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Facts
The assessee, engaged in trading steel and cement, filed a return declaring a loss. The case was selected for scrutiny due to abnormal cash deposits during the demonetization period. The Assessing Officer (AO) added the entire cash deposit of Rs. 2,50,51,450/- as unexplained cash credit under Section 68 of the Income Tax Act.
Held
The CIT(A) deleted the addition, holding that the cash deposits were explained by prior cash withdrawals and maintained in the assessee's books. The Tribunal partly allowed the revenue's appeal, holding that 25% of the interest expenditure was not for business purposes and was therefore disallowed.
Key Issues
Whether the CIT(A) erred in deleting the addition made by the AO on account of unexplained cash credits, and whether the interest expenditure was wholly and exclusively for business purposes.
Sections Cited
68, 115BBE, 37
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Before: SHRI PAWAN SINGH & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the Revenue emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) dated 17.01.2024 by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi, [in short ‘CIT(A)’] for the Assessment Year (AY) 2017-18.
Grounds of appeal
raised by the revenue are as under: “1. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in deleting addition of Rs.2,50,51,450/- made by the Assessing Officer on account of unexplained cash credits u/s 68 of the Income Tax Act.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition u/s 68 of the Act by not appreciating the fact that though the assessee had maintained books of accounts but explanation offered by the assessee for sources of cash deposits during the demonetization period was not found to be satisfactory during the assessment proceedings.
/AY.2017-18 Hindustan Steel & Cement 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has ignored the fact that assessee has taken facility of the cash credit and paid interest on the same of Rs.19,26,233/- for the year under consideration whereas, the assessee has claimed that the firm has cash-in-hand as on 31.10.2016 of Rs.1,72,36,494/- is not acceptable as the explanation of the assessee is against the principle of the business and no prudent businessman can have such a huge fund idle and taking interest bearing loan. Therefore, the findings of the AO in this case regarding the unexplained cash deposits is required to be sustained.
On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO by accepting the contention of the assessee that such huge amount was kept as cash-in-hand to meet unexpected business exigencies from April to October, 2016 (pre-demonetization period) whereas, assessee has not given any explanation for not keeping such huge amount for the post demonetization period (from Nov-16 to March 2017) to face such business contingencies.
The appellant craves leave to add, alter, amend and/or withdraw any grounds either before or during the course of hearing of the appeal.”
The facts of the case in brief are that assessee filed its return of income on 27.10.2018, declaring loss of Rs.3,52,076/-. The case was selected for complete scrutiny under CASS for the reason of “Abnormal increase cash deposits during the demonetization period as compared as pre-demonetization period”. Various notices were issued and served upon the assessee. The assessee has derived income from business of trading in steel and cement during the year under consideration. The assessee submitted cash book, bank statement, audit report and profit & loss account etc. The Assessing Officer (in short, ‘AO’) found that assessee had deposited huge cash of Rs.2,50,51,450/- during the year including Rs.1,68,00,000/- during demonetization period. The AO issued notice u/s 142(1) and asked for source of cash deposit. In response, the assessee stated that various cash deposits were made during the year out of such cash withdrawals from bank. The assessee contended that the said cash withdrawals were kept by /AY.2017-18 Hindustan Steel & Cement it for the purpose of unexpected business contingencies. The turnover of the assessee for the year was Rs.23.76 Crore, i.e., approximately Rs.2 Crore per month. Hence, it was natural that assessee would require certain cash in hand to meet any unexpected business requirements. The assessee also stated that the cash withdrawn from 01.04.2016 to 29.10.2016 was kept as cash in hand in the cash book and same was deposited in the bank account during demonetization. The AO considered these facts and observed that opening cash balance as on 01.04.2016 was Rs.12,15,114/- and the average cash in hand during the year upto demonetization period was Rs.1,27,68,028/- whereas average cash in hand post- demonetization was only Rs.2,91,964/-. The AO further noticed that total interest charged during FY.2016-17 in the bank A/c No.50200005801762 with HDFC bank was Rs.19,26,233/-. As per profit and loss account, the assessee has claimed bank interest of Rs.28,38,146/- and has also paid interest of Rs.20,15,985/- to partners of the firm. The AO, therefore, observed that assessee incurred huge interest expenses but at the same time kept substantial amount as cash in hand. The assessee has stage managed the cash book to give colour of genuineness to its cash deposits during the demonetization period. Hence, the AO made addition of the entire cash deposit of Rs.2,50,51,450/- in HDFC bank during the year including Rs.1,68,00,000/- during the demonetization period to the total income as unexplained cash credit u/s 68 of the Act and taxed the same @ 60% u/s 115BBE of the Act.
/AY.2017-18 Hindustan Steel & Cement 4. Aggrieved by the order of AO, the assessee took up the matter before the CIT(A). The appellant filed detailed written submission on 15.01.2024 and enclosed cash book, bank books, bank statements, day-to-day cash book in excel sheet, copy of VAT returns, acknowledgement of response on IT portal for cash deposit during demonetization and relied upon various decisions. The CIT(A) has reproduced submission of the appellant at pages 5 to 31 of the appellate order. He has given his findings at para 5 from page 32 to 41 of the appellate order. He has noted that the turnover of the appellant was Rs.23,76,06,343/- and the total cash deposit during the whole year including the demonetization period was Rs.2,50,51,450/-. The entire cash deposit of the year was added u/s 68 of the Act. The CIT(A) noted that assessee has given details of cash withdrawals and cash deposits during the year, which showed that cash of Rs.87,01,450/- was deposited from earlier withdrawals even prior to demonetization period. The appellant had contended that the source of cash deposits in the bank was not out of any cash sale but was out of cash in hand as per the audited accounts and cash book and the source of such cash in hand was withdrawal from the bank account. The ITO accepted the cash withdrawals but he has not accepted the cash deposited out of the said withdrawals. Cash withdrawal and re-deposit of the same was not an abnormal feature in case of appellant because similar pattern was there prior to the demonetization as well. The Sales Tax/VAT returns were not revised and the same stand accepted by the State Government. The book results have also been accepted by the AO without pointing out any defect. The /AY.2017-18 Hindustan Steel & Cement AO has wrongly applied provisions of section 68, though he has accepted the cash balance in the cash book of the appellant. It was also submitted that section 115BBE of the Act is not applicable for the year under consideration because the section was amended w.e.f. 15.12.2016 whereas cash deposit was made much earlier on 15.11.2016. The CIT(A) observed that appellant has categorically established from the books of account that cash was withdrawn on different occasions from the HDFC Bank and availability of such cash is evident in the cash book. The entire sale consideration as per the P&L account and as per VAT return were received through banking mode. He also observed that the gross profit for the year under consideration has increased from 2.71% to 3.56%, though the turnover decreased from Rs.28,68,08,885/- to Rs.23,76,06,346/-. The cash deposited was not out of cash sales but from the earlier cash withdrawals. The CIT(A) further held that AO has incorrectly applied provisions of section 68 because source of the cash deposit is fully explained by the appellant, being the cash withdrawals from the same bank account during the year. Hence, the CIT(A) deleted the addition of Rs.2,50,51,450/- made u/s 68 of the Act and allowed appeal of the appellant.
5. Aggrieved by the order of the CIT(A), the revenue filed appeal before the Tribunal. The learned Senior Departmental Representative (ld. Sr. DR) for the revenue relied on the order of the AO. He submitted that the appellant has paid huge interest of Rs.19,26,233/- to HDFC Bank wherein cash of Rs.2,50,51,450/- was deposited during the year. There was no need to keep such huge cash in /AY.2017-18 Hindustan Steel & Cement hand and borrow interest bearing money from bank. He also submitted that assessee has shown loss return of Rs.3,52,076/- during the year. There was no commercial expediency to keep huge cash while borrowing interest bearing funds from the banks. In view of these facts, the ld. Sr. DR urged that the order of CIT(A) may be set aside and the order of AO should be restored.
On the other hand, learned Authorized Representative (ld. AR) for the assessee strongly supported the order of the CIT(A). He has filed two paper books giving details of bank statement, cash book and month-wise details of cash expenses. He has also relied on various decisions in favour of assessees’ concerned. He submitted that the assessee had deposited Rs.1,68,00,000/- on 15.11.2016 in its bank account with HDFC Bank. The said deposit was out of the cash available with the assessee from various cash withdrawals during the year from the same bank account. He submitted that the turnover of the assessee was about Rs.24 Crore during the year and the credits in the bank account were out of the credit sales made by the assessee. The source of cash deposit in the bank account was not out of cash sales. The books of account are supported by audited financial statements and tax audit report. Further, there is no difference between VAT return and the audited accounts filed before the Income-tax Department. The ld. AR also submitted that the AO has not pointed out any defect in the books of account of the assessee. The AO was also not correct in observing that the turnover of the assessee was without any documentary evidence because all details had been given to him to establish that all sales were /AY.2017-18 Hindustan Steel & Cement reflected in the bank account and they were received through banking mode. The ld. AR also stated that if the interest paid to the partners are not considered, profit of the assessee would be Rs.16,93,909/-. In fact, the GP ratio of the year increased to 3.56% against that of 2.75% in the preceding year. 6.1 The ld. AR further submitted that the AO has questioned correctness of interest expense of Rs.19,26,233/- for availing CC limit despite having sufficient cash in hand. In this connection, he submitted that the AO has not pointed out any entry in the cash book as false. He submitted that the interest expenses were incurred for business purpose of assessee. Further, assessee deposited cash of Rs.82,51,450/- before demonetization period. The ld. AR argued that it was not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. Further, on the issue of commercial expediency, reliance was placed on the decision of the Hon’ble Supreme Court in case of S.A Builders vs. CIT, 288 ITR 1 (SC). 6.2 The ld. AR also submitted that in case the addition is confirmed, it should be taxed as business income and not u/s 68 of the Act, so as to attract 115BBE of the Act. Even otherwise, 115BBE is not retrospective as held by the Madras High Court in case of S.M.I.L.E Microfinance Ltd. vs. ACIT, WP No.2078 of 2020 (Madras) and in case of Shamir Shantilal Mehta vs. CIT, (Surat – Trib.).
/AY.2017-18 Hindustan Steel & Cement 7. We have heard both the parties and perused the materials available on record. We have also deliberated on the decisions relied upon by the ld. AR. Ground Nos. 1, 2 and 4 are inter-related and hence are discussed and decided together. The case of the assessee was selected for scrutiny under CASS for the reason of large cash deposit during demonetization period as compared to pre- demonetization period. During the assessment proceedings, assessee had filed reply in the online portal of the Department and had submitted cash book, bank statement, audit report, P&L account etc. The AO found that assessee had deposited cash of Rs.2,50,51,450/- during the year in HDFC bank including Rs.1,68,83,951/- during demonetization. The assessee, in its reply, submitted that it had been regularly withdrawing cash from the bank and the same was available as cash in hand, which was re-deposited during demonetization as well as non- demonetization period. The AO did not accept the explanation of the assessee by stating that it had paid interest to the same bank where it has deposited such huge cash. Further, keeping such huge cash was not a business requirement of the assessee. The assessee also failed to substantiate its turnover of Rs.23,76,06,343/- with sufficient documentary evidence. Hence, he added the entire cash deposit of Rs.2,50,51,450/- during the year including cash deposited during the demonetization period u/s 68 of the Act. The CIT(A) has allowed relief to the assessee as per his findings in para 5 of the appellate order, which has been discussed earlier in detail in this order. After considering the entire factual matrix of the case, we find that the appellant has proved that the cash deposits in /AY.2017-18 Hindustan Steel & Cement the bank account maintained by it with HDFC Bank were out of the cash in hand at the relevant time. The cash in hand was due to cash withdrawals by the assessee from its bank accounts on earlier occasions. There were no cash sales and all sales by the appellant were by way of credit sales. Therefore, the source of cash deposit in the bank accounts was clearly not out of cash sales. The appellant has submitted books of account including cash book and bank book from which it is clear that the appellant had sufficient cash in hand to make the cash deposits in the bank on various occasions including the period of demonetization. It is also found that there is no variation between the VAT returns and the audited accounts filed before the Department. The AO has not pointed out any defect in the books of account maintained by the assessee which were produced before the Department. What is germane to the issue at hand is as to whether assessee had sufficient cash in hand at the time of cash deposit in its bank account and not why it kept such large cash in hand. It was a decision by the appellant which is beyond realm of AO’s discretion. Hence, the AO was not correct in making addition of the entire cash deposit because the source was duly explained by the assessee. The CIT(A) has considered the submission of the assessee as discussed above and has come to a proper and logical conclusion on appreciation of the facts of the case. We do not find any infirmity either in the factual or legal findings of the CIT(A) in deleting the addition and allowing appeal of the appellant. In view of the above facts, the ground of the revenue is dismissed.
/AY.2017-18 Hindustan Steel & Cement 8. Ground No.3 pertain to claim of interest expenses of Rs.19,26,233/- to the bank in spite of cash in hand of Rs.1,72,36,494/- as on 31.10.2016. No separate addition was made on this issue and the only addition was towards the cash deposit during the year. This issue is discussed by AO at page 5 of the assessment order. He has prepared a table mentioning various amounts of interest debited towards CC limit in its bank A/c No.50200005801762 with HDFC Bank. The total interest comes to Rs.19,26,233/-. The AO observed that assessee has incurred huge interest expenses but at the same time it has kept the cash withdrawn in hand to re-deposit the same in the bank account. In this regard, the ld. AR submitted that it is not open to the Department to prescribe what expenditure assessee should incur and in what circumstances it should incur that expenditure. The cash was accumulated by the assessee from 01.04.2016 onwards in the expectation of business requirement/contingencies. The appellant has however failed to substantiate its explanation by providing any credible documentary evidence. It has not furnished any evidence that such an emergency even arose in the past which entailed interest outgo of such huge amount. The appellant has withdrawn cash of Rs.2,57,18,000/- upto 31.10.2016 and had deposited Rs.2,54,17,500/- including Rs.1,68,00,000/- during demonetization period. The appellant had also deposited cash in the bank account on different occasions amounting to Rs.86,17,500/- prior to the demonetization period. Such pattern of withdrawals and re-deposit has not been established by assessee for earlier period. There was no restriction on cash withdrawal from bank during