PATEL WINES,KHEDA vs. THE DY.CIT, KHEDA CIRCLE, NADIAD

The brief facts of the case are that the assessee, a partnership firm engaged in the business of sale of liquor to license holders, filed its return of income for Assessment Year 2017-18 declaring a total income of ₹18,57,653/-. A survey under section 133A of the Income-tax Act, 1961 ("the Act") was conducted on 17.03.2017 at the business premises of the assessee, M/s. Patel Wines. During the course of assessment proceedings, the Assessing Officer observed that the assessee had deposited substantial cash amounting to ₹1,65,81,880/- in its HDFC Bank account during the demonetization period, out of which ₹1,31,34,000/- was in the form of demonetized currency of ₹500 and ₹1000 notes. The assessee submitted that these deposits were made out of accumulated cash-in-hand of ₹1,61,37,212/- as on 01.04.2016, which, according to the assessee, had been retained over the years due to family disputes and apprehension of bank account operations being interfered with by relatives. The statement of one of the partners was recorded during the survey, reiterating this explanation. The Assessing Officer, however, examined the balance sheets of earlier years and observed that the assessee had been consistently showing very high cash-in-hand balances for several years, along with substantial unsecured loans and sundry creditors which had remained unchanged for long periods. The Assessing Officer further observed that these unsecured loans were from close relatives and related concerns, that no interest was paid thereon by the assessee, Patel Wines vs. DCIT Asst.Year –2017-18 - 3– and no repayments were also made for years with respect to loan taken by the assessee. The Assessing Officer also noted that certain trade creditors had remained outstanding for many years and were subsequently written off and offered to tax in later assessment years, which, according to the Assessing Officer, indicated that such liabilities were not genuine. The Assessing Officer also noticed that the assessee was regularly depositing cash sales into bank accounts throughout the year and incurring routine business expenses in cash, which contradicted the claim of the assessee that cash was being hoarded for years due to alleged family disputes.

The Assessing Officer repeatedly asked the assessee to substantiate the reasons for keeping such huge cash-in-hand, including details of family disputes, court cases, and the manner and place where such cash was kept. According to the Assessing Officer, the assessee failed to produce any convincing documentary evidence in support of its explanation. The Assessing Officer therefore held that the explanation offered by the assessee was not satisfactory, that the high cash-in-hand was artificially built up by creating fictitious unsecured loans and bogus liabilities, and that the cash deposited during the demonetization period represented unaccounted income of the assessee firm. Accordingly, the Assessing Officer made an addition of ₹1,61,37,212/- as unexplained money under section 68 read with section 115BBE of the Act, and the total income was assessed at ₹1,79,94,865/-. Penalty proceedings under section 270A were also initiated.

The Ld. CIT(Appeals) considered the submissions of the assessee, the assessment order, and the material available on record. The CIT(Appeals) noted that the Assessing Officer had carried out a detailed analysis of the pattern of cash deposits, the consistency of high cash-in-hand over several years, and the existence of long-standing unsecured loans and creditors which were later written off. The Ld. CIT(Appeals) observed that the assessee failed to substantiate its claim of family disputes with any evidence and that the explanation of keeping huge cash-in-hand for several years did not pass the test of Patel Wines vs. DCIT Asst.Year –2017-18 - 5– human probabilities, especially when the assessee was regularly operating bank accounts and depositing cash sales throughout the year.

With respect to the ground relating to violation of natural justice, the Ld. CIT(Appeals) held that adequate opportunities were granted during the assessment proceedings as well as during the appellate proceedings, and therefore this contention of the assessee was rejected. On the applicability of section 68 and section 69A of the Act, the Ld. CIT(Appeals) held that merely showing an opening cash balance in the books does not automatically explain the source if the genuineness of such cash balance itself is doubtful. The CIT(Appeals) placed reliance on judicial principles relating to burden of proof and human probability and held that the Assessing Officer was justified in treating the cash deposits during the demonetization period as unexplained income. Accordingly, after considering each of the grounds raised by the assessee, the Ld. CIT(Appeals) upheld the action of the Assessing Officer and confirmed the addition of ₹1,61,37,212/- made under section 68 read with section 115BBE of the Act. As a result, the appeal of the assessee was dismissed.

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the counsel for the assessee primarily reiterated the arguments taken before Tax Authorities viz. the cash deposits are from business receipts, from carry forward of cash in hand from three previous years, that the books of accounts of the assessee are duly audited and that Tax Authorities erred in correlating the cash in hand with unsecured loans.

We have heard the rival contentions and perused the material on record.

We have carefully considered the rival submissions, perused the orders of the authorities below and examined the material placed on record. The core issue for our consideration is whether the cash deposits made by the assessee during the demonetization period, claimed to be out of accumulated opening cash-in-hand, have been satisfactorily explained so as to escape addition under section 68 read with section 115BBE of the Act. We note that the Assessing Officer as well as the Ld. CIT(Appeals) have concurrently recorded a clear finding that the explanation of the assessee regarding accumulation of huge cash-in- hand over several years is not supported by any credible evidence and does not satisfy the test of human probabilities. The assessee failed to produce any documentary evidence whatsoever to substantiate the alleged family disputes, court proceedings, or any restriction on Patel Wines vs. DCIT Asst.Year –2017-18 - 7– operation of bank accounts which allegedly compelled the assessee to retain such a large amount of cash for years together. The Hon’ble Supreme Court in CIT v. Durga Prasad More [(1971) 82 ITR 540 (SC)] has held that taxing authorities are entitled to look into the surrounding circumstances and apply the test of human probabilities, and that apparent facts may be disregarded if they are contrary to human conduct and probabilities. The same principle has been reiterated by the Hon’ble Supreme Court in Sumati Dayal v. CIT [(1995) 214 ITR 801 (SC)]. We also find merit in the findings of the lower authorities that the assessee was regularly depositing cash sales into bank accounts throughout the year and was incurring routine business expenses in cash, which clearly contradicts the plea that cash was being hoarded for several years due to apprehension of bank account interference. Such conduct does not accord with normal commercial prudence. In this background, the explanation of retaining cash-in-hand running into crores for multiple years appears wholly implausible.

The argument of the assessee that the cash deposits are fully explained by the opening cash balance reflected in the audited books of account also does not impress us. It is trite law that merely because a figure is shown in the books of account or the books are audited, the same does not automatically establish the genuineness of the entry or the explanation offered. The burden under section 68 squarely lies on the assessee to offer a satisfactory explanation regarding the nature and source of the sum credited. We further note that the Tax authorities have recorded categorical findings regarding long-standing unsecured loans and sundry creditors which remained unchanged for years, without any repayment or interest, and which were subsequently written off and Patel Wines vs. DCIT Asst.Year –2017-18 - 8– offered to tax in later years. These facts strongly support the conclusion that such liabilities were not genuine and were used to artificially inflate the cash-in-hand. The Hon’ble Calcutta High Court in CIT v. Precision Finance Pvt. Ltd. [(1994) 208 ITR 465 (Cal.)] has held that mere identification of the creditor and showing payment through banking channels is not sufficient; the assessee must also establish the genuineness of the transaction and the creditworthiness of the creditor. In the present case, even that minimal standard has not been met.

The contention of the assessee that the addition results in double taxation is also devoid of merit. The Tax authorities have clearly demonstrated that the cash deposits during the demonetization period were far in excess of the normal pattern of deposits and were sought to be explained by an opening cash balance whose genuineness itself was found to be doubtful. We are of the considered view that that when cash deposits are claimed to be out of opening balance, the assessee must conclusively prove the availability and genuineness of such balance. The assessee has failed to discharge this burden.

The reliance placed by the Ld. Departmental Representative on the discrepancies noticed between the cash-in-hand figures reflected in the tax audit report (Rs. 1.65 crores) and those disclosed in the return of income (Rs. 2.65 crores) further reinforces the doubt regarding the correctness and reliability of the books of account. Such inconsistencies strike at the very root of the assessee’s claim that the books correctly reflect the true state of affairs.

Accordingly, the addition so made and sustained by the Ld. CIT(Appeals) is confirmed. The appeal filed by the assessee stands dismissed.