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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER PER BENCH:- This assessee’s appeal arises from order of the Ld. CIT (A)-1, Rajkot dated 04-09-2018, in proceedings under section143(3) r.w.s. 147 of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised the following grounds of appeal:- “1. The Commissioner of Income Tax [appeals] erred in confirming the reopening of the assessment. The reopening of the assessment was not justified.
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Without prejudice to ground no 1, The Commissioner of Income Tax [appeals] erred in Confirming the addition of Rs 3,32,365 being l0% of deposits in bank as business income. The addition is not justified.
Without prejudice to ground no 1 and 2 the addition @ 10% is too heavy and arbitrary and not warranted by the facts of the case.
Without prejudice to ground no 1, The Commissioner of Income Tax [appeals] erred in confirming the addition of Rs 69,994 being 10% of expenses claimed. The addition is not justified.
Without prejudice to ground no 1 and 2 the addition 69,994 is too heavy and arbitrary and not warranted by the facts of the case.
6 Without prejudice to ground no 1, The Commissioner of Income Tax [appeals] erred in confirming the addition of Rs 88440 being interest @12% on loan of Rs 7,37,000. The addition is not justified.”
Ground of appeal no 1: This Ground of appeal is general in nature and does not require separate adjudication.
Grounds of appeal nos.-2 & 3: addition of Rs 3,32,365 being l0% of deposits in bank as business income 4. Brief facts of the case are that Ld. Assessing Officer was in receipt of information that the assessee had deposited cash of Rs.26,61,900/- in Punjab National Bank and Rs.6,61,615/- in ICICI Bank. Notice under section 148 was issued to the assessee. Assessee's original return of income was treated to be return in response to notices u/s 148 on request of assessee. It was found that the assessee had shown net profit of Rs. 2,96,096/- on turnover of Rs. 14,49,856/-. When the Ld. Assessing Officer asked the assessee to
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explain the source of the cash deposits in the PNB bank and the ICICI Bank amounting to Rs. 33,23,650/-, the assessee did not file any explanation. In his final show-cause notice, the AO proposed to estimate 10% profit on these deposits and he also proposed to disallow 10% of the expenses claimed in the P&L account in absence of any details. The AO also proposed to estimate l2% interest income on the loans Rs.7,37,300/- reflected in the balance-sheet. In absence of any compliances from the assessee after a considerable lapse of time of more than 8 months, the AO went on to make the three impugned addition of Rs. 3,32,365/-, Rs.69,994/- and Rs. 88,440/- respectively.
During appellate proceedings, the assessee contended that as per provision section 44AD profit cannot be calculated at more than 8%. However, Ld. CIT(A) dismissed the assessee’s ground by holding as below:
Having considered facts and circumstances of the case I find that it is un-controverted that the cash deposits in the said bank account are not disclosed in the regular return of income. The only contention of assessee is that instead of 10% profit the income should be computed at 8%. However, the assessee has not given any details as to what kind of business he was engaged in as far as the cash deposits in these bank accounts are concerned. I find that in his disclosed business income, the assessee has shown net profit of Rs. 7,96,096/- on a turnover of Rs. 14,49,856/- which translates into 20.42% net profit rate. In these facts and circumstances, in my considered opinion, the estimation of net profit on the undisclosed cash deposits at 10% by the
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Assessing officer is fairly reasonable and calls for no interference. The grounds of appeal 2 & 3 are rejected.
We note that the Cochin ITAT in the case of Thomas Eapen v ITO [2020] 113 taxmann.com 268 (Cochin - Trib.) held that where assessee, a small trader in medicine falling under section 44AD, offered income on presumptive taxation basis, provision of section 69A could not be applied to make addition in respect of undisclosed cash credits found in assessee's bank account. The High Court of Punjab and Haryana in the case of CIT v Surinder Pal Anand[2010] 192 Taxman 264 (Punjab & Haryana), held that once under special provision of section 44AD of the Act, exemption from maintenance of books of account has been provided and presumptive tax at rate of 8 per cent of gross receipt itself is basis for determining taxable income, assessee is not under any obligation to explain individual entry of cash deposit in bank unless such entry has no nexus with gross receipts. Also, the Bombay High Court in the case of CIT v Bhaichand N. Gandhi [1982] 11 Taxman 59 (Bom.), has held that the pass book supplied by the bank to the assessee cannot be regarded as a book maintained by the assessee or under his instructions. Accordingly, the Tribunal is justified in holding that a cash credit for the previous year shown in the assessee's bank pass book issued to him by the bank but not shown in the cash book maintained by him for that year, does not fall within the ambit of section 68 of the Act.
6.1 In view of the above rulings as applied to the assessee’s set of facts, the assessee has submitted that all deposits are not fresh deposits and he has
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also withdrawn cash from the bank account on regular basis and it is from these withdrawals that amount has been re-deposited in the bank account. This fact has not been considered by Ld. CIT(A) while confirming the order of Ld. Assessing Officer and entire deposits of Rs. 33,23,650/- have been subject to tax on gross basis at 10%. The assessee is engaged in the business of hydraulic jack and job-work and is therefore eligible to being assessed u/s 44AD of the Act. Therefore, in the interests of justice, the total amount of deposits may be taxed @8% instead of 10% on gross basis. In our considered view, in light of above facts, the cash deposits may be taxed at 8% on gross basis
Therefore, Ground Numbers 2 and 3 of the assessee’s appeal are allowed.
Ground of appeal 4 & 5: confirming the addition of Rs 69,994 being 10% of expenses claimed
In these grounds the assessee has challenged the disallowance of expenses of Rs. 69,994/- being 10% of the total indirect expenses claimed by the assessee in absence of any details and evidences in support of the expenses so claimed. The assessee has contended that he filed letter dated 15-12-2016 with Ld. Assessing Officer, in which supporting vouchers in respect of all expenses were produced. In appeal Ld. CIT(A) dismissed the assessee’s appeal by holding that the assessee has failed to adduce any evidence in support of the indirect expenses of Rs.69,940/- claimed in the profit and loss account and therefore the disallowance of 10% by AO is fair and just. In our considered view, in the interests of justice, the matter is
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being set-aside for verification of supporting documents and relief may be allowed accordingly in case the assessee is able to produce the relevant documents.
In the result, Ground Nos. 4 and 5 of the assessee’s appeal are allowed for statistical purposes.
Ground of appeal no. 6
In this ground the assessee has challenged the addition of Rs. 88,440/- being the notional interest earned on loans of Rs.7,37,000/- as reflected in the balance sheet of assessee at the rate of 12%. The Ld. CIT(A) disallowed the assessee’s appeal and held that the assessee has not justified why interest free advances have been given out of interest bearing funds. Accordingly, he held that Rs.88,440/- being 12% of the interest free advances tantamount to disallowance of this amount from the interest expenses of assessee. The High Court of Gujarat in the case of Arihant Avenue & Credit Ltd. [2013] 36 taxmann.com 14 (Gujarat) held that where assessee had given interest- free advances to its sister concern but it was not case of revenue that interest bearing borrowed money was given as interest-free advance to those parties, no addition on account of notional interest income was warranted. The Chennai ITAT in the case of Ranjani Enterprises (P.) Ltd. [2022] 139 taxmann.com 208 (Chennai - Trib.) has held that where assessee company advanced loans to its sister entity, since assessee agreed not to charge interest as per mutual understanding between both parties as said sister entity was facing financial crunch and further assessee also had business interest in
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its sister concern, Assessing Officer was not justified in making addition on account of notional interest on such outstanding loans advanced by assessee. Again, the ITAT in the case of DCIT, Circle Vs Maruti Securities Limited (ITAT Hyderabad) in ITA. No.1651/Hyd/2017 held that notional interest on advances cannot be charged on accrual basis. In the instant case before us, the Ld. Assessing Officer has added 12% as notional interest on interest free loans and advances, without discussing whether the assessee was having own interest free funds, whether the assessee had taken interest bearing loans to advance these loans, the purpose behind giving interest free advances etc. The addition was made on purely on notional basis by Ld. Assessing Officer. In our view, respectfully following the above judgments in the instant case, we are hereby allowing Ground No. 5 of the assessee’s appeal.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 13-07-2022
Sd/- Sd/- (WASEEM AHMED) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Rajkot : Dated 13/07/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.
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By order,
Assistant Registrar, Income Tax Appellate Tribunal, Rajkot