to deposit the cash in hand. As regards the case laws quoted by the assessee, we agree that they having been passed in different circumstances, would not apply to the facts of the assessee’s case. However, we are not in agreement with learned CIT(A) in her decision to uphold the addition in respect of nine debtors who had neither been served with the summons or had not responded to them. To our mind, their failure to respond could at best be a starting point for further investigation into their debts, but could not be the basis for making the disallowance without such investigation. Therefore, we delete the additions made by the Assessing Officer en toto and allow grounds 1 to 4 of the assessee’s appeal. Ground 5 has not been pressed and is therefore, dismissed as such. Accordingly, is held to be partly allowed. In view of the aforesaid finding and the facts of the case, both grounds raised by the Revenue in are also dismissed and appeal no.430/Lkw/2020 is accordingly held to be dismissed.
(Order pronounced in the open court on 04/09/2025)