Nitin Valecha Vs ITO (ITAT Mumbai)
Cash Deposits Tell Only Half the Story – Examine the Withdrawals, Agency Role and CBDT Instructions Too
The assessee, an individual, had not originally filed his return of income for Assessment Year 2017-18. Information available with the Income-tax Department revealed cash deposits aggregating to ₹1,95,73,079 in his bank account maintained with ICICI Bank. Based on this information, proceedings under section 147 were initiated.
In response to the notice under section 148, the assessee filed his return on 21 January 2022. He explained that he was functioning as a collecting and commission agent for textile and readymade garment traders and manufacturers. According to him, the amounts deposited in his bank accounts did not belong to him but represented collections made on behalf of different parties in the course of his agency activity.
The assessee claimed that he was entitled only to commission on such collections and had offered the commission income in his return. He also pointed out that the credits in the bank accounts were followed by corresponding withdrawals and debit entries, since the money collected was subsequently handed over or transferred to the concerned principals.
Assessing Officer Treats Deposits as Turnover
The Assessing Officer did not accept the assessee’s explanation because adequate documentary evidence had not been furnished to establish that he was merely acting as a collecting or commission agent.
Instead of treating the entire cash deposits as unexplained income, the Assessing Officer treated the aggregate deposits of ₹1.95 crore as the assessee’s gross business turnover. Profit was estimated at 8% of such deposits, amounting to ₹15,65,846. After giving credit for the business income already disclosed by the assessee, the balance amount of ₹15,25,846 was added to his income.
The CIT(A) confirmed the addition by observing that the assessee had failed to produce supporting evidence proving the alleged commission or collection agency arrangement.
Delay of 170 Days Condoned
There was a delay of 170 days in filing the appeal before the Tribunal. The assessee explained that the matter had been entrusted to an Income-tax Practitioner who was attending to his return and assessment proceedings but was not well conversant with the appellate procedure.
The Tribunal found that there was no deliberate delay, mala fide intention or benefit accruing to the assessee by filing the appeal belatedly.
Relying upon the Supreme Court decisions in Collector, Land Acquisition v. Mst. Katiji, N. Balakrishnan v. M. Krishnamurthy, Ram Nath Sao v. Gobardhan Sao and Improvement Trust, Ludhiana v. Ujagar Singh, the Tribunal held that “sufficient cause” must receive a liberal interpretation to advance substantial justice.
Accordingly, the delay of 170 days was condoned and the appeal was admitted.
Legal Challenge to Reopening
The assessee also challenged the reopening on the ground that the notice under section 148, though dated 31 March 2021, was digitally signed only on 7 April 2021. It was contended that the notice was therefore issued after the new reassessment provisions had come into effect and could not be sustained under the old law.
The assessee further questioned the competence of the jurisdictional Assessing Officer to issue the notice in view of the faceless reassessment scheme and relied upon the Bombay High Court’s decision in Hexaware Technologies Ltd. v. ACIT.
Another contention was that only four days had been granted to respond to the show-cause notice, thereby violating the principles of natural justice.
However, since the Tribunal restored the matter on the factual issue of bank deposits, it expressly refrained from deciding these legal grounds. Therefore, this order should not be understood as deciding the validity of the notice under section 148 or the jurisdiction of the Assessing Officer.
Tribunal’s Findings on Cash Deposits
The Tribunal observed that the central controversy concerned the nature and source of the substantial cash deposits appearing in the assessee’s bank accounts.
The assessee had consistently claimed that he was acting as a collecting or commission agent and that the bank deposits represented collections made in that capacity. He had also claimed that corresponding debit entries and withdrawals existed against those deposits.
However, the Assessing Officer treated all the deposits as the assessee’s turnover and estimated profit at 8% without examining the individual transactions, the corresponding withdrawals or the real nature of the assessee’s activity.
CBDT Instructions on Demonetisation Deposits Must Be Followed
A portion of the cash deposits related to the demonetisation period. The Tribunal noted that the CBDT had issued specific instructions and circulars prescribing the manner in which such cash deposits were required to be verified, including:
- Instruction No. 3/2017 dated 21 February 2017;
- Instruction No. 4/2017 dated 3 March 2017;
- Circular dated 15 November 2017; and
- Circular dated 9 August 2019.
The orders of the Assessing Officer and the CIT(A) did not demonstrate that the cash deposits had been examined in accordance with these instructions.
The Tribunal therefore restored the matter to the Assessing Officer for fresh examination.
Scope of Fresh Examination
The Assessing Officer was directed to verify the nature and source of the bank credits, the activity carried on by the assessee, the commission income disclosed in the return and the corresponding withdrawals and debit entries.
The assessee was also directed to furnish the necessary details and supporting evidence to substantiate his claim that he was functioning as a collecting or commission agent.
The Tribunal clarified that it had expressed no opinion on whether the deposits constituted the assessee’s turnover or on the rate of income, if any, that could be estimated from the transactions. All contentions were kept open.
Authors’ Comments
The decision highlights that bank deposits cannot be viewed in isolation from corresponding withdrawals and the surrounding business activity. Where an assessee claims to be an intermediary, collection agent or commission agent, only the income beneficially belonging to him can ordinarily be taxed. However, the burden of proving the agency arrangement remains upon the assessee.
The Tribunal has not accepted the assessee’s commission-agent claim as established. It has merely directed a proper factual verification. The assessee must therefore produce party-wise collections, confirmations from principals, commission agreements, bank-to-bank correlation, withdrawal details, ledger accounts and evidence showing the ultimate recipients of the money.
Similarly, the order does not lay down that applying an 8% profit rate to bank deposits is always impermissible. Its objection is to estimating profit on the aggregate deposits without first determining whether those deposits represented the assessee’s own turnover.
The larger principle is simple: cash deposited may attract inquiry, but it does not automatically become turnover—and turnover itself does not automatically become income.
Cases Discussed
- Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors. — 167 ITR 471 (SC)
- N. Balakrishnan v. M. Krishnamurthy — [(1998) 7 SCC 123]
- Ram Nath Sao @ Ram Nath Sahu & Ors. v. Gobardhan Sao & Ors. — [(2002) 3 SCC 195]
- Improvement Trust, Ludhiana v. Ujagar Singh & Ors. — [(2010) 6 SCC 786]
- M/s. Remi Metals (Gujarat) Ltd. v. ACIT 9(3), Mumbai
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
1. The present appeal filed by the assessee arises out of the order dated 27/09/2024 passed by the National Faceless Appeal Centre, Delhi [hereinafter referred to as “Ld. CIT(A)”] for Assessment Year 2017-18.
2. At the outset, we note that there is a delay of 170 days in filing the present appeal before this Tribunal. The assessee has filed a petition seeking condonation of the said delay.
2.1. It is submitted in the petition that the Income-tax Practitioner who was entrusted with filing the return of income of the assessee and attending to the assessment proceedings and of taking necessary steps for filing the appeal was not well conversant with the appellate procedure and, on account of such procedural lapse, the appeal could not be filed within the period of limitation before this Tribunal. It is therefore submitted that the delay was neither deliberate nor intentional and that the assessee did not derive any benefit by filing the appeal belatedly. The assessee thus prayed that the delay be condoned and the appeal be decided on merits.
2.2. We have considered the reasons stated in the condonation petition. Section 253(5) of the Act empowers this Tribunal to admit an appeal after expiry of the prescribed period where sufficient cause for not presenting the appeal within time is demonstrated. The Hon’ble Supreme Court in Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors. reported in 167 ITR 471 (SC) has held that the expression “sufficient cause” deserves to be construed liberally so as to advance substantial justice. The Hon’ble Supreme Court observed, inter alia, that ordinarily a litigant does not stand to benefit by lodging an appeal late and that refusing to condone the delay may result in a meritorious matter being thrown out at the threshold.
2.3. Similar principles have been reiterated by the Hon’ble Supreme Court in N. Balakrishnan v. M. Krishnamurthy reported in [(1998) 7 SCC 123], wherein it was held that the length of delay is not by itself decisive and that acceptability of the explanation furnished for the delay is the primary consideration. In Ram Nath Sao @ Ram Nath Sahu & Ors. v. Gobardhan Sao & Ors. reported in [(2002) 3 SCC 195], the Hon’ble Supreme Court reiterated that the expression “sufficient cause” should receive a liberal construction so as to advance substantial justice where no negligence, inaction or want of bona fides is attributable to the party seeking condonation. Further, in Improvement Trust, Ludhiana v. Ujagar Singh & Ors. reported in [(2010) 6 SCC 786], the Hon’ble Supreme Court emphasised that unless mala fides, deliberate delay or gross negligence is established, the endeavour should ordinarily be to decide the lis on merits rather than terminate the proceedings on technicalities.
2.4. We also note that in the condonation petition reliance has been placed on the decision of the Coordinate Bench in M/s. Remi Metals (Gujarat) Ltd. v. ACIT 9(3), Mumbai, wherein, following the principles laid down in Mst. Katiji (supra), the delay of about ten months was condoned upon finding that the explanation was not mala fide or intended to cover an ulterior purpose and that technicality should not prevent adjudication of the matter on merits.
2.5. Applying the aforesaid principles to the facts before us, we find that the delay occurred on account of the assessee having entrusted the matter to the practitioner who had been attending to his tax proceedings and the consequential procedural lapse in filing the appeal within time. There is nothing on record to indicate that the assessee deliberately delayed filing the appeal or that the delay was actuated by mala fides. No advantage could have accrued to the assessee by filing the appeal belatedly. In our considered opinion, the reasons furnished constitute sufficient cause within the meaning of section 253(5) of the Act. Considering the totality of the circumstances and keeping in view the settled principle that substantial justice should prevail over technical considerations, we condone the delay of 170 days and admit the appeal for adjudication.
3. On merits it is noted that the assessee filed revised grounds of appeal along with application explaining that, while filing Form No.36, the statement of facts and grounds of appeal filed before the Ld.CIT(A) were inadvertently uploaded instead of the grounds intended to be raised before this Tribunal. The assessee has accordingly requested that the revised grounds be taken on record. Considering the explanation furnished, the revised grounds are admitted and are reproduced hereunder:
“GROUNDS OF APPEAL
1. The Ld. Assessing officer has erred in initiating the proceedings vide notice u/s 148 of the Income tax Act, 1961, though dated 31/03/2021, but the same being digitally signed on 07/04/2021, without appreciating that since the notice was issued on 07/04/2021 Ld. AO ought to have gone ahead, as per amended provisions of law as has been held by various judicial forums i.e.,
-
- Honourable Allahabad High Court in the case of Daujee Abhushan Bhandar Pvt. Ltd. Vs. Union of India in Writ Tax No : 78 of 2022 vide order dated 10/03/2022
- Honourable Madhya Pradesh High Court in the case of Yuvraj Singh Jain Vs. ITO, PCIT, CDBT & Union of India in Writ petition No. 28293 of 2021, order dated 03/03/2022,
- Calcutta High Court in the case of M/s Kasturi Towers Private Limited V/s Income Tax Officer, Ward 13(1) & Ors in WPA No 4090 of 2022,
Thereby making the very initiation itself and the consequential assessment order passed in contravention provisions of law.
2. The Hon’ble CIT(A) has failed to appreciate that the notice issued u/s. 148 of the I.T Act, dated 31/03/2021 but digitally signed on 07/04/2021, not being in accordance with amended provisions of law i.e., (notice u/s 148 could not have been issued by JAO post introduction of e-assessments of income escaping assessments scheme, dated 31/03/2021) making it ab-initio void & bad in law as has been held by Hon’ble Jurisdictional High Court in a very recent judgement, dated 03/05/2024 i.e. Hon’ble Bombay High Court in the case of Hexaware Technologies Limited vs ACIT (162 Taxmann.com 225).
3. On the facts and circumstances of the case, the Hon’ble CIT(A) had erred in not appreciating the fact that the a time of only 4 days was provided to reply to the show cause notice issued which is against the principal of natural justice and making the notice untenable in the eyes of law as has been held by Hon’ble Delhi High Court in the case of Dauphin Travel Marketing Private Limited V/s Income Tax Officer, Ward 7(1) in W.P (C) 8870/2023 and Indo Laminated Private Limited V/s Assessment Unit, Income Tax Department & Others (2023/DHC/000879).
Without prejudice to any other contention
4. On the facts and circumstances of the case, the Hon’ble CIT(A) had erred in confirming the addition made by Ld. Assessing Officer without appreciating the facts of the case as well law.
5. On the facts and circumstances of the case, the Hon’ble CIT(A) had erred in not appreciating the facts that from the very nature and frequency of transactions appearing in appellant’s different bank accounts it was clearly evident that the bank accounts of the appellant were being used in the course of being an intermediary / commission agent.
6. On the facts and circumstances of the case, the Hon’ble CIT(A) had erred in upholding the order passed by Ld. Assessing Officer and treating the amount of cash deposits as his business turnover, and estimating profit @ 8% on the very deposits without appreciating the facts of the case that appellant was a commission agent.
7. The Hon’ble CIT(A) has failed to appreciate the fact and the law that in the case like that of appellant, it is only percentage of commission which is liable to be treated as income.
8. On the facts and circumstances of the case, the Hon’ble CIT(A) had erred in not appreciating the fact that the Ld. Assessing Officer has failed to appreciate that the amount of cash deposited was correspondingly withdrawn by appellant in the course of his activity of working as a commission agent for and on behalf of his principals on which he was entitled to commission only.
9. The appellant craves leave to add, amend, alter and/or vary any of the grounds at the time/ before the hearing of the appeal.
10. The appellant therefore prays that the the very initiation of reassessment proceedings vide notice u/ 148 of the I.T Act, 1961 being untenable in the eyes of law the assessment order passed deserves to be and may please be deleted and /or alternatively addition made by the Ld. Assessing Officer and upheld by Hon’ble CIT (A) without appreciating the facts of the case as well as law, deserves to be and may please be deleted and / or may please be reasonably estimated.”
4. Brief facts of the case are as under:
The assessee is an individual. Information available with the Department reflected substantial cash deposits aggregating to Rs.1,95,73,079/- in the bank account maintained by the assessee with ICICI Bank during the year under consideration. Since the assessee had not filed his return of income, proceedings u/s. 147 of the Act were initiated.
4.1. In response to notice u/s. 148 of the Act, the assessee filed return of income on 21/01/2022. It was the case of the assessee that he was engaged as a collecting/commission agent for textile and readymade garment traders and manufacturers and that the amounts deposited in the bank account represented collections made in the course of such activity. The assessee claimed that he earned only commission on these transactions and had offered such commission income in the return of income.
4.2. During assessment proceedings, the assessee further submitted that his business was predominantly carried out in cash and that the amounts received on behalf of various parties were deposited into his bank account. He also contended that there were corresponding debit entries/withdrawals against the credits appearing in the bank account and therefore the gross credits could not, in isolation, be regarded as his income.
4.3. The Ld. AO did not accept the contention of the assessee on the ground that no satisfactory documentary evidence had been furnished to demonstrate that the assessee was merely acting as a commission/collecting agent. The Ld. AO accordingly treated the bank deposits as gross turnover of the assessee and estimated profit thereon @ 8% at Rs.15,65,846/-. After reducing the amount already offered by the assessee as business income, the balance amount of Rs.15,25,846/- was added to the total income. Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A).
4.4. Before the Ld. CIT(A), the assessee reiterated that he was acting merely as a collecting/commission agent and that the entire credits appearing in the bank account did not represent his income. The Ld. CIT(A), however, observed that the assessee had failed to furnish documentary evidences in support of his contention that he was acting as a collecting/commission agent. The Ld. CIT(A) accordingly declined to interfere with the action of the Ld. AO and confirmed the addition. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal.
5. The Ld. AR reiterated the submissions advanced before the authorities below. He submitted that the entire bank credits could not be treated as turnover of the assessee without first examining the nature of each transaction, the corresponding withdrawals/debit entries and the explanation of the assessee that the bank accounts were being operated in the course of his activity as a collecting/commission agent. He further submitted that the cash deposits made during the demonetisation period were required to be verified in the light of the specific Instructions/Circulars issued by the CBDT.
5.1. The Ld. DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in light of the record placed before us.
6. We note that the principal controversy arises from the substantial cash deposits appearing in the bank account of the assessee. The consistent case of the assessee is that he was functioning as a collecting/commission agent and that the bank credits represented amounts received in the course of such activity, against which corresponding debit entries/withdrawals were also made. The Ld. AO, however, treated the aggregate deposits as turnover and estimated profit @ 8% thereon on account of failure of the assessee to substantiate his claim with supporting evidences.
6.1. We note that the CBDT had issued specific Instructions/Circulars laying down the manner in which cash deposits, particularly deposits made during the demonetisation period, were required to be verified. The relevant Instructions/Circulars include:
a) Instruction No.3/2017 dated 21/02/2017;
b) Instruction No.4/2017 dated 03/03/2017;
c) Circular F. No.225/363/2017-ITA.II dated 15/11/2017; and
d) Circular F. No.225/145/2019-ITA.II dated 09/08/2019.
6.2. On perusal of the orders passed by the authorities below, we find that the nature and source of the cash deposits have not been examined in the light of the aforesaid Instructions/Circulars. Further, the contention of the assessee that the credits in the bank account represented collections received in the capacity of a commission/collecting agent and that there were corresponding withdrawals/debit entries requires factual verification with reference to the relevant bank accounts and supporting evidences.
6.3. We, therefore, deem it appropriate to restore the issue to the file of the Ld. AO for fresh examination. The Ld. AO is directed to verify the cash deposits, including the deposits made during the demonetisation period, in the light of the relevant CBDT Instructions/Circulars applicable to the facts and circumstances of the present case. The Ld. AO shall also examine the nature and source of the credits appearing in the bank accounts, the nature of the activity carried on by the assessee, the turnover/commission income disclosed in the return of income, the corresponding debit entries/withdrawals relied upon by the assessee and the explanation/evidences furnished in support of the claim that the assessee was functioning as a collecting/commission agent.
6.4. The assessee is directed to furnish all such details and supporting evidences as may be required by the Ld. AO for proper verification of the transactions. The Ld. AO shall thereafter decide the issue afresh, in accordance with law, after granting reasonable opportunity of being heard to the assessee. We make it clear that we have not expressed any opinion on the merits of the addition or on the rate/percentage of income, if any, liable to be assessed from the impugned transactions. All contentions of the assessee as well as the Revenue are kept open.
6.5. In view of the matter being restored to the file of the Ld. AO for fresh examination, we refrain from expressing any opinion on the other legal and factual contentions raised by the assessee at this stage. The same are kept open to be urged in accordance with law. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.
In the result, the appeal filed by the assessee stands allowed for statistical purposes.
