Interesting case : Validity of addition where genuineness of business itself is doubted by Income Tax Authorities

Short Overview : Where assessee filed return under section 44AD there was no necessity for assessee to maintain books of account or bills and vouchers of sales and purchases and therefore, there was no justification to hold that sales made by him were bogus and if there was no creditor of assessee, there was no question of considering it to be cash credit.

Assessee showed cash-in-hand of Rs. 11,22,000 in balance sheet submitted during course assessment proceedings. As per assessee, he was engaged in business of trading of cloth at a small level and that he had sold goods amounting to Rs. 15,00,000 during year and filed return under section 44AD. AO inferred that cloth business of assessee was totally bogus and does not exist at all and accordingly treated same as unexplained cash credit in shape of bogus sales and made addition of Rs. 15 lakhs under section 68. CIT(A) had restricted addition to Rs. 11,22,090 i.e., to extent of cash-in-hand which was considered as unaccounted.

it is held that  Assessee had filed details of sales and purchase giving names of parties, their telephone number and address. If AO had any doubt about same he could have made direct inquiry from them. Since assessee declared return of income under section 44AD, there was no necessity for assessee to maintain books of account or bills and vouchers of sales and purchases. At most, AO could have doubted quantum of sales and could have enhanced same, but, there was no justification to hold that sales were bogus. Since copy of balance-sheet was provided at assessment stage, it would not prove that assessee maintained books of account. If there was no creditor in books of account of assessee and that no books of account have been maintained, there was no question of considering it to be cash credit.

Decision: In assessee’s favour.

IN THE ITAT, DELHI BENCH

BHAVNESH SAINI, J.M.

Pradeep Jain v. ITO

ITA No. 8001/Del./2018

4 June, 2019

Assessee by: Rakesh Gupta, & Somil Agarwal, Advocates

Revenue by: S.L. Anuragi, Sr. Departmental Representative

This appeal by Assessee has been directed against the Order of the learned Commissioner (Appeals)-1, Gurgaon, Dated 29-6-2018, for the assessment year 2015-2016, challenging the addition of Rs. 11,22,090 on account of cash in hand.

2. Briefly the facts of the case are that the return of income was filed declaring income of Rs. 9,63,920 on 13-12-2016. The case was selected for limited scrutiny for the reasons of cash deposit for demonetization period. As per information available with the assessing officer, during the demonetization period from 9-11-2016 to 30-12-2016, assessee had deposited cash amount in his bank accounts mentioned in para 3.1 of the assessment order i.e., Rs. 8,49,000 in Bank of Maharashtra, Palam Vihar, Gurgaon, Rs. 9,49,000 in Syndicate Bank, Kashmiri Gate, Delhi and Rs. 10,49,000 in Andhra Bank, Palam Vihar, Gurgaon. The assessee explained source of Rs. 8,49,000 out of earlier years income and remaining cash were explained to be retail sales made during the year. The assessing officer in order to verify cash deposit of Rs. 8,49,000 out of earlier year’s income, issued show cause notice to the assessee.

The assessee filed copy of the ITR for assessment year 2015-2016 declaring income of Rs. 9 lakhs under the Head “Profits and gains from Business”. Further, the assessee showed cash in hand of Rs. 11,22,000 as on 31-3-2015 in the balance sheet submitted during the course of assessment proceedings. As per assessee, he was engaged in the business of trading of cloth at a small level. The goods were procured from local market, getting some small work done on the same, and packed nicely to make them look more beautiful and wearable. They were then sold in Gurugram.

The assessee submitted that he had sold goods amounting to Rs. 15,00,000 during F.Y. 2014-15 and filed his ITR under section 44AD of the Act. The assessing officer noted that according to assessee he did not maintain bills of purchase as the same were done in cash. All transactions were done in cash. The assessing officer further noted that assessee has not furnished even a single bill/voucher in respect of sale and purchase. The assessee submitted a list of suppliers giving their names and addresses, but, no confirmations have been filed. The returns were filed subsequently. The assessing officer, therefore, inferred that the cloth business of assessee is totally bogus and does not exist at all. The explanation of assessee was called for as to why addition of Rs. 15 lakhs should not be made because of absence of any proof of business activity and as to why the sale receipts of Rs. 15 lakhs out of which assessee has claimed cash deposits should not be treated as unexplained cash credit under section 68 of the Income Tax Act. The assessing officer after considering the reply of the assessee noted that assessee has submitted his balance-sheet for the year under consideration which proved that assessee has maintained his books of account, therefore, addition could be made under section 68 of the Income Tax Act, 1961. The assessing officer treated the same as unexplained cash credit in the shape of bogus sales and addition of Rs. 15 lakhs was accordingly made.

3. The addition was challenged before the learned Commissioner (Appeals). The assessee also pleaded that assessing officer was not justified in making addition of Rs. 15 lakhs because this figure has been adopted from assessee’s submissions. At the most, if at all any addition is to be made, it could be made to the extent of cash in hand claimed by the assessee. The learned Commissioner (Appeals), therefore, held that in these circumstances the assessing officer was not justified in adopting receipts of Rs. 15 lakhs to estimate the income of assessee under section 68 of the Income Tax Act at Rs. 15 lakhs. The learned Commissioner (Appeals), further made the addition of Rs. 11,22,090 i.e., to the extent of cash in hand which was considered as unaccounted. The addition was restricted to Rs. 11,22,090.

4. The Learned Counsel for the Assessee reiterated the submissions made before the authorities below. He has submitted that assessee filed return of income under section 44AD of the Income Tax Act, 1961, being a small trader. The assessee is not required to maintain any books of account, bills and vouchers for the same. The assessee filed list of customers who purchased goods from the assessee and also maintained list of parties from whom assessee made the purchases, copies of the same are filed in the paper book at Page Nos. 9-11 of the PB. He has submitted that cash sales cannot be added under section 68 of the Income Tax Act. He has relied upon decision of Hon’ble Madras High Court in the case of CIT v. Taj Borewells (2007) 291 ITR 232 (Mds) : 2007 TaxPub(DT) 1133 (Mad-HC) in which it was held as under :–

“Held, that the following striking features were present :–

(a) since there were no books of account, there could be no credits in such books;

(b) it was the first year of assessment of the assessee;

(c) the explanation offered by the assessee-firm was not rejected and only the explanation offered by the partners was rejected.

Unless and until the explanation offered by the firm was rejected and was found not genuine, the assessing officer could not invoke the provisions of section 68. The addition could not be made.”

4.1. He has referred to PB-7 which is balance-sheet ending on 31-3-2015 in which cash in hand of Rs. 11,22,090 have been shown. He has further submitted that balance-sheet is prepared on estimate basis without any maintenance of books of account. He has submitted that in subsequent assessment year 2016-2017, assessing officer has accepted the returned income under section 143(1) in which also assessee has declared income at Rs. 9 lakhs under section 44AD of the Income Tax Act. Copy of the same is filed on record. He has, therefore, submitted that there was no justification to treat cash in hand as unexplained credit.

5. On the other hand, learned Departmental Representative relied upon the Orders of the authorities below.

6. I have considered the rival submissions. The assessee has filed the return of income for assessment year under appeal declaring income of Rs. 9,63,920, out of which, income was declared at Rs. 9 lakhs under section 44AD of the Income Tax Act, 1961. In subsequent assessment year 2016-2017 also, assessee declared income under section 44AD of the Income Tax Act which have not been disputed by the revenue authorities. The assessee filed details of sales and purchase before assessing officer giving the names of parties, their telephone number and address. If the assessing officer had any doubt about the same assessing officer could have made direct inquiry from them. Since assessee declared return of income under section 44AD of the Income Tax Act, therefore, there was no necessity for the assessee to maintain books of account or bills and vouchers of sales and purchase. At the most, assessing officer could have doubted the quantum of the sales and could have enhanced the same, but, there was no justification to hold that the sales are bogus. Since copy of the balance-sheet is provided at assessment stage, it would not prove that assessee maintained books of account. The assessing officer made the addition under section 68 of the Income Tax Act on account of bogus sales.

Thus, it is admitted by the assessing officer that there is no creditor in the books of account of assessee. If there is no creditor in the books of account of the assessee and that no books of account have been maintained, there is no question of considering it to be cash credit. The learned Commissioner (Appeals) did not accept the view of the assessing officer and on the basis of copy of the balance-sheet filed at assessment stage, taken the amount of cash in hand of Rs. 11,22,090 and made the addition.

Copy of the balance-sheet is filed at page-7 of the paper book. In the liability side, assessee has shown capital account of Rs. 20,28,123.75 ps. On the other side i.e., assets, assessee has shown investment, current asset, cash and bank balances, which also tally with the same amount of Rs. 20,28,123.75 ps. This figure includes cash in hand of Rs. 11,22,090. If the figure of Rs. 11,22,090 is taken-out of assets side, it would not tally the balance-sheet of the assessee. It is, therefore, clear that Rs. 11,22,090 is part of capital account of the assessee. These facts, therefore, show that there was no justification for the learned Commissioner (Appeals) to pick-up the figure of Rs. 11,22,090 for the purpose of making the addition on the basis of estimated balance-sheet filed at assessment stage. No evidence has been brought on record as to how the assessee maintained books of account in assessment year under appeal. The assessing officer has specifically noted that case was selected for scrutiny because assessee had deposited cash in his three Bank Accounts, but, no addition have been made on account of such amount deposited in the Bank Accounts. There was thus, no basis for the authorities below to make any addition against the assessee. The explanation of assessee has not been found to be false. Learned Counsel for the Assessee, during the course of arguments rightly contended that assessee started retail business on cloth after his retirement. Since assessee is involved in small business activity and filed return of income under presumptive provisions under section 44AD of the Income Tax Act, there was no justification to consider the sales of assessee to be bogus or to make addition of cash in hand as per details submitted by the assessee because assessing officer did not bring any sufficient evidence on record to justify the addition. I, therefore, do not find any justification to sustain the addition. I, accordingly, set aside the Orders of the authorities below and delete the entire addition.

7. In the result, appeal of Assessee allowed.