SUNDARAM SUBRAMANIAN REP. BY LEGAL HEIR S SUNDARAM,PUDUKKOTTAI vs. ITO, CIRCLE-2(1), TRICHY

The brief facts emanating from the records are that the assessee is an individual and had not filed the Return of Income for A.Y.2013-14 and A.Y. 2014-15. However, as per data available with the Department, the assessee had deposited substantial sums of cash in the Bank Accounts maintained by the assessee during financial years 2012-13 and 2013-14, and in the absence of any Return of Income for the relevant assessment years, the information formed the basis for Reopening of assessment by issue of notice u/s.148 of the Act.

Finally, the assessment orders were concluded for the A.Y. 2013-14 on 14.03.2022 and A.Y. 2014-15 on 12.03.2022, resulting in a taxation of income to the tune of Rs.5,86,78,109/- for A.Y.2013-14 and Rs.5,80,50,096/- for A.Y.2014-15. The additions were made u/s.68 of the Act by the AO holding that the source of cash deposited in four bank accounts held by the assessee was unexplained.

Aggrieved by the addition, the assessee had preferred an appeal for both assessment years before the ld.CIT(A) by principally contended that the cash deposited relates to the moneylending business activity undertaken by the assessee. Being a cash-intensive business, the withdrawals made earlier to fund the lending were subsequently received and re-deposited, and therefore when the source of cash deposited is proven to be out of withdrawals and to some extent by way of account transfers, the cash deposited cannot be treated as ‘unexplained’.

The ld.CIT(A) did not agree with the contention of the assessee and held all the grounds against the assessee on a finding that: “a) The claim of moneylending business is devoid of merit as the mandatory moneylenders’ license was not furnished and neither were the particulars of the borrowers.

Aggrieved by the conclusion drawn by the ld.CIT(A) in the appeals of both the assessment years, the assessee had fostered multiple grounds of appeal and primary among them which were sought to be adjudicated by us are given hereunder: “i. The Ld. CIT(A) erred in substituting the charging provision from Section 68 to Section 69A without providing specific opportunity of being heard on this new ground, in violation of Section 251(2) of the Act and the principles of natural justice.

The ld.AR for the assessee Shri Y.Sridhar, FCA, submitted that the books of accounts in the form of cash book, bank book, copies of the bank statements, financials for both the assessment years, the ledger of interest received and interest paid, etc. were furnished before the AO at the time of assessment proceedings and also before the First appellate Authorities.

The ld.AR emphasized that the entries in the statement of bank accounts, by way of cash withdrawals and deposits by themselves are self-explanatory on the fact that the transactions are cyclical and therefore treating the entire amount of cash deposited during the years as unexplained was inappropriate.

The copies of the assessment orders for A.Y. 2015-16 and 2016-17 which were passed by the jurisdictional AO, the contention that the assessee is engaged in money lending business gets established. In this regard, the attention of this Bench was invited by the AR, the acceptance of the facts by the AO with regard to the following facts:

The ld.AR argued that if these finding of facts which had resulted in acceptance of the income returned in A.Y.2015-16 and 2016-17 are applied to the disputed assessment years, the claim of the assessee cannot be precluded.

The ld.AR further argued that for A.Y.2013-14, the average monthly value of advances is Rs.70.93 lakhs and that of A.Y. 2014-15 is Rs.48.67 lakhs. Even if the finding of the AO that interest at the rate of 18% would normally be the earnings from such moneylending, if these percentage is applied on the average monthly value of advances, the earnings should be of Rs.13.00 lakhs and Rs.9.00 lakhs (approximately) respectively. On the contrary, when the gross interest received and disclosed in the financials for the year stands at Rs.17,66,970/- for A.Y. 2013-14 and Rs.13,61,009/- for A.Y.2014-15, any further intervention to the income disclosed in the revised returns, was submitted to be unsolicited.

On the action on part of the ld.CIT(A) to modify the section under which the addition was made from S. 68 (wrongly made by the AO) to S. 69A (corrected by the ld.CIT(A)), the ld.AR stated that the same is not permissible under law and the provisions of section 251(1)(a), and even otherwise, the same cannot be undertaken , without bringing to the notice of the assessee.

Finally, the ld.AR brought on record that without prejudice to the procedural irregularities, when the cash book and bank book, substantiate, that the source of cash deposited is out of earlier withdrawals from the same bank account, the source cannot be classified as undisclosed, unless the AO had proved that the cash withdrawn earlier was utilised elsewhere and that the cash deposited subsequently are distinct from the funds withdrawn.

Per contra the ld.DR made his strong representation, the order of the ld.CIT(A) needs to be sustained as the source of cash deposited is not properly explained. Moreover, it was argued that as per section 252(1)(a) the ld.CIT(A) has power to substitute the correct section while the powers of AO and ld.CIT(A) are coterminous.

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper book filed. The appeals pertain to A.Ys.2013-14 and 2014-15 and arise out of reassessment proceedings-initiated u/s.147 of the Act on account of substantial cash deposits in the assessee’s bank accounts, in the absence of original returns of income. The core dispute before us revolves around the nature and source of cash deposits, the sustainability of addition u/s.68/69A of the Act, the powers of the Ld.CIT(A) to substitute the charging section, and the applicability of peak credit theory and evidentiary value of books of account.

Since facts and grounds are common, both appeals are disposed of by this consolidated order.

The AO made additions u/s.68 of the Act treating cash deposits in bank accounts as unexplained credits. It is a settled proposition of law, as laid down

We find that the Ld.CIT(A) himself has accepted this legal infirmity and has categorically held that the invocation of section 68 by the AO was erroneous. However, instead of deleting the addition, the Ld.CIT(A) proceeded to sustain the same addition by invoking section 69A, exercising powers under section 251(1)(a)/(1A) of the Act. While it is true that the appellate authority has wide and coterminous powers with that of the Assessing Officer, such powers are not unbridled. Section 251(2) mandates that no enhancement or modification prejudicial to the assessee shall be made without providing a reasonable opportunity of being heard. In the present case the assessee was never put to notice that the addition proposed u/s.68 would be sustained u/s.69A of the Act, the nature of explanation and burden u/s.69A of the Act materially differs from section 68, and the assessee was deprived of an opportunity to specifically address the applicability of section 69A of the Act.

The ld.CIT(A) had suo moto concluded that the addition is factually and legally justified u/s.69A of the Act but failed to give an opportunity of being heard before drawing such conclusion. This action on part of the ld.CIT(A) is illegitimate as the same is not permitted under law and violates the provisions of section 251(2) of the Act.

Reliance is placed on the decision of the Calcutta High Court in the case of Vishal Jhajharia vs. Assessment Unit, Income-tax Department Faceless Assessment Centre [2024] 164 taxmann.com 781 (Calcutta)[27-06-2024] wherein it was held: “Where revenue issued a show cause notice to assessee for adding back amount in question as 'unexplained cash credits' under section 68, it could not pass final order by adding said amount as 'unexplained money' under section 69A without giving assessee an opportunity to explain”.

With regard to the finding of fact about nature of business by the AO and ld.CIT(A) that the claim of moneylending business by the assessee is unsupportive and the objection raised by the assessee through the corresponding ground of appeal, we find that the ld.CIT(A) erred in assuming that there is no moneylending activity, despite the fact that the entries in the bank account prove its existence in the form of cyclic transactions.

Further, the order of the AO passed in A.Y.2015-16 and 2016-17, had clearly accepted this fact and have also appreciated that the cash deposited in the bank account is out of the interest earned on such money lending business and the principal collected from the debtors. Moreover, the profit and loss account and financials demonstrate that the assessee had carried on money lending business and that the interest and money in mode of cash collected from the debtors were only deposited in the bank accounts held by the assessee.

It is an undisputed fact that the assessee produced cash book, bank book, ledger accounts, financial statements, and copies of bank statements both before the Assessing Officer as well as before ld.CIT(A). However, neither the AO nor the ld.CIT(A) has rejected the books of account by invoking section 145(3) of the Act. No specific defects, inconsistencies, or falsities have been pointed out in the cash book or ledger entries. It is trite law that so long as books of account are not rejected in accordance with section 145(3), they retain their evidentiary value, and the entries therein cannot be brushed aside summarily. The approach of the lower authorities in disregarding books without statutory rejection is legally unsustainable.

The assessee has demonstrated that total cash withdrawals during the years exceed the total cash deposits, substantial deposits are preceded by withdrawals from the same or other bank accounts, and there are inter-account transfers amounting to Rs.39.99 lakhs. The Ld.CIT(A) rejected the peak credit theory on the ground that no credible working was furnished. However, the record shows that bank statements and cash book entries were available, evidencing cyclical movement of funds. In a situation where the Revenue does not dispute the fact of withdrawals, there is no finding that withdrawn cash was utilised elsewhere, and the business is admittedly cash-intensive, taxing the gross amount of deposits leads to manifestly inflated and unrealistic additions.

The argument of the ld.AR that unless the AO is able to substantiate that the money withdrawn have been utilized elsewhere and does not fund the investment made in the form of cash deposits subsequently, it needs to be necessarily presumed that the cash deposited is sourced out of earlier withdrawals only, more particularly when they are undertaken in the same bank accounts held by the assessee.

This legal position has been explained by Karnataka High Court in the case of S.R. Venkatraman vs. CIT reported in 127 ITR 807 (Kar), wherein it has been held that, once the assessee disclosed the source as withdrawals made on a given date from a given bank, it was not open to the revenue to examine as to what the assessee did with that money and it cannot chose to disbelieve

It is settled position of law that when the assessee has given an explanation regarding source of the credit/currency, which is plausible/probable from prudent person point of view, then, it can’t be rejected by the AO without having any material to rebut the plausible explanation given by assessee. The Hon’ble Supreme Court in the case of Sreelekha Banerjee & Ors. v. CIT reported in [1963] 49 ITR 112 (SC), observed that: “the department could not act unreasonably and reject that explanation to hold that it was income. If, however, the evidence was unconvincing then such rejection could be made. The department cannot by merely rejecting unreasonably a good explanation, convert good proof into no proof”.

In the present facts of the case, we note that the assessee is into the business of money lending and the cash deposits have been made into the bank accounts out of the collection from the finance debtors (Innums) and earlier cash withdrawals from the bank accounts. However, we note that the interest revenue shown in the profit and loss account is low, when compared to the Finance receivables shown in the Balance sheet. Therefore, in the interest of natural justice and fairplay we are estimating the interest revenue @ 18% per annum of the total receivables shown in the balance sheet as at the end of the respective financial year. Accordingly, we are directing the AO to make following addition to the total income, which is the difference between the Interest @ 18% per annum and the interest income shown in the profit and loss account.

In light of the above reasoning and findings, in the present facts of the case and circumstances, we delete the additions made u/s.68 / 69 of the Act and set aside the order of the ld.CIT(A). We direct the AO consider the above-

In the result, both the appeals of the Assessee are partly allowed.