MR. MAHADEVAPPA BASAPPA EDARAMANI,KOPPAL vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 1, BELLARY

The Assessee is an individual. He is a PWD Contractor executing various civil work. For AY 2015-16, the Assessee filed return of income declaring total income of Rs.16,55,650. The AO completed the Assessment u/s.144 of the Income Tax Act, 1961 (the Act) i.e., Best Judgment Assessment because the Assessee did not respond to the various notices issued by the AO calling for various details. In the assessment so completed, the AO noticed that the contract receipts of the Assessee as per Form 26AS i.e., the details of Tax deduction at source (TDS) the receipts of the Assessee from contracts was Rs.3,28,21,904 as against the contract receipts of Rs.2,78,98,724 declared by the Assessee in the return of income. The AO added 10% of the difference of Rs.49,23,180 viz., a sum of Rs.4,92,318 as profit on contract receipts not disclosed. The AO also added a sum of Rs.1,16,269/- which was interest on income tax refund received by the Assessee. The AO also disallowed the claim of the Assessee for deduction of a sum of Rs.27,616/- being contribution to Contractors Benevolent Fund (CBF) on the ground that the said sum is not allowable u/s.36(1) of the Act. The AO found that the Assessee had deposited cash totalling Rs.51,34,000/ in his bank account. Since the source of funds remained unexplained the AO added 50% of the cash deposited in the bank account viz., a sum of Rs.25,67,000/-. The AO according determined the total income of the Assessee as follows:-

Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(Appeals). The CIT(A) deleted the addition made on account of disallowance of contribution to CBF of Rs.1,16,269 and restricted the addition on account of interest u/s.244A of the Act to Rs.30,603. With regard to the addition of 10% profit being difference in contract receipts disclosed in Form 26AS and as per the books of accounts of the Assessee viz., a sum of Rs.4,92,318 being 10% of Rs.49,23,180/-, the plea of the Assessee before CIT(A) was that the addition should have been @ 5.39% which was the net profit declared by the Assessee in the return of income on the contract receipts as per the books of accounts. The CIT(A) called for a remand report from the AO. The AO in his remand report pointed out several defects/discrepancies in the books of accounts of the Assessee. The CIT(A) was of the view that the books of accounts of the Assessee have to be rejected and he accordingly rejected the books of accounts of the Assessee by invoking provisions of Sec.145(3) of the Act and estimated the income of the Assessee @ 8% of the contract receipts as per Form AS 26 viz., a sum of Rs.3,28,21,904/- which resulted in the income from business being estimated at 26,25,752. Income from business was accordingly determined by the AO at Rs.26,25,752 and the other additions to income under the head income from business was deleted by the CIT(A).

As far as the addition of Rs.25,45,279, which was added by the AO as unexplained cash deposited in bank account, the Assessee claimed before CIT(A) that the source of funds was out of cash received in the course of business which is duly reflected in the cash book of the Assessee. The CIT(A) called for a remand report from the AO on the claim of the Assessee that the source of funds for deposit of cash to the bank account was cash from the cash book of the Assessee. The AO after examination of the claim of the Assessee and books of accounts of the Assessee gave a remand report dated 4.1.2019 in which in paragraph 6 and the first sentence of paragraph-7 of the remand report, the AO accepted that the source for cash deposits made by the Assessee stands explained. The AO, however, submitted in the remand report that he has some doubts about the genuineness of cash balance as per books and also submitted that he is unable to vouch the veracity of books of accounts produced before him by the Assessee in the remand proceedings. The discrepancies pointed out by the AO in the remand report is as follows:-

In view of the above, the Sources for Cash Deposits made by the assessee stands explained. However, I would like to bring it on record that the Books of Accounts claimed to be maintained by the assessee and produced for verification found o defective, not reliable and suffers from following major defects: i) Considering the meagre Opening and Closing Cash Balance of Rs 41,468/- and Rs.8,222/- respectively, the assessee purported to have maintained disproportionately huge Cash Balance during the period from 04/04/2014 (Rs. 21,97,468) to 24/02/2015. ii) With huge cash balance in Books, the assessee keep on drawing the cash from Bank which creates doubt about correctness Cash Balance as per Books. Few of such instances are produced as under: Date Cash Balance Cash Withdrawn from Bank Rs.44,40,845/- Rs.1,00,000/- 25/08/2014 19/09/2014 R's.1,70,000/- Rs 42,38 875/-

The CIT(A) accepted the remand report and held that the source of funds to the extent of Rs.25,67,000/- being cash deposits in the bank account remained unexplained. The CIT(A) however gave benefit of the telescoping the addition sustained by him whereby 8% profit rate was applied on the turnover of Rs.3.28,21,904/-, which resulted in an addition of Rs.11,20,584/-. To the extent of Rs.11,20,584 which was the increase in business income of the Assessee consequent to rejection of books and estimation of profits of business of the Assessee, the CIT(A) gave benefit of set off against the addition of Rs.26,57,000/- being unexplained cash deposits in bank account. Thus the addition made by the AO of Rs.26,57,000/- was reduced to a sum of Rs.14,46,416 (Rs.26,25,752 – Rs.11,20,584) by the CIT(A). Aggrieved by the order of CIT(A) sustaining addition to the extent of Rs.14,46,416/- as unexplained cash deposits in the bank account, the Assessee is in appeal before the Tribunal.

The learned counsel for the Assessee submitted that the AO having accepted the correctness of the cash book in paragraph-6 of his remand report was not justified in expressing some doubts on the genuineness of the cash book maintained by the Assessee. He pointed out that low cash balance during the opening and closing days of the financial year and maintenance of huge balance in a particular period cannot be the basis to doubt the genuineness of the cash book. So also the fact that cash was withdrawn from bank despite cash balances being available in the cash book, cannot be the basis to doubt the genuineness of the cash book. It was also pointed that presence of sundry creditors and the fact that the Assessee could have discharged sundry creditors instead of having cash in hand cannot also be the basis to doubt the genuineness of the cash availability as per cash book. He therefore submitted that the addition of Rs.26,57,000/- deserves to be deleted as the source of funds for cash deposit in the bank account stands duly explained and therefore the addition sustained by the CIT(A) should be deleted. The learned DR relied on the order of the CIT(A).

In the result, the appeal by the Assessee is allowed.