Cash Deposit Addition: ITAT provides opportunity to substantiate source  

Nayagi Fireworks Limited Vs ACIT (ITAT Chennai)

Introduction: The case of Nayagi Fireworks Limited vs. ACIT for Assessment Year (AY) 2017-18 revolves around the contentious issue of confirming the addition of cash deposits amounting to Rs. 99.50 Lacs. The order was passed by the Commissioner of Income Tax (Appeals) of the National Faceless Appeal Centre (NFAC), Delhi, concerning an assessment conducted by the Assessing Officer (AO) under section 143(3) on December 18, 2019. Nayagi Fireworks Limited is a resident corporate entity involved in the manufacturing of fireworks used during festival seasons.

Detailed Analysis: During the assessment proceedings, it was revealed that the company made cash deposits of Rs. 100.50 Lacs after demonetization from November 14, 2016, to December 31, 2016. The company claimed that these deposits were sourced from the cash balance recorded in the books as of November 8, 2016. However, the AO held that the company failed to substantiate these accruals from sales collections, worker advances recovery, and other sources, and subsequently added this amount to the company’s income as unexplained cash credit under section 68.

In the appellate proceedings, the company provided a summary of its cash position, explaining the source of the cash deposits. According to this summary, a substantial amount of Rs. 96.90 Lacs was sourced from the OTS-Accumulation Account. The company argued that the source of the cash deposits was adequately explained in this manner.

However, the CIT(A) upheld the addition of Rs. 2.60 Lacs related to worker’s advances received back, stating that the company failed to provide any evidence proving the legitimacy of these advances. Regarding the OTS-Accumulation Account, the CIT(A) rejected the company’s submissions, stating that they lacked documentary evidence. The bank loan account was declared non-performing (NPA) on August 12, 2018, and a notice under the SARFESI Act was issued on August 14, 2018, for loan recovery. The CIT(A) argued that instead of repaying the interest-bearing bank loan, the company chose to accumulate cash, which was not a valid decision. The company was unable to clarify the source of this cash accumulation, and the bank’s notice did not support the company’s contention of accumulating cash for the one-time settlement (OTS). Therefore, the addition made by the AO under section 68 was confirmed.

Conclusion: In light of the facts and the principle of natural justice, the case has been set aside, providing Nayagi Fireworks Limited with another opportunity to substantiate the source of the cash deposits. The order has been restored for a de novo assessment, with the direction that the company must present supporting evidence to establish its case. This decision offers the company a chance to clarify and validate the source of the cash deposits, which is essential to resolve this dispute.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. The sole grievance of the assessee in captioned appeal for Assessment Year (AY) 2017-18 is confirmation of addition of cash deposits of Rs.99.50 Lacs. The impugned order has been passed by learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] on 21-07-2022 in the matter of an assessment framed by learned Assessing Officer (AO) u/s 143(3) on 18­12-2019. The assessee being resident corporate assessee is stated to be engaged in manufacturing of fire crackers which are used during festival seasons.

2. The Ld. AR advanced arguments and submitted that the cash in hand as on 08-11-2016 was duly supported by the cash book as maintained by the assessee. The Ld. AR drew attention to the summary of cash in hand as noted in the impugned order. It was further submitted that no fault was found in the books of accounts. The Ld. Sr. DR, on the other hand, supported the orders of lower authorities and submitted that the assessee did not furnish requisite evidences to establish the source of cash deposit.

Proceedings before lower authorities

3.1 During assessment proceedings, it transpired that the assessee made cash deposits Rs.100.50 Lacs after demonetization during 14-11­2016 to 31-12-2016 as tabulated in para-3 of the assessment order. The assessee submitted that the cash was sourced out of cash balance standing in the books as on 08-11-2016. However, Ld. AO held that the assessee failed to substantiate the accruals from sales collection, recovery of worker advances etc. The assessee failed to file the evidences like name, PAN, address of customers, stock registers, stock movements etc. Accordingly, the Ld. AO added the same to the income of the assessee as unexplained cash credit u/s 68.

3.2 During the appellate proceedings, the assessee summarized the cash position as under: –

On the basis of the same, the assessee submitted that the source of cash deposit was duly explained. From the aforesaid summary, it could be seen that substantial amount of Rs.96.90 Lacs is stated to be sourced out of OTS-Accumulation Account. Accordingly, the assessee claimed that the source was duly explained.

3.3 The Ld. CIT(A) confirmed addition of worker’s advance received back for Rs.2.60 Lacs by observing that the assessee could not file even iota of evidence to prove that this amount was genuinely worker’s advance received back.

3.4 Regarding OTS-Accumulation Account, the assessee submitted that the assessee obtained loan from SBI, Sivakasi. The loan limit was Rs.4.90 Crores. The assessee started negotiating for repayment of loan as one time settlement (OTS). However, the bank did not agree for waiver of any part of loan. Finally, bank loan account became NPA from 12.08.2018 onwards and the bank served notice under SARFESI Act on 14.08.2018 for recovery of loan. The assessee had started hoarding cash for bank OTS accumulation account and kept this cash in custody of its directors. The accumulated cash was Rs.96.90 Lacs from 04.04.2016 to 09.11.2016. After demonetization was announced, this cash was deposited on piecemeal basis expecting that bank would yield for OTS acceptance.

3.5 However, Ld. CIT(A) rejected the aforesaid submissions of the assessee by observing as under: –

(ii) The entire contention of appellant is not supported by any documentary evidence. The bank loan account became NPA on 12.08.2018 and notice under SARFESI Act was issued by bank on 14.08.2018. The appellant instead of paying off the bank loan of Principal and Interest started hoarding the cash for OTS. This action of appellant itself is not valid in the eyes of law. Appellant has been unable to explain the· source of this cash accumulation of Rs.96,90,000/- from 04.04.2016 to 09.11.2016. What was the source of this cash accumulation along with dates i.e. from the amount received in cash from sales, from the amount received from Debtors in cash or from any other source connected with appellant’s business etc. None of this has been explained. No documentary evidence has been filed to prove that appellant had opted for OTS with SBI or that appellant intended to opt for OTS. Only a notice under SARFESI Act issued by bank on 14.08.2018 was filed. This notice was issued on August 2018 whereas the appellant claims to have deposited the accumulated cash in its bank account of Rs. 96,90,000/- in November 2016 and December 2016. Thus, this notice under SARFESI Act dated 14.08.2018 in no way supports the appellant’s contention of cash accumulation for OTS. This notice just proves that loan account of appellant became NPA on 12.08.2018 and in no way supports the contention of appellant of cash accumulation for OTS from 04.04.2016 to 09.11.2016. Appellant’s contention is based on a general statement devoid of any supporting documentary evidences. Appellant has not produced even a single documentary evidence to prove that it had opted for OTS or was on the process of opting for OTS. In view of these facts the contention of appellant is not acceptable. Hence, the addition of Rs. 96,90,000/- made by AO u/s 68 is confirmed.

Aggrieved as aforesaid, the assessee is in further appeal before us.

Our findings and Adjudication

4. From the findings as given by Ld. CIT(A) in the impugned order, a pertinent fact to be noted is the explanation of the assessee for cash accumulation. As rightly held in the impugned order, the aforesaid explanation was not supported by any documentary evidences. The bank loan account became NPA in subsequent year i.e., on 12.08.2018 and notice under SARFESI Act was issued by bank on 14.08.2018. The assessee, instead of paying-off interest bearing bank loan, accumulated huge cash balance in the books of accounts starting from financial year 2016-17 which could not be said to be a prudent decision. No reasonable / plausible explanation could be furnished by the assessee to support the same. The assessee is unable to explain the source of this cash accumulation. The day-wise cash book was not furnished by the assessee before any of the lower authorities. The notice issued by the bank merely supports the fact that the loan account became NPA on 12.08.2018 and nothing else. The assessee could not furnish any documents to substantiate workers’ advances received back. On the basis of these facts, it could be said that the burden as casted upon assessee to establish the source of cash deposit remained un­discharged.

5. Keeping in mind the principle of natural justice and considering the facts of the case, we deem it fit to provide another opportunity to the assessee to substantiate the source of cash deposit. Therefore, we set aside the impugned order and restore the matter of assessment back to the file of Ld. AO for de novo assessment with a direction to the assessee to substantiate its case with evidences.

6. The appeal stand allowed for statistical purposes.

Order pronounced on 8^th September, 2023