Validity of Addition under section 69 if Assessee deposited cash in bank account when cash book was showing negative balance

Short Overview  Where AO made addition under section 69 on allegation that assessee deposited cash in bank account even though cash balance in cash book showed negative balance, considering fact that AO did not issue any show cause notice to explain source of cash and that it was only a genuine mistake on part of data entry operator, who made erroneous entry with a prior date, addition was unjustified.

Assessee-individual was running a hospital. AO alleged that assessee deposited substantial cash amount in bank account on a particular date, whereas on same day, there was a negative cash balance in cash-book. AO therefore, made an addition under section 69 read with section 115BBE.

It is held that AO made addition on basis of copy of cash balance in the cash-book on a particular date. It was manifest from the assessment order that AO did not issue any show cause notice to the assessee or even asked the assessee to explain the source of cash deposit in the bank account. Thus, entries made in cash-book for relevant period were considered by CIT(A) and it was found that it was only a genuine mistake on the part of the data entry operator, who made erroneous entry with a prior date. Thus, there was no error in order of CIT(A) in deleting the addition made by AO.

Decision: In assessee’s favour.

IN THE ITAT, JAIPUR BENCH

RAMESH C. SHARMA, A.M. & VIJAY PAL RAO, J.M.

ACIT v. Dr. Radhey Shyam Garg & (Vice-Versa)

ITA No. 1317/JP/2019, Cross Objection No. 02/JP/2020 (Arising out of ITA No. 1317/JP/2019)

10 August, 2020

Assessee by: Subhash Chand Gupta, (Advocate)

Revenue by: Runi Pal, (DCIT)

ORDER

Vijay Pal Rao, JM

This appeal by the revenue and cross objection by the assessee are directed against the Order, dated 5-9-2019 of learned Commissioner (Appeals), Alwar for the assessment year 2016-17. The revenue has raised the following grounds :–

“1. Whether on the facts and circumstances of the case and in law learned Commissioner (Appeals) is justified in deleting addition of Rs. 1,01,774 made by the assessing officer on account of cash deposited in bank account despite of the fact that sufficient cash was not hand as per cash book.

2. Whether on the facts and circumstances of the case and law, the learned Commissioner (Appeals) is justified in deleting the action of the assessing officer in considering Rs. 4,07,77,191 as business income as against of Long Term Capital Gain of Rs. 3,51,17,040 declared by the assessee in the return of income, without appreciating material facts of the case.”

Due to the prevailing situation of COVID 19 pandemic, the hearing of the appeal was concluded through Video Conference.

Ground No. 1 is regarding an addition of Rs. 1,01,774 made by the assessing officer on account of cash deposit in the bank account of the assessee was deleted by the learned Commissioner (Appeals).

2. The assessee is an Individual and running a Hospital in the name and styled as M/s. Mayuri Surgical Hospital. The assessee has filed his return of income on 14-10-2016 declaring total income of Rs. 3,80,07,400 including Long Term Capital Gain of Rs. 3,51,17,040. During the course of assessment proceedings, the assessing officer noted that the assessee has deposited cash of Rs. 2,90,000 in the Central Bank of India whereas on the said date i.e. 16-11-2015 there was a negative cash balance in the cash book of Rs. 1,01,773.84. The assessing officer accordingly made an addition of Rs. 1,01,774 under section 69 of the IT Act read with section 115BBE of the IT Act. The assessee challenged the action of the assessing officer before the learned Commissioner (Appeals) and submitted that the assessing officer has made the addition without giving him any show cause notice and opportunity to explain the source of cash deposited in the bank account. The assessing officer has called for a copy of cash-book for the designated date to verify the cash deposit with the bank and in compliance the assessee filed copy of the cash book for the required date only. Thus the assessee has contended before the learned Commissioner (Appeals) that without giving show cause notice and opportunity to explain the availability of cash, the addition made by the assessing officer is not justified and liable to be deleted. The assessee further explained that it is a wrong entry passed on 17-11-2015 instead of 16-11-2015 or 14-11-2015 for Rs. 1,20,000 being cash shown as deposited with the Bank on 14-11-2015. Since there was no actual cash deposited in the bank on the said date, therefore, a reverse entry was passed on 17-11-2015. The learned Commissioner (Appeals) deleted the addition after considering the facts explained by the assessee.
3. We have heard the learned D/R as well as the learned A/R and carefully perused the orders of the assessing officer and learned Commissioner (Appeals). The assessing officer has made the addition on the basis of copy of the cash balance in the cash book on a particular date. It is manifest from the assessment order that the assessing officer has not issued any show cause notice to the assessee or even asked the assessee to explain the source of cash deposit in the bank account. The learned Commissioner (Appeals) after considering the facts as explained by the assessee has deleted the addition in para 4.3 as under :–

“ 4.3. I have perused the assessment order as well as submissions filed by the appellant including judicial citations given therein. Following facts have emerged :–

1, That the appellant has submitted that cash of Rs. 1,20,000 was handed over to the cashier for deposit in the bank but being a Saturday the same could not have been deposited but in the cash book entry was made on 14-11-2015. However, on Monday i.e. 16-11-2017 a total cash of Rs. 2,90,000 including Rs. 1,20,000 was deposited and the contra entry in the cash book was made in the cash book on 17-11-2015 instead of 16-11-2015 due to oversight of the computer operator. I have considered the submission along with the cash-book entry and it is my considered view that it is a genuine mistake on the part of data entry operator. The assessing officer has also not rejected the books of accounts. Therefore, the addition of Rs. 1,01,774 is deleted and the appellant’s ground of appeal on the issue is allowed.”

Thus the entries made in the cash-book from 14-11-2015 to 17-11-2015 were considered by the learned Commissioner (Appeals) and it was found that it was only a genuine mistake on the part of the Data Entry Operator who has made the entry of 17-11-2015 instead of 16-11-2015. In view of the above facts as discussed by the learned Commissioner (Appeals) and no contrary material brought before us, we do not find any error or illegality in the impugned order of learned Commissioner (Appeals).

Ground No. 2 of the revenue’s appeal and ground in the Cross Objection are common regarding the Long Term Capital Gain declared by the assessee was treated as Business income by the assessing officer and subsequently bifurcated by the learned Commissioner (Appeals) into Long Term Capital Gain as well as Business income as per provisions of section 45(2) of the IT Act. Thus the revenue as well as the assessee are aggrieved by the order of learned Commissioner (Appeals) and filed respective appeal and cross objection on this issue.

4. 4. The learned D/R has submitted that the assessee has shown the Long Term Capital gain on sale of various plots and shops after claiming deduction under section 54F.

Since the assessee has developed a residential colony and divided the land into 102 residential plots in the colony named as Mayuri Nagar Colony, therefore, the assessing officer has rightly considered this activity of the assessee as a business activity instead of investment in capital asset. The assessing officer has rightly treated the income arising from the sale of the said plots as Income from business and consequently the deduction under section 54F was denied. The learned D/R has further submitted that this is not the only activity of the assessee in the real estate business but the assessee has also sold shops during the year under consideration. Therefore, it is evident from the facts that the assessee is purchasing and selling the real estate property and even developing the land and then selling, some of which even constructed as commercial property and shops are sold. He has relied upon the order of the assessing officer. The activity is a regular business activity and the assessee has specifically devoted his time to develop the colony by preparing a lay out plan, site plan, ear marking the blocks in the colony A, B, C, D, E, F, G, H, I, J, K and thereafter the plots were sold as residential plots and not agricultural land. Therefore, the income arising from sale of these plots is nothing but the business income of the assessee. The assessee is otherwise engaged in the business of running the Hospital and hence bifurcation of the said income into Long Term Capital Gain and Business income by the learned Commissioner (Appeals) is not based on the facts of the case.

5. On the other hand, the learned A/R of the assessee has submitted that there is no dispute that the assessee purchased the agricultural land in the village Mehemadpur, District Dholpur in the year 2000 as an Investment without any intention to derive profit by selling the same. The assessee was holding this land for a long time till it was sold in the year under consideration. The assessee was using the land for agricultural purposes till the land was divided into plots and sold. Since the nearby area of the land has been developed and people started residing along with farming their lands, therefore, to avoid the illegal encroachment on the land, the assessee decided to sale the land after dividing the same into residential plots. Thus the learned A/R has submitted that the assessee has sold the agricultural land though after dividing the same into plots and, therefore, gain arising from the sale of the land is nothing but Long Term Capital Gain as the assessee purchased the land as an investment and at the time of sale it cannot be treated as business activity. He has relied upon the decision of Hon’ble Jurisdictional High Court in the case ofSohan Khan & Mohan Khan, (2008) 304 ITR 194 (Raj.) : 2008 TaxPub(DT) 1941 (Raj-HC).
6. We have considered the rival submissions as well as the relevant material on record. The undisputed fact as emerging from the record is that the assessee purchased the agricultural land in question in the year 2000-01. During the year under consideration, the assessee has sold various plots of land and the description of the land given in the sale document clearly reveals that what is sold by the assessee is residential plot to each buyer. Therefore, undisputedly the assessee has developed the land into a residential colony by carving out 102 residential plots, ear-marking the plots as A, B, C, D, E, F, G, H, I, J, K as well as number of the plots. This exercise of the assessee, whereby the assessee has prepared a layout plan and which has been executed on the ground the plots have been carved out as per the lay-out plan and the map under which a proper residential colony is developed. Therefore, the plots are sold by the assessee as residential plot in a colony developed by the assessee though the colony was yet to be approved by the Authorities. When there were proper roads and pathways in the said colony, then it cannot be said that the agricultural land was simply divided and sold by the assessee for maximizing the valuation of the land. The assessing officer has reproduced the contents of the registered documents through which the plots of land were sold by the assessee. The assessee has not disputed those contents and facts that what is sold by the assessee are the residential plots in the colony developed by the assessee in the name of Mayuri Nagar Colony. This description is given by the assessee in the Sale Deed whereby the plots were sold. The assessing officer has also given the details of the plots sold by the assessee during the previous year relevant to the assessment year under consideration at pages 4 & 5 of the assessment order as under :–

Sale of Plots		40328500
On 31-3-2016	25510500
On 30-9-2015	4033000
On 31-12-2015	10785000
Sale of shops		2836600
On 12-2-2016	1493000
On 29-2-2016	1343600
Total Sales		43165100
Cost of plots sold		365396
Cost of plots sold on 31-3-2016	232030
Cost of plots sold on 30-9-2015	35601
Cost of plots sold on 31-12-2015	97765
Cost of Shops Sold		372513
Cost of shops sold on 12-2-2016 (Cost of land purchase 14675 + Construction Cost 200000)	214675
Cost of shops sold on 29-2-2016 (Cost of land purchase 7838 + Construction Cost 150000)	157838
Development Cost of Colony		1650000
Total Cost of sold property		2387909
Profit from business of real estate		40777191

Thus it is clear that the assessee has sold the plots as well as shops in the colony developed by assessee. The learned Commissioner (Appeals) though upheld the finding of the assessing officer to the extent that what was sold by the assessee were the residential plots and, therefore, the activity of developing the colony is a business activity of the assessee which is adventurous in nature. However, the learned Commissioner (Appeals) has also held that initially the assessee has invested in capital assets and, therefore, the capital asset was converted into stock-in-trade and thereby the profit arising from sale of plots has been bifurcated by the learned Commissioner (Appeals) into capital gain as well as business profit. The learned Commissioner (Appeals) has applied the fair market value for the purposes of arriving at the capital gain and the difference of the sale consideration and the fair market value is treated as Business income of the assessee. The relevant finding of the learned Commissioner (Appeals) on this issue is in para 5.3 as under :–

“ 5.3. I have perused the assessment order as well as submissions filed by the appellant including judicial citations given therein. Following facts have emerged :–

1. That the appellant had purchased agricultural land vide registered deed dated 27-9-2000 & 12-2-2001 for an amount of Rs. 3,73,234 .
2. That in the year 2015-16, the appellant had divided the agricultural land into small plots and developed a colony under the name of Mayuri Nagar Colony.
3. That the appellant had also constructed shops on the land for sale.
4. That after plotting has been done, the appellant has started selling the plots. Such plots were sold during the year under consideration and declared the income as long term capital gain.
5. That the assessing officer had considered the income arisen out of the above mentioned sale as business income by treating it as ‘business income’.”

On principle, we agree with the order of the learned Commissioner (Appeals) on the point that initially the assessee has invested in the land in question, however, subsequently when the assessee has decided to develop the residential colony on this land then the capital asset has been converted into stock-in-trade. However, the bifurcation of the profit arising from the sale of the plots of land ought to have been based on the FMV on the date when the assessee has decided to develop the land into residential colony. The timing and date of such conversion is taken by the learned Commissioner (Appeals) as on 1st day of financial year 2015-16 i.e. 1-4-2015. However, the said date is not the actual date coming from the relevant material/record. The preparation of the site plan for developing the colony shall be the actual date of conversion of the agricultural land into stock-in-trade.

The learned Commissioner (Appeals) has not examined this issue as on when the capital asset was converted into stock-in-trade. The learned Commissioner (Appeals) has just taken the 1st day of previous year relevant to assessment year as the date of conversion which is not based on any documentary evidence. Accordingly, the computation of capital gain as well as the business income arising from the sale of land is dependent on the fair market value of the undeveloped land in question on the date when the assessee decided to develop the land. The documentary evidence on this point would be the lay out plan prepared by the assessee or any other document which was prepared by the assessee for the purpose of development of the land. Therefore, the bifurcation and computation of Long Term Capital Gain and Business income requires a proper verification and re-consideration.

Accordingly we set aside this limited issue to the record of the assessing officer for determining the actual date of conversion of the capital asset into stock-in-trade and then apply the provisions of section 45(2) of the IT Act to bifurcate the profit into Long Term Capital Gain and Business income.

6.1. As regards the deduction under section 54F is concerned, the learned Commissioner (Appeals) has not considered this issue. The assessing officer has denied the claim solely on the ground that the profit on sale of the land is Business income whereas the learned Commissioner (Appeals) has not adjudicated this issue while passing the impugned order. Accordingly the assessing officer is directed to examine the claim of deduction under section 54F and then decide the same after giving an opportunity of hearing to the assessee.

6.2. As regards the income arising from sale of shops, the learned Commissioner (Appeals) has allowed the claim of the assessee as Income from Capital gain, we find that once the assessee has decided to develop the land by construction of shops for the purpose of sale, then a different para meter cannot be applied as applied in the case of development of land in a residential colony. Accordingly, the profit arising from the sale of shops is also required to be bifurcated as per the provisions of section 45(2) of the IT Act. The assessing officer has to compute the capital gain as well as the Business income in view of our observations as regards the conversion of the agricultural land into residential colony.

Hence the appeal of the revenue is partly allowed for statistical purposes and the Cross Objection of the assessee is dismissed.

7. In the result, appeal of the revenue is partly allowed for statistical purposes and the Cross Objection of the assessee is dismissed.