KHIMJI MURJI PATEL,MUMBAI vs. ITO WD 21(3)(3), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-38, Mumbai, dated 05.01.2017, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short ‘I.T. Act’), dated 19.03.2014 for A.Y. 2011-12. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal :

Briefly stated, the assessee had filed his return of income for A.Y. 2011-12 on 24.02.2012, declaring total income at Rs.3,06,200/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the I.T. Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).

On the basis of the AIR information it was gathered by the A.O in the course of the assessment proceedings that the assessee had made cash deposits in his two bank accounts viz. (i) S.B. Account No. 03981000036039 with HDFC Bank, Branch: Malad (East), Mumbai: Rs.43,43,790/-; and (ii) S.B. Account No. 1115767234 with Central Bank of India, Branch Kurla, Mumbai: Rs.3,62,000/-. In the backdrop of the aforesaid details the A.O called upon the assessee to explain the source of the cash deposits, failing which the same were to be treated as his unexplained income from other sources. In reply, it was submitted by the assessee that the source of the aforesaid cash deposits were the cash sales carried out by him in the course of its business of trading in cloth items etc. However, the assessee on being called upon by the A.O to furnish the party wise details of sales along with their full addresses, details of mode of receipts etc. which would prove that the aforesaid amounts deposited in the bank accounts were business receipts, failed to place on record the requisite information. In the backdrop of the aforesaid facts the A.O proceeded with the assessment on the basis of the material available on record. It was observed by the A.O that a perusal of the profit and loss account filed by the assessee on 03.03.2014 revealed his income from fabric and stitching charges of Rs.37,09,870/-, against which after claim of direct P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) expenses of Rs.37,46,362/- in respect of fabric and stitching charges a ‘gross profit’ of Rs.9,63,502/- and a ‘net profit’ of Rs.1,26,870.41/- was disclosed. The A.O after deliberating on the contentions advanced by the assessee was however not persuaded to accept his explanation that the source of the cash deposits were the cash sales carried out by him in the course of his business of trading in cloth items etc., primarily for three reasons viz. (i) that as both the bank accounts were the personal saving bank accounts of the assessee, therefore, it could safely be concluded that the assessee was not carrying on any business, because if that had been so then he would have opened a ‘Current account’ in the name of his business concern; (ii) that as the aforesaid bank accounts were closed by the assessee on 31.03.2011, thus it could safely be concluded that he had never intended to disclose the said bank accounts wherein the cash deposits were parked; and (iii) that as the assessee had filed his return of income in Form ITR-2 which was meant for individuals and HUF’s not having any income from business or profession, and not in the specified Form ITR-4 which is to be filed in case an assessee is deriving business income, therefore, it could safely be concluded that he was not having any business income during the year under consideration. Apart therefrom, it was observed by the A.O that neither of the aforesaid bank accounts were disclosed by the assessee in his return of income for the year under consideration. Further, it was noticed by the A.O that even the assessee had not made any mention of the aforesaid bank accounts in the ‘Column’ provided in the return of income, wherein the requisite details of the bank accounts held by the assessee were mandatorily required to be disclosed. In sum and substance, it was observed by the A.O that the assessee had clearly intended not to disclose his aforesaid bank accounts to the department. Rather, the A.O held a conviction that it was only when P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) the assessee was confronted with the aforesaid cash deposits, that it was only then that he had in order to wriggle out of the aforesaid situation came up with a cooked up story and tried to explain that the same were his cash sale receipts from the business of trading in cloth items etc. Insofar, the income of Rs.1,26,870/- returned by the assessee was concerned, it was observed by the A.O that the same was shown by the assessee under the head “Income from other sources”. It was observed by the A.O that in case the aforesaid income would have been derived by the assessee from his business of trading, then the same would have been reflected by him under the head “Income from business”. In the backdrop of the aforesaid deliberations, it was observed by the A.O that the assessee by fabricating a trading account with a purpose to regularise the cash deposits in his bank accounts had deliberately converted the designing charges received by him into ‘net profit’ from his business. Apart therefrom, the copies of few purchase and sales bills which were placed on record by the assessee at the instance of the A.O also did not inspire much of confidence. It was observed by the A.O that the sales invoices furnished by the assessee revealed that the same were in the name of “Patel Enterprises”, which name was however not appearing anywhere in his ‘books of accounts’. Rather, it was noticed by the A.O that there was no bank account under the name of “Patel Enterprises”. Further, it was observed by the A.O that the fabricated purchase invoices filed by the assessee on the contrary were addressed to “Khimji M. Patel” and not to “Patel Enterprises”. On the basis of the aforesaid facts, it was observed by the A.O that in case the assessee would have been running a business under the name and style of “Patel Enterprises”, then the sellers would have issued invoices/bills in the name of “Patel Enterprises” and not in the name of “Khimji M. Patel”. On a perusal of the 18 purchases invoices/bills that were placed on record by the P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) assessee, it was observed by the A.O that neither of the said invoices/bills were issued in the name of “Patel Enterprises”. Further, it was noticed by the A.O that in the sale bills there was neither any mention of fabric cloth, shirting, fancy shirting, fancy cloth etc. nor any stitching charges were discernible from a perusal of the same. Apart therefrom, it was observed by the A.O that as the aforesaid vouchers/invoices did neither bear any seal or stamp of the business entity nor any tax number, VAT number or any terms or conditions, thus the same did not inspire any confidence as regards the veracity of the same. It was also observed by the A.O that though as per the mandate of law it was obligatory to charge VAT on the items alleged to have been traded by the assessee, but perusal of the purchase/sale bills produced by the assessee revealed a different story and no VAT was found to have been charged in respect of the purchase/sale transactions under consideration. Further, it was also noticed by the A.O that the assessee despite repeated requests to furnish the party wise details of purchases and sales had however failed to place the requisite details on record. In sum and substance, the A.O held a strong conviction that the assessee only in order to wriggle out of the aforesaid unexplained cash deposits in his bank account had came with a cooked up story that the same were his business receipts, while for the fact was that no such business was in existence. On the basis of the aforesaid deliberations the A.O treated the aforesaid cash deposits in the bank accounts viz. (i) S.B. Account No. 03981000036039 with HDFC Bank, Branch: Malad (East), Mumbai: Rs.43,43,790/-; and (ii) S.B. Account No. 1115767234 with Central Bank of India, Branch Kurla, Mumbai: Rs.3,62,000/-, aggregating to Rs. 47,05,799/- as unexplained credits of the assessee and brought the same to tax under Sec.68 of the I.T. Act.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short ‘A.R’) for the assessee at the very outset of the hearing of the appeal submitted that the lower authorities loosing sight of the facts of the case had wrongly made an addition of the entire amount of Rs.47,05,799/- to the returned income of the assessee. It was submitted by the ld. A.R that the cash deposits in the bank account of the assessee viz. (i) S.B. Account No. 03981000036039 with HDFC Bank, Branch: Malad (East), Mumbai: Rs.43,43,790/-; and (ii) S.B. Account No. 1115767234 with Central Bank of India, Branch Kurla, Mumbai: Rs.3,62,000/- were out of the cash sales received by the assessee in the course of his business of trading in fabric cloth, shirting etc. during the year under consideration. In order to buttress his aforesaid claim the ld. A.R drew our attention to the copies of the aforementioned bank accounts of the assessee forming part of the assesses ‘Paper book’ (for short ‘APB’). It was submitted by the ld. A.R. that the narrations mentioned against the specific withdrawals made from the aforementioned bank accounts clearly revealed the payments made by the assessee vide cheques to various textile concerns. On the basis of the aforesaid facts it was P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) averred by the ld. A.R that the transactions in the aforementioned bank accounts clearly established an inextricable nexus between the cash sales carried out by the assessee and the payments made to the textile concerns for the purchases made from them. In sum and substance, it was the contention of the ld. A.R that as the respective credits aggregating to Rs.47,05,799/- appearing in the aforementioned bank accounts of the assessee were the cash sales received by him in the course of his business of trading in fabric cloth, shirting etc., thus the A.O had wrongly made an addition of the entire sale consideration as an unexplained cash credit in the hands of the assessee. On a specific query by the bench as to whether the aforementioned bank accounts were disclosed by the assessee in his return of income for the year under consideration, it was submitted by the ld. A.R that the interest income relating to the same was shown by the assessee in his return of income. Apart therefrom, it was submitted by the ld. A.R that the CIT(A) while disposing off the appeal had confined himself to the alternative contention of the assessee that in case if the explanation as regards the ‘nature’ and ‘source’ of the cash deposits in the bank account was to be rejected, then the addition may be restricted to the extent of the ‘Peak credit’ appearing in the said bank accounts. The ld. A.R. submitted that the CIT(A) had failed to advert to and therein adjudicate upon the contentions which were advanced before him in context of the merits of the addition keeping in view the duly substantiated explanation of the assessee as regards the ‘nature’ and ‘source’ of the cash deposits appearing in his abovementioned bank accounts. Further, the ld. A.R submitted that as the cash deposits in the aforementioned bank accounts were the trading receipts of the assessee, therefore, for determining his income in respect of the said transactions the addition was liable to be restricted to the extent of the profit involved in the said trading transactions. In support of his P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) aforesaid contention the ld. A.R relied on the order of the ITAT “SMC” Bench, Mumbai in the case of Shri Suharsh R. Joshi Vs. ITO, 21(2)(4), Mumbai [ITA No. 6262/Mum/2014; dated 06.08.2015]. The ld. A.R taking us through the aforesaid order of the Tribunal submitted that in the aforesaid case involving identical facts the Tribunal had on an estimate basis restricted the addition to 25% of the aggregate amount of deposits. On the basis of the aforesaid contentions, it was averred by ld. A.R that in all fairness the addition in the hands of the assessee may be restricted to the extent of the profit element involved in the aforesaid trading transactions of the assessee.

Per contra, the ld. Departmental Representative (for short ‘D.R’) submitted that the assessee had in the course of the proceedings before the lower authorities failed to explain the ‘nature’ and ‘source’ of the cash deposits in his aforementioned bank accounts. The ld. D.R drawing our attention to the observations of the CIT(A) recorded at Para 4.1.5 of his order, submitted that even the claim of the assessee that the addition may be restricted to the extent of the “Peak credit” was rightly rejected by the CIT(A). It was submitted by the ld. D.R that as the cash was deposited in the bank account of the assessee in several far off cities, therefore, it was beyond comprehension that the assessee would withdraw the money and send the same for redepositing to the said different cities. Apart therefrom, it was submitted by the ld. D.R that the lower authorities had rightly observed that the assessee on being cornered with the aforementioned cash deposits in his bank accounts had came up with a cooked up story to wriggle out from the aforesaid situation. It was the contention of the ld. D.R that as the claim of the assessee that the cash deposits in his bank accounts were his trading receipts was proved to be false P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) by the lower authorities, thus, the latter had rightly made an addition of the entire amount of cash deposits under Sec.68.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. Admittedly, the assessee during the year under consideration had made cash deposits aggregating to Rs.47,05,799/- in his two bank accounts viz. (i) S.B. Account No. 03981000036039 with HDFC Bank, Branch: Malad (East), Mumbai: Rs.43,43,790/-; and (ii) S.B. Account No. 1115767234 with Central Bank of India, Branch Kurla, Mumbai: Rs.3,62,000/-. It is also a matter of fact that the said bank accounts were not disclosed by the assessee in his return of income for the year under consideration. Insofar, the claim of the assessee that the interest income pertaining to the aforementioned bank accounts was offered for tax in the return of income is concerned, the same in the absence of any evidence substantiating the said claim cannot be accepted on the very face of it. Be that as it may, in our considered view the aforesaid cash deposits appearing in the aforementioned bank accounts of the assessee were not disclosed by him in his return of income for the year under consideration. We have further perused the observations of the lower authorities in context of the veracity of the profit and loss account that was filed by the assessee on 03.03.2014 (i.e. in the course of the assessment proceedings), on the basis of which the latter had tried to explain that the aforementioned cash deposits of Rs.47,05,799/- were the cash sales receipts of his business of trading in fabric cloth, shirting, cloth items etc. Apart therefrom, we have also deliberated upon the observations of the lower authorities in context of the veracity of the purchase/sales invoices and vouchers. We are of the considered view that the ‘book results’ of the assessee as had been projected by the assessee by placing on record a stand alone profit and loss account for P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) the year under consideration does not inspire any confidence, and the same in the absence of any material which would irrefutably support the same to the hilt, deserves to be rejected.

We shall now deliberate on the claim of the assessee that the cash deposits in his aforementioned bank accounts were the cash sales of his business of trading in cloth items etc. Admittedly, the purchase/sale bills produced by the assessee before the lower authorities does not inspire any confidence and had rightly been rejected by them. However, we find from a perusal of the Saving Bank Account No. 03981000036039 held by the assessee with HDFC Bank Ltd. that there is an inextricable nexus between the respective cash deposits therein appearing and the corresponding payments made by cheques to certain textile concerns. On a careful perusal of the aforementioned bank account, it stands revealed that the balance in the same on an average during the entire year remained to the extent of few thousands rupees only. Interestingly, as and when certain cash deposits were made in the said bank account the same was followed by payments to certain textile concerns viz. (i) Anmol Textiles; (ii) Harsha Textiles; (iii) Jaina Fab; (iv) Harshil Textiles; (v) Ranakpur Mills; (vi) Neeta Enterprises; (vii) Geeta Textiles; (viii) Mahesh Textiles; (ix) Malav Syntex; (x) Raj Creation; (xi) Amandeep Fabrics; (xii) Vardhaman Agency etc. In sum and substance, on a perusal of the aforesaid bank account it can safely be gathered that the cash deposited in the same was either on the same day or within a short span of few days utilised/exhausted primarily for the purpose of making payments to the textile concerns, therein leaving a balance of few thousand of rupees. In our considered view, on an overall conspectus of the facts of the case it can safely be concluded that the assessee had channelized the purchase/sale transactions of his business of trading in cloth items etc. through his aforesaid bank P a g e | Khimji Murji Patel Vs. ITO, Ward-21(3)(3) account viz. Saving Bank Account No. 03981000036039 with HDFC Bank Ltd. Rather, the fact that the cash was deposited in different cities viz. Jodhpur, Brindavan, Durg, Vijaywada, Amravati, Hyderabad, Varanasi, Kolkata etc. further advances the claim of the assessee that the same were in the nature of the sale receipts which were deposited by his outstation customers. In our considered view, there is substantial force in the contention of the assessee that the cash deposited in his aforementioned bank accounts was out of the cash sales carried out by him in the course of his business of trading in cloth items. On the basis of our aforesaid observations, we are of the considered view that the addition in respect of the aforementioned cash deposits of Rs. 43,43,790/- in the Saving Bank Account No. 03981000036039 held by the assessee with HDFC Bank Ltd. is liable to be restricted only to the extent of the profit element involved in the business of trading in cloth items carried out by the assessee. At the same time, in the absence of any material which would assist in quantifying the element of profit involved in the aforementioned trading transactions, the same has to be arrived at on an estimate basis. In the backdrop of the reliance placed by the ld. A.R. on the order of the ITAT, “SMC” bench, Mumbai in the case of Shri Suharsh R. Joshi Vs. ITO, 21(2)(4), Mumbai, in dated 06.08.2015, wherein the profit element in respect of the business activities was estimated at 25% of the aggregate amount of deposits, we restrict the addition in the case of the assessee before us to 25% of the aggregate amount of deposits of Rs.47,05,799/-.

Insofar, the cash deposits of Rs. 3,62,000/- in the S.B. Account No. 1115767234 with Central Bank of India, Branch: Kurla, Mumbai are concerned, the same in our considered view are not similarly placed and rather reveals a different story. On a perusal of the