Section 69A Addition Deleted as Cash Deposits Were Business Turnover: ITAT Chennai

Sakthi Traders Vs ITO (ITAT Chennai)

The assessee, a partnership firm engaged in the business of running a hardware store, filed its return of income for Assessment Year 2017-18 declaring total income of Rs.97,940. After scrutiny proceedings under Sections 143(2) and 142(1), the Assessing Officer (AO) noted cash deposits of Rs.27,07,500 in the assessee’s bank account, including Rs.22,51,000 deposited in specified bank notes during the demonetisation period. As the assessee did not furnish documentary evidence explaining the deposits or comply with the notices, the AO completed the assessment ex parte under Section 143(3). The AO attributed Rs.9,38,000 to the closing cash balance as on 08.11.2016 and treated the remaining Rs.13,13,000, stated to represent daily cash collections during the demonetisation period, as unexplained money under Section 69A. In addition, owing to non-production of books of account, the AO estimated business income by applying a net profit rate of 2% on the declared turnover of Rs.2,71,44,530, resulting in estimated business income of Rs.5,42,890.

The Commissioner of Income Tax (Appeals) sustained the addition of Rs.13,13,000 under Section 69A. For estimating business income, however, the CIT(A) excluded the same amount from the declared turnover and recomputed the turnover at Rs.2,58,31,530, while maintaining the 2% profit rate, thereby reducing the estimated business income to Rs.5,16,630 and granting relief of Rs.26,260.

The appeal before the Tribunal was filed with a delay of 322 days. After considering the condonation petition and affidavit, the Tribunal condoned the delay on being satisfied that sufficient cause existed. However, noting the assessee’s casual and nonchalant approach in pursuing the appeal, it imposed costs of Rs.10,000 payable to the State Legal Services Authority attached to the Hon’ble High Court of Madras within 30 days, with proof of payment to be furnished before the AO.

Before the Tribunal, the assessee contended that the CIT(A) had disposed of the appeal ex parte without granting an effective opportunity of hearing. On merits, it was argued that the cash deposits of Rs.13,13,000 represented business receipts recorded in the regular books of account and formed part of the disclosed business turnover. The assessee submitted that once such receipts had been treated as business revenue, the same amount could not also be taxed as unexplained money under Section 69A. It was further submitted that the authorities had failed to grant credit for the returned income of Rs.97,940 while computing taxable income. The Revenue supported the orders of the lower authorities.

The Tribunal identified two issues for adjudication: whether business income had been rightly estimated at 2% of the disclosed turnover and whether the cash deposits of Rs.13,13,000 could be assessed as unexplained money under Section 69A. It observed that the assessee had failed to produce books of account or supporting evidence despite statutory notices. In these circumstances, the AO was justified in estimating business income. Considering the nature of the assessee’s hardware trading business and the absence of material rebutting the estimation, the Tribunal held that the 2% net profit rate on the disclosed turnover of Rs.2,71,44,530 was neither excessive nor unreasonable and upheld the estimated business income of Rs.5,42,890. The Tribunal, however, directed the AO to grant due credit for the returned income of Rs.97,940 while recomputing the final taxable income.

On the Section 69A addition, the Tribunal noted that while the AO treated the cash deposits as unexplained money, the CIT(A) had simultaneously treated the same amount as part of the disclosed turnover by excluding it from turnover for the purpose of estimating business income. The Tribunal held that once the cash deposits were accepted as forming part of the business turnover and business income was estimated on that turnover, the same receipts could not again be assessed separately as unexplained money under Section 69A. It observed that only the profit element embedded in such receipts could be brought to tax and that separately taxing the gross receipts under Section 69A after estimating profits on the same turnover would amount to taxing the same amount twice. Since the business income had been upheld on the disclosed turnover of Rs.2,71,44,530, which included the impugned sum of Rs.13,13,000, the Tribunal found no justification for sustaining the separate Section 69A addition and directed its deletion.

Accordingly, the Tribunal upheld the estimation of business income at 2% on the disclosed turnover, directed the AO to grant credit for the returned income of Rs.97,940 while computing the final taxable income, deleted the separate addition of Rs.13,13,000 under Section 69A, and partly allowed the assessee’s appeal.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

The present appeal of the assessee is directed against the order dated 30.01.2025 of the Learned Commissioner of Income Tax (Appeals) , NFAC [hereinafter referred to as “the Ld.CIT(A)”], arising out of the assessment order dated 26.12.2019 passed u/s.143(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Income Tax Officer, Ward 1, Thanjavur [hereinafter referred to as “the AO”] pertaining to the Assessment Year 2017-­18.

2. At the outset, it is observed that the present appeal has been filed with a delay of 322 days. The assessee has moved a petition seeking condonation of the delay, duly supported by an affidavit explaining the reasons for the belated filing of the appeal. Upon perusal of the condonation petition and the affidavit filed in support thereof, and having regard to the facts and circumstances of the case, we are satisfied that the assessee was prevented by sufficient cause from presenting the appeal within the prescribed period of limitation. Accordingly, the delay of 322 days in filing the appeal is condoned and the appeal is admitted for adjudication on merits. However, we cannot overlook the casual and nonchalant approach exhibited by the assessee in pursuing the appellate remedy. Therefore, while condoning the delay in the interest of substantial justice, we deem it appropriate to impose cost of Rs.10,000/- upon the assessee. The said amount shall be paid to the State Legal Services Authority attached to the Hon’ble High Court of Madras within a period of 30 days from the date of receipt of this order. The assessee shall furnish proof of such payment before the AO. The AO is directed to verify compliance with the aforesaid direction and ensure payment of the costs while giving effect to this order.

3. The brief facts of the case, as emanating from the assessment records, are that the assessee, a partnership firm engaged in the business of running a hardware store, filed its return of income for the assessment year under consideration on 16.08.2017 declaring a total income of Rs.97,940/-. The return was processed u/s.143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s.143(2) of the Act was issued on 09.08.2018, followed by notices u/s.142(1) of the Act. However, the assessee failed to comply with the notices issued by the AO and did not furnish the details called for during the course of assessment proceedings.

4. During the assessment proceedings, the AO noticed that the assessee had deposited cash aggregating to Rs.27,07,500/- in its bank account maintained with Indian Bank, Pattukkottai. In order to verify the nature and source of such deposits, the AO issued a notice u/s.133(6) of the Act to the concerned bank. On the basis of the information received, it was found that out of the total cash deposits of Rs.27,07,500/-, a sum of Rs.22,51,000/-represented deposits made in specified bank notes during the demonetization period.

5. The AO, therefore, called upon the assessee to explain the source of the aforesaid cash deposits. However, according to the AO, the assessee failed to furnish any documentary evidence in support of the source of the cash deposited in the bank account. In the absence of any explanation or supporting material, the AO proceeded to complete the assessment ex parte.

6. While examining the cash deposits, the AO observed that a sum of Rs.9,38,000/- could be reasonably attributed to the closing cash balance available with the assessee as on 08.11.2016. Accordingly, the AO worked out the balance amount of Rs.13,13,000/- as cash deposits allegedly made out of daily cash collections generated by the assessee during the period commencing from 09.11.2016.

7. The AO was of the view that pursuant to the demonetization notification issued by the Government of India, the old series currency notes(SBNs) of Rs.500/- and Rs.1,000/- ceased to be legal tender with effect from 09.11.2016, except in respect of persons and entities falling within the categories specifically exempted under the said notification. Since the assessee did not fall within any such exempted category, the AO held that the sum of Rs.13,13,000/- deposited during the demonetization period out of the alleged business collections constituted unexplained money within the meaning of section 69A of the Act and accordingly made an addition of the said amount.

8. Further, in the absence of production of books of account and supporting records, the AO estimated the business income of the assessee by applying a net profit rate of 2% on the declared turnover of Rs.2,71,44,530/-, resulting in an estimated business income of Rs.5,42,890/-.

9. Accordingly, the assessment was completed u/s.143(3) of the Act vide order dated 26.12.2019 determining the total income of the assessee at Rs.18,55,890/-, after making the following additions: (i) Rs.13,13,000/- u/s.69A of the Act on account of cash deposits made during the demonetization period, treated as unexplained money; and (ii) Rs.5,42,890/- being the estimated business income.

10. Aggrieved by the assessment order and the additions so made, the assessee preferred an appeal before the Ld.CIT(A).

11. The Ld.CIT(A), vide the impugned appellate order dated 30.01.2025, sustained the addition of Rs.13,13,000/- made by the AO by treating the cash deposits made during the demonetisation period as unexplained money u/s.69A of the Act. Further, insofar as the estimation of business income is concerned, the Ld. CIT(A) excluded the aforesaid amount of Rs.13,13,000/- from the turnover declared by the assessee at Rs.2,71,44,530/- and consequently recomputed the turnover at Rs.2,58,31,530/-. On such recomputed turnover, the Ld.CIT(A) upheld the estimation of business income at 2%. Accordingly, the business income was re-estimated at Rs.5,16,630/- as against Rs.5,42,890/-estimated by the AO, thereby granting relief of Rs.26,260/- to the assessee.

12. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.

13. The Ld.AR, appearing on behalf of the assessee, vehemently contended that the Ld.CIT(A) had disposed of the appeal ex parte without granting the assessee an effective and adequate opportunity of being heard, thereby violating the principles of natural justice. It was submitted that the impugned appellate order had been passed without proper consideration of the facts and explanations placed on record by the assessee.

14. On merits, the Ld.AR submitted that the cash deposits aggregating to Rs.13,13,000/- represented business receipts arising in the ordinary course of the assessee’s business activities and were duly recorded in the regular books of account maintained by the assessee. It was argued that the said receipts had already been accounted for as part of the business turnover and consequently formed part of the business income offered to tax. The Ld. AR contended that once a particular sum has been disclosed and assessed as business revenue, the same amount cannot simultaneously be subjected to tax as unexplained money under the provisions of section 69A of the Act, as such an approach would result in impermissible double taxation of the very same income.

15. The Ld. AR further submitted that both the lower authorities failed to grant due credit for the income of Rs.97,940/- already returned by the assessee in the return of income. According to the Ld.AR, while making and sustaining the impugned addition, the authorities below had overlooked the fact that the returned income had already been offered to tax, thereby resulting in an inflated assessment of the taxable income.

16. In view of the aforesaid submissions, the Ld.AR prayed that the addition made by the AO and subsequently sustained by the Ld.CIT(A) be deleted in entirety and appropriate relief be granted to the assessee in accordance with law.

17. Per contra, the Ld.DR supported the orders of the lower authorities and prayed for dismissal of the assessee’s appeal.

18. We have carefully considered the rival submissions, perused the assessment order as well as the impugned order passed by the Ld. CIT(A), and examined the material placed on record. The issues arising for our adjudication are twofold, namely, (i) whether the authorities below were justified in estimating the business income of the assessee at 2% of the disclosed turnover, and (ii) whether the cash deposits of Rs.13,13,000/- made during the demonetisation period could validly be brought to tax as unexplained money u/s.69A of the Act.

19. At the outset, insofar as the estimation of business income is concerned, we find that the assessment proceedings were completed under circumstances where the assessee had failed to furnish the books of account and other supporting evidences called for by the AO. The assessment records reveal that despite issuance of statutory notices, the assessee did not place before the AO the primary records necessary for verification of the correctness of the income returned. In the absence of books of account and supporting documentary evidence, the AO was left with no alternative except to determine the business income on an estimated basis. It is a settled proposition of law that where the correctness and completeness of accounts cannot be verified due to non-production of books and records, the AO is empowered to estimate the profits of the business on a reasonable basis having regard to the facts and circumstances of the case.

20. In the present case, the AO adopted a net profit rate of 2% on the turnover disclosed by the assessee at Rs.2,71,44,530/-, resulting in an estimated business income of Rs.5,42,890/-. On careful consideration of the nature of business carried on by the assessee, namely trading in hardware goods, and keeping in view the fact that no reliable books of account were produced either before the AO or before the first appellate authority to rebut the estimation made, we do not find the profit rate adopted by the AO to be excessive, arbitrary or unreasonable. The estimation has been made on a rational basis and no material has been brought before us to demonstrate that a lower rate ought to have been adopted. Therefore, in the facts and circumstances of the present case, we are inclined to uphold the estimation of business income at 2% of the disclosed turnover of Rs.2,71,44,530/-, which works out to Rs.5,42,890/-.

21. However, we find substantial force in the contention advanced by the Ld.AR that the income already returned by the assessee amounting to Rs.97,940/- has not been appropriately given credit while computing the assessed income. Once the business income is determined on an estimated basis, such estimation effectively substitutes the income originally declared from the business activity. Therefore, while giving effect to this order, the AO shall ensure that due credit is granted for the income of Rs.97,940/- already offered to tax by the assessee in the return of income and that the same is appropriately adjusted while arriving at the final assessed income. We accordingly direct the AO to recompute the taxable income after granting such credit in accordance with law.

22. Coming to the addition of Rs.13,13,000/- made u/s.69A of the Act, we find that the AO treated the said amount as unexplained money on the premise that the cash deposits made during the demonetisation period represented deposits of specified bank notes which, according to him, could not have been accepted by the assessee in the ordinary course of business after 08.11.2016. However, a careful reading of the findings recorded by the Ld.CIT(A) reveals that the impugned amount of Rs.13,13,000/- was considered by the first appellate authority as forming part of the turnover disclosed by the assessee. In fact, while sustaining the addition u/s.69A of the Act, the Ld.CIT(A) simultaneously excluded the very same amount from the disclosed turnover for the purpose of estimating business income, thereby implicitly acknowledging that the deposits were linked with the business receipts of the assessee.

23. Once it is accepted that the impugned cash deposits constitute part of the business turnover disclosed by the assessee, the inevitable legal consequence is that the same receipts stand embedded in the trading results of the business. It is well settled that where sales or business receipts are accepted as forming part of turnover and business income is thereafter determined by applying a profit rate on such turnover, the entire receipts cannot again be separately assessed as unexplained money u/s.69A of the Act. What can be brought to tax in such circumstances is only the profit element embedded in the receipts and not the gross receipts themselves. Any contrary view would result in taxation of the same amount twice over, once as part of the business turnover on which profits are estimated and again as unexplained money u/s.69A of the Act. Such a course is clearly impermissible under the scheme of the Act and would lead to an anomalous and unjust result.

24. In the present case, having upheld the estimation of business income on the disclosed turnover of Rs.2,71,44,530/-, which admittedly includes the impugned sum of Rs.13,13,000/-, we are of the considered opinion that there remains no justification for sustaining a separate addition of the very same amount u/s.69A of the Act. The source of the deposits having been linked to the business receipts disclosed by the assessee, the addition u/s.69A of the Act loses its independent existence and becomes unsustainable. Accordingly, the addition of Rs.13,13,000/- made by the AO and sustained by the Ld.CIT(A) u/s.69A of the Act is directed to be deleted.

25. In view of the foregoing discussion, we uphold the estimation of business income at 2% on the disclosed turnover of Rs.2,71,44,530/-, subject to the direction that credit for the returned income of Rs.97,940/- shall be granted while computing the final taxable income. The separate addition of Rs.13,13,000/- made u/s.69A of the Act is hereby deleted. Consequently, the grounds raised by the assessee are partly allowed.

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

Order pronounced in the court on 10^th June, 2026 at Chennai.