Case Law Details
DCIT Vs Sushil Kumar Sharma (ITAT Delhi)
Merely because certain cash was deposited in the specified bank notes by the assessee during the demonetization period will not make the assessee tainted party when the very same transaction are being made by the assessee in the part as well as in the future.
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Delhi has deleted additions for unexplained cash deposits in the case of DCIT vs. Sushil Kumar Sharma. This judgment highlights the importance of substantiating transactions with proper evidence, especially during critical periods like demonetization. The case revolved around cash deposits made by the assessee during the demonetization period, which the Assessing Officer (AO) initially treated as unexplained income. However, the ITAT Delhi’s decision to delete these additions underscores the tribunal’s reliance on thorough evidence and proper documentation.
Case Background
The case involved cross appeals for the Assessment Year (AY) 2017-18 against the order of the National Faceless Appeal Centre (NFAC), which partially upheld the additions made by the Assessing Officer (AO). Sushil Kumar Sharma, the assessee, was engaged in the business of providing security, housekeeping, and manpower supply under the name Vandana Enterprises. During the financial year 2016-17, he operated as a business correspondent for First Rand Bank (FRB), a scheduled commercial bank. His responsibilities included collecting loan installments from numerous microfinance borrowers and depositing the collected amounts in his bank account before transferring them to FRB’s account.
Grounds of Appeal
The assessee challenged the AO’s decision to treat cash deposits made during the demonetization period (09.11.2016 to 30.12.2016) as unexplained money. The AO had added a sum of INR 89,41,86,882 to the assessee’s income, ignoring the explanations and evidence provided by the assessee. The assessee argued that the deposits were legitimate collections from microfinance borrowers on behalf of FRB, supported by cogent evidence and proper documentation.
ITAT Delhi’s Findings
The ITAT Delhi carefully examined the evidence presented by the assessee. The tribunal noted that the assessee had a clear modus operandi of collecting loan installments from various borrowers, depositing these amounts in his bank account, and subsequently transferring the funds to FRB. The tribunal acknowledged the business correspondent agreement between the assessee and FRB, which outlined the responsibilities and the nature of transactions.
The ITAT Delhi found the following points significant in its decision:
- Consistency of Transactions: The tribunal noted that the assessee had consistently engaged in similar transactions before, during, and after the demonetization period. This consistency supported the assessee’s claim that the deposits were part of regular business operations.
- Confirmation from FRB: The assessee provided a confirmation letter from FRB, which verified that the cash deposits during the demonetization period were legitimate collections from microfinance borrowers. This confirmation played a crucial role in substantiating the assessee’s claim.
- Lack of Adverse Evidence: The ITAT Delhi observed that the AO did not present any evidence to contradict the assessee’s explanation or to suggest that the deposits were from unexplained sources. The absence of such evidence reinforced the legitimacy of the transactions.
Partial Deletion by CIT(A)
The Commissioner of Income Tax (Appeals) [CIT(A)] had previously acknowledged the legitimacy of cash deposits made before and after the demonetization period, as well as non-SBN deposits during the demonetization period. However, the CIT(A) upheld the addition for specified bank notes (SBN) deposited during the demonetization period, amounting to INR 7,43,58,350. Both the assessee and the revenue appealed against this partial deletion and the sustained addition, respectively.
ITAT Delhi’s Final Ruling
After reviewing the case in detail, the ITAT Delhi ruled in favor of the assessee. The tribunal deleted the addition for unexplained cash deposits, affirming that the deposits were legitimate and properly explained through substantial evidence. The ITAT emphasized that mere cash deposits during the demonetization period do not automatically render the assessee a tainted party, especially when the transactions were consistent with past and future operations.
Conclusion
The ITAT Delhi’s ruling in the case of DCIT vs. Sushil Kumar Sharma sets a precedent for the treatment of cash deposits during critical periods like demonetization. The decision underscores the importance of maintaining proper documentation and substantiating transactions with credible evidence. This case highlights that legitimate business operations, supported by consistent practices and third-party confirmations, can withstand scrutiny and avoid being labeled as unexplained income.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeals in ITA No.1944/Del/2023 by the revenue and ITA No. 1630/Del/2023 for AY 2017-18, arise out of the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “ld. CIT(A)”, in short] in Appeal No. ITBA/NFAC/S/250/2022-23/1051681088(1) dated 30.03.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) dated 22.01.2020 by the Assessing Officer, ACIT, Circle-2(2)(1), Ghaziabad (hereinafter referred to as „ld. AO’).
2. These are the cross appeals hence, they are taken up together and disposed of by this common order for the sake of convenience.
3. The assessee has raised the following grounds of appeal:-
1. That on the facts and circumstances of the case and in law, Ld. AO has grossly erred in making an erroneous and untenable assessment u/s 143(3) of Income Tax Act 1961 without appraising all the facts and substance of the transactions and the Ld. CIT (A) also erred in upholding the impugned addition of Rs. 14,28,26,056/- (to the extent of deposit of Specified Banking Notes during 09.11.2016 to 30.12.2016), on mere imaginary grounds, contrary to his own judgment in the appellant case for deletion of addition of Rs. 75,13,70,826 out of total addition of Rs. 89,41,86,882/- Therefore, the Ld. CIT (A) has in the same breath accepted that the money deposited during 01-042016 to 08-11-2016 and 31-12-2016 to 31.03.2017 and even the deposits made in non SBN during the subject period 09.11.2016 to 30.12.2016, did belong to the First Rand Bank as the collection was made by the appellant as business correspondent in terms of the agreement executed to that effect but rejected the explanations offered by the Appellant with respect to the transactions of absolute identical nature undertaken during the period from 09.11.2016 to 30.12.2016 for the remaining amount.
2. The learned CIT (A) erred in considering the fallacious assumption of Ld. AO that cash deposit made by the appellant during 08.11.2016 to 30.12.2016 was unauthorized and unexplained money in the hands of the appellant and treated the same as unexplained moneytaxing the cash deposit in SBN at the rates u/s 115 BBE of the Income Tax act 1961, without appreciating the facts and material on record that Section 69 A cannot be invoked when the appellant has produced all cogent evidence and information in support of his claim and the same is accepted by the Ld. CIT (A). Ld. CIT (A) has misconstrued, the Section 69 A of the Act, which has very limited and specific jurisdiction and cannot be applied irrationally on surmises, conjectures and presumption.
3. That on the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in stating in the order sheet that the appellant could not produce any relevant material to substantiate his claim adhering to norms of RBI during demonetization period and the parties does did not make any explicit agreement during the period of demonetization towards collection of cash in SBN from the customer’s in line with the guidelines of RBI, without appreciating the fact that gamut of explanation along with supporting documents submitted by appellant during the proceedings and the most importantly letters of confirmations obtained from FRB is available on record, which categorically endorses the transactions undertaken by the appellant on behalf of the First Rand Bank declaring that the appellant acted within banking policies.
4. The learned CIT (A) erred by extending his jurisdiction in considering Clause (X) of RBI Notification No. RBI/2016-17/112 DCM (Plg) no. 1226/102700/2016-17 dated 08.11.2016 in wrong perspective and incorrectly held that “Business correspondence” has to transact within the limit as per the aforesaid Clause and appellant has not adhered to norms provided in RBI guidelines during demonetization period, without appreciating the fact that FRB, which is a RBI licensed Bank, and was the arm of Reserve Bank of India in implementation of demonetization of SBN, has unequivocally accepted, authenticated and declared that the transaction of cash collection and deposit, undertaken by the appellant during demonetization, was on their behalf, in accordance with banking policies and procedures as communicated to Bank Correspondent from time to time.
5. The Order of CIT(A) is against the very intention of Operation Clean Money drive of Government of India to have check on malpractices concerning conversion of unaccounted / black money into books and under which CBDT had issued detailed instructions/guidelines for the help of the assessing authorities for verification, scrutiny, and assessment of cases involving huge cash deposits during the demonetization period of 9.11.2016 till 31.12.2016, to ensure uniformity, eliminate arbitrary investigation and avoid harassment of honest tax payers. In the given case it is recorded in the order sheet of CIT(A) that he made verification, analysis of the cash deposit and the trends do not indicate any suspicion of income concealed but contrary to that observations CIT (A) maintained addition in the order without bringing on records any material for ignoring such observation.
6. The learned Ld. CIT (A) erred in not considering the scope and effect of the Specified Bank “Notes (Cessation of Liabilities) Act dated 28/02/2017 properly while maintaining addition of Rs. 14,28,26056/- on the sole assertion that the appellant was not authorized to collect money in SBN as per notification of the Government of India dated 08.11.2016. It is stated that there was no prohibition to transact in Specified Bank Notes up to appointed date as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, passed by parliament and as per said Act, appointed date for this purpose was 31.12.2016. In this regard, appellant relied upon the decision of ITAT Visakhapatnam Bench in the case VS of ITO Sri Tatiparti Satyanarayana in ITA No.76/Viz/2021vide order dated 16.03.2022 and in Umamaheswari Vs ITO (ITAT Chennai) ITA No.527/Chennai/2022 vide Order dated 14.10.2022.
7. That the Ld CIT (A) erred in facts and Law by acting contrary to the intent of Central Government decision of bringing demonetization of High Value Currency after due consideration to curb:-
i) The menace of fake currency notes of the specified bank notes in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones.
ii) Whereas, it has been found that high denomination bank notes are used for accumulation of unaccounted money as has been evident from the large cash recoveries made by law enforcement agencies;
iii) Whereas, it has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country.
Thus, the reason for demonetization was never to consider arbitrarily, even an explained nature and source of cash deposit as unauthorized and treat them as deemed income under Income Tax act and taxed at special rate provided u/s 115
8. That on the facts and circumstances of the case and in law, Ld. CIT-(A) erred in maintaining the order passed by Ld. AO u/s 147/143(3) to the extent of addition of Rs. 14,28,26,056 (to the extent of SBN) without any valid basis and erred in not restoring the returned income declared by appellant in its return of income.
9. That the appellant reserves the right to add, alter and amend or to delete any or all the grounds of appeal on or before the date of hearing.”
4. The revenue has raised the following grounds of appeal:-]
“1. Whether on the facts, circumstances and in Law, the Ld.CIT(A) was justified in relying on the Business Correspondence Agreement that came into existence on 30.03.2017, after the end of the previous year 2016-17 2. Whether on the facts, circumstances and in Law, the Ld. CIT(A) was justified in ignoring the condition laid down in para ‘O’ at page 9 of the BCA (Business Correspondent Agreement) dated 08.01.2016 which directed to maintain a collection account & a payment account to make all the transactions. 3. Whether on the facts, circumstances and in Law, the Ld. CIT(A) was justified in ignoring the facts that the assessee provided the list of customers/borrowers from whom collections were made on 25.12.2019 i.e. at the fag end of assessment and that too with incomplete information viz. many PANs & phone numbers were incorrect.
2. Ld. CIT(A) has erred in law and facts by deciding the appeal in favour of the assessee without appreciating the fact that when the depositors/borrowers were based on Mumbai and the FRB is also in Mumbai with its Head Quarter, therefore it is beyond comprehension that these customers relied upon the service of banking correspondent. 5. Appellant craves leaves to modify/amend or add any one or more grounds of appeal.”
5. We have heard the rival submissions and perused the material available on record.
6. The assessee is engaged in the business of providing security, housekeeping, manpower supply since 2009 under the name and style Vandana Enterprises. During the FY 2016-17, the assessee was under an arrangement as business correspondent with First Rand Bank (FRB), a South African company, registered as a foreign company in India under the Companies Act and carried out business of banking as a scheduled Commercial bank after obtaining license from the Reserve Bank of India (RBI). As per the business correspondent agreement executed between the parties services to FRB by the assessee under the aforesaid arrangement included supply manpower for their operations, selling/ marking of banking products, payments and administration of expenses and the collection of loan installment from their micro borrowers who are thousands in numbers spread over all over the region of Mumbai and its suburb. The assessee was collecting monthly installments from borrowers on behalf of FRB in terms of aforesaid arrangement and thereafter the amount of cash was collected from borrowers of FRB was then deposited to his bank account maintained with ICICI, HDFC Bank and Axis Bank wherein, the day to day collection made by the assessee on behalf of FRB were deposited in the assessee‟s bank account along with list of details of borrowers from whom amount was collected and later the monies were transferred to the account of FRB by the assessee. For rendering such services, the assessee was charging a fee as mark up above his cost and monthly bills were raised by FRB. During the financial year 2016-17, the assessee earned total fees of Rs. 8.91 crores from FRB which is duly recorded in the books of account maintained by him. The said fee is duly subjected to service tax and TDS.
7. During the course of assessment proceedings in response to first notice issued by the ld AO including explanation for huge cash deposit made in the bank account, the assessee replied with all the cogent evidence before the ld AO together with supporting documents duly explaining the source of cash deposit made in the bank account. Ignoring the explanation of the assessee , the ld AO proceeded to determine the total income of the assessee at Rs. 89,78,73,732/- as against the returned income of Rs. 36,86,850/- thereby making an addition of Rs. 89,41,86,882/- on account of total cash deposit.
8. The ld CIT(A) duly appreciated modus operandi adopted by the assessee in the form of collecting the loan installments in cash from various borrowers and proceeded to delete the addition partially on account of cash deposits in the following way:-
a. cash deposits made during the period 01.04.2016 to 08.11.2016 and 01.01.2017 to 31.03.2017- Rs. 75,13,70,826/-
b. cash deposits made during the period 09.11.2016 to 31.12.2016 other than in specified bank notes (SBN)- Rs. 7,21,44,556/-
9. The ld CIT(A) sustained the addition towards cash deposits made in the bank account in specified bank notes during the period 09.11.2016 to 30.12.2016 in the sum of Rs. 7,43,58,350/-. Aggrieved by this order both the assessee as well as the revenue are in appeals before us for their respective grievances.
10. We find that the ld CIT(A) had deleted the addition by appreciating the contentions of the assessee together with modus operandi adopted by him apart from placing reliance on the confirmation letter given by FRB confirming the fact that FRB during the period 08.11.2016 to 31.12.2016 had received loan installments from various micro finance customers through assessee in the sum of Rs. 14,34,24,448.40 pisa. This confirmation is placed in pages 4 and 5 of the Paper Book. The said confirmation categorically stated that assessee had indeed received loan installments in cash from various micro finance customers of FRB and had deposited the said cash in the bank account of the assessee and the said amounts were thereafter transferred to FRB by the assessee. Hence, there is absolutely no dispute with regard to modus operandi adopted by the assessee in collecting the cash representing loan installments from micro finance customers of FRB, deposit the same in the bank account of the assessee and thereafter transferring the amounts to the account of FRB. Hence, the assessee is merely acting as a post office/ collection agent in this entire episode. Accordingly, the cash deposits made in the bank account of the assessee gets properly explained by the assessee. In our considered opinion, the assessee had merely acted as a custodian of the money belonging to FRB. The assessee itself is an agent and had engaged several agents/ personnel in various suburbs of Mumbai to collect the loan installments from thousands of micro finance borrowers of FRB. Those personnel after collecting monies from the borrowers in cash had deposited the cash in the bank account of the assessee by going to the nearby branch in the collection area for the purpose of safety and security. The assessee is merely acted as a custodian of the monies. There is absolutely no dispute that the assessee had received all money in his bank account had thereafter transferred the monies to the account of FRB who is legitimately entitled for the same. In this process the assessee had also earned a fee/ commission/ agency commission by whatever name called for rendering such collection services, which is duly offered to tax by the assessee. Hence, absolutely no adverse inference could be drawn on the assessee with regard to this activity carried out by him. It is also pertinent to note that the very same business activities carried out by the assessee has been accepted by the ld CIT(A) for the entire period during the year except for the period 09.11.2016 to 30.12.2016 that to only in respect of deposits made in SBN. How can an assessee be treated differently for cash deposits made in SBN and cash deposits made other than in SBN during the very same period of 09.11.2016 to 30.12.2016. While making this observation we are conscious of the fact that the addition deleted by the ld CIT(A) is subject matter of dispute by the revenue before us. But in our considered opinion the modus operandi adopted by the assessee is details (supra) deserves to be accepted and the same activity is being carried on pursuant to a business correspondence agreement dated 08.11.2016 between FRB and assessee which is enclosed at pages 39 of the Paper Book and scope of service to be rendered by the assessee is detailed in pages 44 and 45 of the Paper Book. Once such services clearly indicates recovery of loan dues from the customers of FRBs. The relevant clause of the said agreement are reproduced below:-
(vi) scope of services
(v) duties and obligation of business correspondent
The business correspondent shall undertake the following activities:-
a……………..
b…………………………..
c…………………….
d………………….
e…………………….
f……………….
g. collect funds and fees from customers for the financial products in accordance with the bank‟s policies and procedures as communicated to the business correspondent from time to time;
h. recovery/ collection of principal, interest and other charges from the customers by strictly following the code of conduct for recovery.
i…………
j…………..
k……….
l ……….
m………..
n…………
o………….
p………..
q………….
11. Yet another clause in the agreement is also relevant for our adjudication herein.
(v) f. The Business Correspondent undertakes to manage cash on the field, in transit and at its retail outlets and ensure availability of sufficient cash at its retail outlets/ branches / BAMs, to enable Customer transactions as per the agreed product programs of the Bank. The Business Correspondent also assumes all the risk associated with handling of cash at the ground level.
12. Further, we find that FRB vide letter dated 28.11.2019 in connection with assessment proceedings of AY 2017-18 had also confirmed this fact that assessee had acted as a loan collection agent of FRB by collecting loan dues through banks, micro finance customers. This confirmation is enclosed in page 80 of the Paper Book.
13. The only grievance of the revenue is that the assessee had collecting the cash from borrowers is supposed to deposit the money in the bank account of FRB. The assessee was supposed to open with FRB. But without depositing the money in the account of FRB the assessee had deposited the cash in his bank account thereafter transferred the money to FRB. In our considered opinion this is different and irrelevant consideration in as much as ultimately monies had reached the account of FRB and there is absolutely no dispute raised by FRB with regard to recovery of any money due from the assessee. While this is so how the income tax department be bothered on this transaction when there is no dispute between the parties concerned. As far as the assessee is concerned he is bound to explain the source of cash deposit made in his bank account which has been properly done in the instant case. Hence, the assessee is duly complied with the requirement of the provision of the Income Tax Act. How, the assessee should have conducted his business or the manner in which the business should be conducted is certainly not in the domain of the income tax department. It is trite law that businessman knows his interest best and the revenue cannot ceremonies the businessman as to how he should conduct his business. The business expediency should be viewed from the point of view of the businessman and not from the point of view of the revenue. The assessee had given a plausible explanation that cash collected from customers were deposited in assessee‟s bank account which are located near the collection centres and immediately transferred to FRB. It is also pertinent to note that the very same transactions have been duly accepted by the ld AO in AY 2016-17 and 2018-19 vide order passed u/s 144 read with section 147 read with section 144B of the Act dated 26.03.2022 for AY 2016-17 (enclosed in pages 81 to 83 of the Paper Book) and u/s 143(3) read with section 143(3A), 143(3B) of the Act dated 25.02.2021 fro AY 2018-19 (which is enclosed in page 86 of the Paper Book), wherein, the case was selected for scrutiny exclusively to verify cash deposits made in the bank accounts. Merely because certain cash was deposited in the specified bank notes by the assessee during the demonetization period will not make the assessee tainted party when the very same transaction are being made by the assessee in the part as well as in the future.
14. As stated supra, the cash deposits made by the assessee during AY 2016-17, during the period 01.04.2016 to 08.11.2016; cash deposit made during 01.01.2017 to 31.03.2017 and the cash deposit in other than SBN during the period 09.11.2016 to 30.12.2016 has been accepted as genuine. It is not the case of the revenue that assessee was in receipt of SBN from the customers of FRB during the period 09.11.2016 to 30.12.2016.
15. With regard to observation made by the ld AO in pages 7 para 5(vi) of his order that PAN and phone no of the borrower furnished by the assessee are incorrect and incomplete. As stated earlier the assessee is merely a loan collection agent. The entire details have been obtained by the assessee from the bank. The assessee had duly explained in this regard that the phone numbers given there are there complete in view of the fact that first two digits are given in previous column and remaining 8 digits in next column thereby making mobile no and land line no complete. Further, the assessee had conducted enquiry on few borrowers on test check basis and found the borrowers to be genuine and had also verified PANs with them. These details are also placed on record before the lower authorities. Hence, the observations made by the ld AO in this regard in the assessment order is completely devoid of merit.
16. In view of the aforesaid observation there is absolutely no case for making any addition on account of cash deposit made by the assessee in his bank account and that the entire cash deposit made in his bank account stands thoroughly and properly explained. Hence, we have no hesitation to accept the stand of the assessee herein. Accordingly, grounds raised by the assessee are allowed and grounds raised by the revenue are dismissed.
17. In the result, the appeal of the assessee is allowed and appeal of the revenue is dismissed.
Order pronounced in the open court on 14/05/2024.
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