KUPPUSAMY BASKARAN,CHENNAI vs. ITO NON CORPO WARD 10(1), CHENNAI

Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) and filed detailed Written Submissions, wherein, he reiterated that he was running a Proprietaryship Firm in the name of M/s.Baskaran Milk Parlour and he was a trader in milk and allied products. It was pointed out to the Ld.CIT(A) that assessee had asserted before the AO that amount deposited during demonetization period was from cash sales of milk & milk products and such transaction has been duly recorded in the books of the assessee. Therefore, according to the assessee, question of addition made of such deposit in bank can’t in any case attract unexplained investment u/s.69 of the Act; and therefore, the addition made u/s.69 of the Act can’t be sustained. However, the Ld.CIT(A) was not convinced and according to him, the assessee ought not to have accepted SBNs after 08.11.2016 and therefore, he confirmed the action of the AO making addition of Rs.28,13,900/- (erroneously adopted this figure, whereas, AO added only Rs.25,46,290/-) u/s.69 of the Act.

Aggrieved, the assessee is in appeal before this Tribunal.

We have heard both the parties and perused the material available on record. We note that the assessee is an individual, who is in the business of trading of milk & milk products; and had filed his return of income declaring Rs.4,56,870/-; and later, the return was taken up for scrutiny and AO noted that in the relevant year, there was deposit of cash during demonetization in assessee’s two bank accounts i) Canara Bank - Rs.3,34,000/- & ii) Lakshmi Vilas Bank - Rs.28,13,900/-, totaling Rs.31,47,900/- and the AO asked the assessee to explain/prove the nature and source of cash deposits of Rs.31,47,900/- deposited in the bank accounts. Pursuant to the same, the assessee filed audited financials, P&L A/c, balance sheet of the relevant assessment year and explained to the AO that the SBNs were trade receipts/sales receipts from the sale of milk products. It is noted that the assessee purchased milk [in packets] from M/s.Creamline Dairy Products Ltd., (hereinafter in short ‘M/s.CDPL’) and the assessee distributed the same through small vendors who gave cash to the assessee which were deposited by the assessee in the bank accounts of M/s.CDPL. The assessee has filed customer statement maintained by M/s.CDPL in the name of the assessee for the period from 01.04.2016 to 31.03.2017 which reveals that on 01.04.2016, there was opening balance of Rs.5,18,630/- debited in the name of the assessee and on that date M/s.CDPL supplied milk products of value of Rs.90,969.25; and on next date i.e. 02.04.2016 supplied milk valued Rs.88,285.50 and the assessee deposited dues on 02.04.2016 of Rs.73,750/- and on 03.04.2016 deposited Rs.90,620/- and M/s.CDPL supplied products worth Rs.88,152/- and also Rs.1,755/- and assessee deposited Rs.90,620/- on 03.04.2016, likewise, every day from 01.04.2016, it is seen that regular transaction were taking place between the assessee and M/s.CDPL, wherein, M/s.CDPL used to give milk products to the assessee on credit and the assessee in turn used to collect it and distribute the same to his customers, and the dues were collected and deposited regularly in the bank account of the M/s.CDPL. Thus, assessee followed modus operandi throughout till 15.11.2016. [Please note that demonetization was ordered on 08.11.2016]. It was also brought to our notice that from 08.11.2016 to 15.11.2016, M/s.CDPL accepted the cash deposits in their bank account (of M/s.CDPL) by the assessee; however, from 15.11.2016, they refused to accept the cash to be deposited in their bank account, instead, asked the assessee to deposit it in his own bank-account and issue cheques to M/s.CDPL. It is noted from the customer statement that from 15.11.2016, the assessee was issuing cheques to M/s.CDPL after depositing the same into the assessee’s bank account. This fact is proved from the assessee’s bank statement also and also noted these facts from perusal of audited financials (Form No.3CB) which was filed before the AO. A perusal of the same would reveal that the assessee had procured milk products worth Rs.2,99,84,346/- and total sales was to the tune of Rs.3,13,70,274/- and has shown gross profit of Rs.13,85,928/- and has shown net profit of Rs.4,56,872/-. We find that the AO has not rejected the purchases, sales or audited books of accounts of the assessee. And it is common knowledge that the milk products were essential commodity for human consumption and were perishable items and were being supplied on day to day basis which fact is also discernable from the customers statement placed before us for the period from 01.04.2016 to 31.03.2017. Thus, it is noted that assessee’s total sale consideration from sale of milk/milk products was to the tune of Rs.3,13,70,274/- which included cash deposits/sales of Rs.31,47,900/-. However, the AO having taken note that out of the total deposit of Rs.31,47,900/-, cash deposits of Rs.6,01,610/- was valid currency and therefore, the AO has added only Rs.25,46,290/-.

In the light of the discussion, it can be safely inferred that the profits embedded in the total sales of Rs.3,13,70,274/- has been accepted by the AO. However, the AO has made separate addition of Rs.25,46,290/- which has already been considered for the purpose of Income Tax; and by again adding the entire cash/SBNs which was sales of Rs.25,46,290/- u/s.69 of the Act alleging it as unexplained investment of the assessee is legally sustainable or not is the question before us.

In order to adjudicate this issue, it would be gainful to refer to sec.69 of the Act, which reads as under:-

A plain reading of sec.69 indicate that where in the Financial Year, the assessee has made investments which are not recorded in the books of accounts of the assessee, and the assessee offers no explanation about nature and source of investments or the explanation offered by him is not in the opinion of the AO satisfactory, the value of the investment may be deemed to be income of the assessee. Keeping the definition of unexplained investment in mind, in order to make an addition under this section i.e. sec.69, the AO has to first make a finding of fact that this investment of Rs.25,46,290/- has not been recorded in the books of the assessee; and when asked by the AO (about the investment), the assessee failed to explain the nature and source of such investment or his explanation offered (by assessee) is not to the satisfaction of the AO, then only the value of such investment may be deemed to be un-explained investment u/s.69 of the Act. Unless the conditions prescribed in sec.69 of the Act are satisfied, the deeming provision can’t be said to be attracted. In the present case, it is noted that it is not the case of the AO that the assessee has not recorded the impugned sum of Rs.25,46,290/- in his regular books; and that when asked by him (AO) to explain the nature and source of such sum, the assessee failed to do so. In such a scenario, in the facts and circumstances of the case, the deeming provision of sec 69 of the Act are not attracted. It is further noted that the assessee even told the AO that he was ready to give the details, name & address of his customers to whom he was regularly supplying milk & milk products. Despite that the AO didn’t ask the details of the customers and went ahead and made the addition u/s.69 of the Act, which action can’t be countenanced, because, assessee who deals with supply of milk products to customers on daily basis has recorded the sum of Rs.25,46,280/- as well as Rs.6,01,640/- cash but valid currency during demonetization period shows that cash deposit of Rs.25,46,290/- was also from sale of milk/milk products; and when AO accepted the nature and source of cash deposit of Rs.6,01,640/- (being valid currencies) during demonetization period, in the absence of or without incriminating material, the AO couldn’t have rejected the explanation backed by audited books of accounts.

Further, we find that the assessee had recorded Rs.25,46,290/- in its books as trade receipts and when confronted by the AO to prove the nature and source of the same, the assessee produced the relevant documents to prove it and thus, discharged the burden on him to prove the nature and source of the SBNs deposited during the demonetization period. 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”. Thus we find that assessee has discharged his burden to prove the nature and source of the cash deposits during the demonetization period which was nothing but the receipts from trade of milk & milk products, therefore, the explanation/evidences could not have been brushed aside by the AO on conjectures, surmises and assumptions.

As noted, the assessee has not only explained the source of SBNs to the tune of Rs.25,46,290/- as cash sales of milk & milk products along with the relevant evidences which shows that average sales of the assessee in a month comes to Rs.26 lakhs; and it is noted that during demonetization period, assessee has deposited Rs.31,47,900/- and also deposits made between 08.11.2016 to 15.11.2016 which also comes to around Rs.6 lakhs. In this case, we have asked for the sales during the earlier years and have gone through the analysis furnished by the assessee in respect of total sales, cash sales realization from debtors and cash deposits during Financial Years 2015-16 & 2016-17, and find that there is no significant change in cash deposits during demonetization period. Thus, we find that there is no much variation in the cash deposits during the demonetization period. We also noted that the modus operandi of the assessee (sale of milk & milk products which are normal in cash and that the CBDT notification dated 08.11.2016 (S.O.3408 (E) had exempted the payments as collection of SBNs for purchase of milk though it was milk booths operating under the authorization of Central or State governments. However, the general public was not aware of the intricacies of the exemptions given by this Notification and insisted assessee to distribute the milk and they had given SBNs which could not be refused by the assessee. It is common knowledge that members of the public gives cash for purchase of milk and considering that the assessee into milk & milk products business, we can’t doubt the explanation offered by the assessee. We note that the assessee also declared sales made in their books of accounts and has filed return of income and paid tax on the said income and as noted, the assessee has also been regularly depositing the cash in the suppliers account (M/s.CDPL) up to 15.11.2016 and thereafter, only deposited Rs.25,46,290/- in the assessee’s own account and immediately thereafter issued cheques to M/s.CDPL. The AO has not disputed the claim of the assessee, the nature and source of the deposits were from sale of milk & milk products and only reason given by the AO to make addition was that the assessee could not have transacted/received SBNs after 08.11.2016.

Further, the assessee had brought to our notice the notification issued by the Ministry of Finance (Department of Economic Affairs)

Further, according to the Ld.AR, there was no ordinance/law which prohibited transacting in SBNs from 08.11.2016 to 31.12.2016. And the only reason given by the AO to make addition u/s.69 of the Act was that assessee could not have transacted/received SBNs during demonetization period and relies on the notification issued by the Government of India (supra). No doubt Specified Bank Notes of Rs.500/- & Rs.1,000/- has been withdrawn from circulation from 09th November, 2016 onwards. The Government of India and RBI has issued various notifications and SOP to deal with Specified Bank Notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes up to 31st December, 2016. Further, the Specified Bank Notes (Cessation of Liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact Specified Bank Notes, and appointed date has been stated as 31st December, 2016. Therefore, there is no clarity on how to deal with demonetized currency from the date of circumstances, some persons continued to accept and transact the Specified Bank Notes and deposited into bank accounts. Therefore, merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with Specified Bank Notes, the genuine explanation offered by the assessee towards source for cash deposit can’t be rejected, unless the Assessing Officer makes out a case that the assessee has deposited unaccounted cash into bank account in Specified Bank Notes.

We further, notes that the Central Board of Direct Taxes had issued a Circular for the guidance of the Assessing Officer to verify cash deposits during demonetization period in various categories of explanation offered by the assessee and as per the Circular of the CBDT, examination of business cases, very important points needs to be considered is analysis of bank accounts, analysis of cash receipts and analysis of stock registers.

Thus, we note that the assessee had filed the books of accounts and relevant documents to prove the nature and source of cash/SBNs deposited during demonetization; and asserted that it was trade receipt and had been part of the turnover, which has been offered to tax.

In the light of the aforesaid facts and circumstances discussed supra, we set aside the impugned order of the Ld.CIT(A) and direct deletion of Rs.25,46,290/-.

In the result, appeal filed by the assessee is allowed.