KISHAN KUMAR GUPTA,GHAZIABAD vs. ITO, WARD- 1(3), GHAZIABAD

The assessee has raised the following grounds of appeal:

That the Ld/-CIT(A) has erred in facts of the case by treating the amount of Rs. 78,00,000/- as cash credit under section 68 of the Act, however the same was trade advance given by the appellant in ordinary course of business through banking channel. The application of Section 68 is completely arbitrary, incorrect, unjustified and bad in law.

The appellant craves the right to add, amend, modify the grounds of appeal.”

Briefly stated, the facts of the case are that the assessee is a merchant trading in agro/vegetable products and has been regularly filing his return of income. During the year under consideration, the turnover of the assessee was Rs. 52,80,325/-. The assessee calculated his income @ 8% of turnover u/s 44AD of the Income-tax Act, 1961 [the Act, for short] and declared an income of Rs 3,92,730/- on 18.07.2014.

Now the further aggrieved assessee is in appeal before us.

Before us the ld counsel of the assessee submitted that the assessee is engaged in the business of vegetables and does not maintain any books of accounts. The ld AR of the assessee further submitted that the case is of limited scrutiny and provisions of section 144 of the Act are not applicable in his case. The ld AR reiterated that funds advanced to TAHA Traders of Rs 78,00,000/- was on account of purchases from T.A.H.A. Traders for past and future years. The ld AR argued that as per law under 44AD, the assessee is not required to maintain books of account and therefore the AO/CIT(A) reliance on balance sheet and profit and loss account of the assessee is bad in law. The ld AR emphasized that the A.O. has, while making addition u/s 68, relied upon balance sheet and profit & loss account which the assessee does not maintain for Income Tax purpose.

With regard to source of cash deposit, the ld AR submitted that it is out of own capital cash savings, advance from parties, profit from business for several years as also cash from Mr. Satanand Gupta (Father) his capital, cash savings and business accruals and profit of several years.

The ld AR further made an alternate plea that the cash deposit may be considered as part of sales proceeds and turnover and a percentage be applied of the turnover for the determining profits as per section 44AD.

We have heard the rival submissions and have perused the relevant material on record. The factual matrix of the case shows that the assessee is a trader in vegetables. The assessee has been declaring his income u/s 44AD from a turnover of Rs 38,00,000/- in AY 2012-13 to Rs 2,15,21,367/- in AY 2017-18 and has offered 8% of total turnover or receipts as profits and gains from business. For the impugned assessment year 2014-15, the assessee has declared a turnover of Rs 52,80,325/- and has shown profit of Rs 4,22,426/-. The assessee claims that it has offered profits u/s 44AD therefore, he is not obliged to maintain regular books of account for Income Tax purposes.

We note that, during the AY 2014-15, the AO found out that there are cash deposits of Rs 1,58,95,000/- in the assessee’s bank account maintained with Punjab National Bank, Ghaziabad. The assessee claimed before the AO/CIT(A) that out of Rs 1.58 crore, the cash deposit amounting to Rs 52,80,325/- represents sales. Other cash deposit is daily cash in hand, business deposit which is a requirement of liquidity at shop and sale proceeds of its agricultural produce from his own farm. The assessee has further claimed that part of the cash deposit belonged to the assessee’s late father Satanand Gupta who himself had a turnover of over Rs 62 lakh during AY 2014-15 and was operating the assessee bank account for making payments to his creditors/party before he expired in 2016. With regard to advance of Rs 78,00,000/- made to T.A.H.A. Traders, the assessee reiterated that the same was given for purchase of stock in trade. The assessee, however, did not provide any materials/documents/evidence to explain the source of cash deposit which was used to make advance to TAHA Traders which resulted in addition of the same under section 68.

We note that though the assessee claimed that he does not maintain books of account for the income tax purposes as the same is not required u/s 44AD, he produced balance sheet and profit & loss account as also the cash book before the AO. There is also a noting by the AO at para 4 of the assessment order that in the course of assessment proceedings, the assessee produced the cash book to explain the cash deposits in bank as follows:

We further find that the AO accepted the sales proceeds of Rs 52,80,325/- for presumptive tax of 8% u/s 44AD. The AO also treated Rs 28,14,676/- [Rs 1,58,95,000/- - (Rs 78,00,000/- + Rs 52,80,325/-)] as part of turnover and levied a presumptive tax @ 8%. The AO, however, questioned Rs 78,00,000/- out of the debit for loan as the assessee could not explain the source of cash deposit.

The assessee has presented a legal argument before us, that the provision of section 68 is applicable only when the credit is made in the books of the assessee. Since the assessee is not required to maintain books u/s 44AD, there is no credit in the books. Since the mandatory requirement of section 68 remains uncomplied with, therefore the addition u/s 68 is bad in law.

We find that the legal argument on non-applicability of section 68 as the cash credits are not credited in the “books” of the assessee is fallacious for the reason that the assessee himself acknowledged the existence of the ‘cash book’ when he produced the ‘cash book’ before the AO to explain the source of cash deposits in bank as discussed above in para 12. The assessee also had prepared ‘balance sheet and profit and loss account’, as recorded in para 5 of the assessment order to show gross purchase and current assets, loan and advances. We are of the considered view that though the provision of section 44AD provides for deeming 8% of turnover/gross receipts as profits and gain of the such business, it nowhere prohibits the assessee from maintaining books of account. To our mind the cash book maintained by the assessee and the credit entries in the said “cash book” by the assessee, would attract the provision of section 68 of the Act when it is read with section 2(12A) of the Income Tax Act which defines “books of account includes ledgers, day-book, cash book, account books and other books, whether kept in written form….”. Consequently, cash credits of Rs 78,00,000/- entered in cash book would sufficiently fall within the ambit of the provisions of section 68 rendering the action of the AO as valid in the eyes of law.

In this factual conspectus, we have to examine whether the assessee has furnished any explanation about the nature and source thereof or has offered satisfactory explanation before the AO with respect to cash deposit of Rs 78,00,000/-. We find that the explanation offered for the source of cash deposit is:- out of own capital cash savings, advance from parties, profit from business for several years as also cash from Mr. Satanand Gupta (Father) his capital, cash savings and business accruals and profit of several years. The assessee has however, not furnished any cogent evidence/document to substantiate his averments such as any names of the parties who had given advance etc.

The assessee alternate plea that the cash deposit of Rs 78,00,000/- may be considered as turnover and the presumptive percentage of 8% be applied to determine the profits of the business is also misleading. If it is considered that the entire cash deposit of Rs 1,58,95,900/- is coming out of business sales, then the assessee can no longer avail the benefit of section 44AD as he no longer remains engaged in the “eligible business” as per Explanation(b)(ii) of section 44AD of having a turnover of Rs 60 lakh being the threshold limit for the instant year. In view of the discussion as above, we hold that the assessee has failed to offer a satisfactory explanation with regard to the cash deposits of Rs 78,00,000/-. We therefore hold that the decision of the CIT(A) needs no interference and accordingly we sustain the addition of Rs 78,00,000/- u/s 68. Ground no 1,2 and 4 are dismissed.

The ground no 3 relates to addition of 8% i.e., Rs 2,25,676/- on the remaining turnover of Rs 28,14,676/-. We have discussed elsewhere in the order that there was a total cash deposit of Rs 1,58,95,000/- in the PNB bank account of the assessee. Out of this, the AO accepted the sales proceeds as Rs 52,80,325/- for presumptive tax of 8% u/s 44AD and Rs 78,00,000/- as unexplained credit under 68. The AO further treated the balance cash deposit of Rs 28,14,676/- [Rs 1,58,95,000/- - (Rs 78,00,000/- + Rs 52,80,325/-)] as part of turnover and levied a presumptive tax @ 8% of Rs . Rs 2,25,676/-.

We find from the balance sheet of the assessee that the assessee had a capital of Rs 6,22,725/-, liability of Rs 1,76,226/- and current assets of Rs 7,98,951/- with him as on 31.03.2014. We may, taking a considerate view, accept that the assessee’s father had used the assessee bank account. We also note that the assessee’s father had a turnover ranging from Rs 51 lakh in FY 2011-12 to Rs 62 lakh in FY 2013- 14, therefore it may be plausible that some portion of cash belonging to the father may have been deposited in assessee’s bank account.

In the result, appeal of assessee in is partly allowed.