Yamanappa Bagayi Vs ITO (ITAT Panaji)
Demonetisation Deposits Treated as Poultry Business Receipts; Only 2% Profit Taxable and Section 115BBE Inapplicable: Panaji ITAT
The assessee was engaged in poultry farming and declared income of ₹9.49 lakh for AY 2017-18. The AO made two major additions:
- ₹54.26 lakh deposited during demonetisation as unexplained money under section 69A; and
- ₹93.30 lakh as cash expenditure allegedly violating section 40A(3).
Cash deposits during demonetisation
The assessee explained that the deposits represented cash sales from the poultry business. Cash-flow statements for the preceding, current and subsequent years demonstrated that cash sales and deposits were a regular feature of the business.
The ITAT noted that although deposits had increased sharply during demonetisation, deposits for the corresponding period in subsequent years were even higher. This supported the assessee’s contention that the amounts represented normal business receipts.
However, as the assessee could not produce complete documentary evidence for every sale transaction, the Tribunal estimated profit at 2% of the deposits, consistent with the assessee’s normal net-profit margin of 1–2%. Consequently, only ₹1,08,520 was sustained as business income against the original addition of ₹54.26 lakh.
The Tribunal specifically held that since the sustained amount represented estimated business income, the higher tax rate under section 115BBE was not applicable.
Section 40A(3) disallowance
The ITAT found that the AO had apparently mistaken the amounts of purchase invoices for cash payments. A test check of one supplier’s ledger revealed that the cited amounts were purchase bills, while the payments had been made through banking channels.
Accordingly, the ₹93.30 lakh disallowance was restored to the AO for verification of vendor ledgers, bank payments and any actual cash payments. The Tribunal directed that no disallowance should be made if no individual payment was found to violate section 40A(3).
FULL TEXT OF THE ORDER OF ITAT PANAJI
The captioned appeal at the instance of assessee pertaining to A.Y. 2017-18 is directed against the order dated 23.11.2022 framed by National Faceless Appeal Centre (NFAC), Delhi arising out of Assessment Order dated 28.12.2019 passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
2. This is the second round of litigation before this tribunal in as much as the earlier order dated 25.08.2023 has been recalled vide MA No.13/PAN/2023 dated 17.03.2026.
3. Brief facts of the case are that the assessee is engaged in the business of Poultry farming at Losasur, Gokak in the name and style “Bagai Poultry Farm. Income of Rs.9,49,450/- declared in the return of income for A.Y. 2017-18 on 30.10.2017. Case selected for scrutiny under CASS followed by valid statutory notices. Ld. Assessing Officer had information about cash deposit of Rs.54,26,000/- during the demonetization period and the same was examined during the course of assessment proceedings. Even though the assessee filed submissions stating that alleged sum is out of the cash sales made during the year, however, ld. Assessing Officer was not satisfied and made addition of Rs.54,26,000/-. Secondly, ld. Assessing Officer has made disallowance u/s.40A(3) of the Act at Rs.93,29,812/- alleging payment in cash exceeding the prescribed limit towards purchases and list of such parties are appearing in para 6 of the assessment order. Income assessed at Rs.1,57,05,262/-.
4. Aggrieved assessee preferred appeal before ld.CIT(A) but failed to succeed. Now the assessee has approached this Tribunal.
5. Ld. Counsel for the assessee submitted that the addition u/s.40A(3) is uncalled for because ld. Assessing Officer has made the addition for the purchase bills of the respective parties. However, no single payment exceeding Rs.20,000/- in cash has been made to any parties during the year under consideration and major payments have been made through account payee cheques.
6. As regards the cash deposit during the demonetization period, he made reference to the paper book showing the cash flow statement of the preceding and subsequent years which shows that regular cash sales are made round the year and that the alleged cash deposit during the demonetization are out of business receipts.
7. On the other hand, ld. Departmental Representative vehemently argued heavily supporting the order of ld.CIT(A).
8. We have heard the rival arguments made by both the sides and perused the record placed before us. The grievance of the assessee is two fold, firstly against the addition for unexplained money for cash deposit during the demonetization period at Rs.54,26,000/ – and secondly against the disallowance u/s.40A(3) of the Act at Rs.93,29,812/-.
9. We firstly take the addition of cash deposit made u/s.69A of the Act at Rs.54,26,000/-. We note that the assessee is in the Poultry Farming business and in the regular course of its business activity, assessee is making cash sales for the year under consideration. The cash flow statement of the preceeding, current and subsequent year has been filed demonstrating that cash sales are consistently made. Prima-facie, it indicates that the alleged cash deposits are part of the normal business receipts. However, we take note that there is sharp increase in the cash deposits during the demonetization period as compared to the preceding year. But, it is an admitted fact that the cash deposit for the very same period in subsequent years are more than the deposits during the demonetization period. It is also an admitted fact that the net profit margin of the assessee is normally 1-2% as per the audited financial statements. Therefore, we are of the considered view that firstly the alleged cash deposits are part of the business sale proceeds, however, in absence of complete documentary evidence to explain each and every transaction of sales, we deem it appropriate to estimate the net profit at 2% on the alleged receipts at Rs.54,26,000/- and sustain the addition of Rs.1,08,520/-. The relevant grounds of appeal raised against the addition for unexplained money are hereby partly allowed and further we hold that the addition sustained by us is on account of estimated business income and therefore provisions of section 115BBE of the Act are not attracted.
10. So far as the second issue of disallowance u/s.40A(3) of the Act is concerned, ld. Assessing Officer in para 6 of the assessment order has referred to various vendors/suppliers to whom the alleged cash payment has been made. L d. Counsel for the assessee has contended that ld. Assessing Officer has wrongly mentioned the amount of purchase bills in the assessment order and totally failed to take note that maximum payments to all these parties have been made through account payee cheques and the cash payments if any are belong the limit prescribed u/s.40A(3) of the Act. On test check basis, we have examined the ledger account of the party namely Kwality Animal and find that there are purchases on 30.08.2016, 02.09.2016, 06.09.2016 and 09.09.2016 at Rs.1,91,100/ -, Rs.1,91,100.- and Rs.1,22,000/- respectively. As per the ledger account, there is no cash payment of said sum in contravention to section 40A(3) of the Act but these are the purchase bill amounts. The payments have been made through banking channel and they have also been supported by the bank statement furnished in the paper book. Therefore, perusal of records test check basis clearly indicates that ld. Assessing Officer has grossly erred by mentioning the purchase bills amount and has wrongly made addition u/s.40A(3) of the Act for the purchase bills amount. We therefore are of the considered view that this issue needs necessary verification and the impugned order on this issue is set aside to the file of ld. Jurisdictional Assessing Officer. The assessee shall furnish the requisite details of purchases from the alleged parties appearing in the assessment order along with the details of payments made through banking channel and cash payments and based on those details ld. Assessing Officer shall decide this issue as to whether any disallowance u/s.40A(3) is called for. If the claim of the assessee is found to b e correct and no payment is found to be in contravention to section 40A(3) of the Act, then no disallowance is called for. Relevant grounds of appeal raised on this issue are allowed for statistical purposes.
11. In the result, the appeal of the assessee is partly allowed for statistical purposes as per the terms indicated herein above.
Order pronounced on this 18th day of August, 2026.
