Recent rulings by the Chennai ITAT focused on disputes involving unexplained income and penalties under the Income Tax Act. In G. Elumalai v. Dy. CIT, the assessee failed to substantiate the source of cash found during a search, leading to a partial acceptance of his claims by the CIT, while the remaining amount was treated as unexplained under Section 69A. The case was remanded to the AO for further investigation. In Sardar Jabasingh v. ITO, unexplained bank deposits resulted in an addition under Section 68. The ITAT ordered a reassessment, giving the assessee a chance to provide more evidence. In Narayanan Sundaramahalingam Rajkumar v. ACIT, penalties under Section 270A were imposed for underreporting income, but the Tribunal ruled in favor of the assessee due to the bonafide explanation of missing documents. Lastly, in Tractors & Farm Equipment Ltd. v. ACIT, penalties were levied under Section 271(1)(c) for disallowed deductions, which were challenged based on the accuracy of reported income. These rulings underscore the importance of substantiating claims and the Tribunal’s thorough scrutiny in such tax matters.
1. G.Elumalai v. Dy. CIT ITA No. 1591/Chny/2023
The assessee G. Elumalai filed appeal against order of the CIT Chennai upholding addition of Rs. 22,89,925 towards unexplained money u/s. 69A of the Income Tax Act. Search conducted at assessee’s residence during the by election to the Vellore Parliamentary constituency on 13/7/2019 cash Rs. 27,74,000 found. Against the above addition it was explained before the AO that the amount was brought from real estate transactions, agriculture, and rental income. However the AO rejected the explanations and treated the amount as unexplained money. The matter comes up before CIT (A) on appeal who partly accepted the explanation of the assessee but sustained the remaining addition.
Fact of the Case:
1. 13-7-2019 search was made at the residence of assessee G. Elumalai. Rs. 27,74,000 cash was seized.
2. The assesses contended, earned that sum of money from the proceeds of sale of his properties, a loan advanced by his son for his jewelry, receipt of rent and income from agriculture. But he failed to substantiate these through any documentary evidence.
3. The AO added the whole amount of Rs. 27,74,000 U/S. 69A of the Income tax Act as unexplained money.
4. On appeal the Commissioner of Income Tax partly accepted the explanation and reduced the addition to Rs. 22,89,925 after allowing Rs. 4,84,075 as explained money.
Submission by the Assessee:
1. The assessee claimed that cash found during the raid by revenues derived from real estate deals agricultural income and rental incomes on properties belonging to his family.
2. He presented cash flows statement in which he showed how the cash was accumulated by family members including various sources of incomes earned from agricultural landholding property or real estate, and rental amounting to 23,22,500.
3. The assessee argued that the Commissioner had erred in not fully considering the sources of cash including rental income, agricultural and commission income.
Observations by the Income tax officer:
1. The AO could not find any evidence regarding the source of cash found during search upon the assessee
2. The AO did not accept the explanation of the assesse regarding the sources from which the money had come and added Rs. 27,74,000 as unexplained money u/s 69A.
Observations by the CIT:
1. CIT (Appeals) accepted the cash flow statement filed by the assessee and explained cash from various sources including agricultural income and real estate transactions at Rs.4,84,075.
2. The balance of Rs. 22,89,925 was treated as unexplained money since the assessee does not furnish any strong proof for the purpose of support of the said balance.
Tribunal’s Decision:
1. The tribunal observed that assessee has agricultural landholdings and disclosed agricultural income rental income and commission income. However such claims were neither verified by the AO in the original assessment.
2. Citing the Supreme Court’s decision in Tin Box Company v. CIT the Tribunal restored the case to the file of the AO to re-examine the sources of cash allowing the assessee to provide further documentation
3. The Tribunal directed the AO to verify the particulars furnished by the assessee on agricultural income, rental income and real estate transactions. If the explanation was satisfactory nothing further was to be added.
Key Takeaway:
1. Burden of Proof: The taxpayer has to establish by documentary evidence how the cash found during search originated particularly when cash sums are substantial.
2. Restorations of the case: Where the preliminary investigation was insufficient or incomplete in nature the Tribunal may resume cases for further investigation.
3. Unexplained Money U/S.69 A: : The Income Tax Department can treat any unsubstantiated cash found during searches as unexplained money under Section 69A which carries tax penalties unless adequately explained
4. Family Income Role: When it comes to family business and income the cumulative income of different sources such as agricultural income or real estate income becomes part of the wider playfield in establishing a cash claim.
2. Sardar Jabasingh v. ITO ITA No. 169/Chny/2024
The main dispute is in relation to the addition of Rs. 1,03,23,100 made by the AO u/s. 68 of the Income Tax Act 1961 and CIT confirmed this. The case pertains to the unexplained cash deposits made in the bank accounts of the assessee a Pastor by profession.
Facts of the case:
- Assessee is a Pastor. During assessment year 2016/2017 assessee disclose income Rs. 1,200920
- The case was selected for scrutiny under CASS to test the high cash deposits in assessee’s saving account.
- The Assessing Officer found bank deposits of cash Rs. 1,03,23,100 in assessee’s SBI bank account Rs. 50 lakhs and the balance of Rs. 53,23,100 in the IOB account.
- The AO unsatisfied with the assessee’s explanation about cash deposits, AO added total amount income tax section 68.
Submissions by the Assessee:
- He declared that he was taking cash collections from the parish members with the aim of providing them allotment in houses issued by the Tamil Nadu Housing Board,
- But instead some person fraudulently introduced himself as an official of the Tamil Nadu Housing Board.
- The assessee collected money from parish members on the belief that houses would be allotted to them but when this did not happen complaints were filed against him and he returned the collected money to the members.
- The assessee had requested that he be allowed to present more evidence and had alleged that he was a victim of circumstance and request the Tribunal for the opportunity of reassessment.
Observations by the Income Tax officer:
- LAO observed large cash deposits in the assessee’s bank account and question the nature and source of the funds.
- Assesseee said that he was into civil construction and renovation of business was also disbelieved by the Assessing Officer as bank withdrawals did not sufficient to justify this explanation.
- Hence the AO considered the deposits as unexplained and wholly added the total amount of Rs. 1,03,23,100 under section 68.
Observations by the CIT:
- The CIT observed that explanation during the appellate proceedings of the assessee was that the cash deposits were made in respect of certain alleged allotments of houses by the Tamil Nadu Housing Board.
- The logic provided was not accepted by the CIT since it ran contrary to the earlier submissions made by the assessee that he was carrying on a construction business.
- The CIT upheld the addition made by the AO under section 68, treating the cash deposits as unexplained.
Tribunal’s Decision:
- The ITAT de novo perused the record found that for the first time during the appellate proceedings an explanation was offered by the assessee who was not produced before the Assessing Officer at all.
- The Tribunal admitted the appeal for statistical reasons and restored the matter back to the Assessing Officer for de novo assessment and gave the assessee an opportunity to present further evidence regarding the source of cash deposits.
- It is seen that the facts indicate justice and the ITAT ordered the AO to assess the case de novo uninfluenced by the initial assessments.
Key Takeaways:
1. Section 68 Application: Even though the addition under section 68 stood confirmed which added the cash deposits unexplained but it was ordered to be so for lack of sufficiency of evidence proving source of funds.
2. Purpose of Full Disclosure: Importance The case under discussion highlights the need for effective clarity in presenting consistent and proper justification for cash deposits during the assessments.
3. Tribunal’s Direction for Fresh Assessment: It is directed that the case be re-assessed and fresh evidence allowed to be led by the assessee with due fairness by the AO.
4. Opportunity for Reassessments: The Tribunal granted the assesse an opportunity to rectify the record and to present additional explanations before the Assessing Officer.
3. Narayanan Sundaramahalingam Rajkumar v. ACIT (2024 Tax Pub(DT) 4748 Chen-Trib)
The case is of penalty under Section 270A of the Income Tax Act1961 for underreporting of income due to indexed development expenditure having been disallowed by the assessees. The point of deciding this appeal would be whether, in the case when the AO had estimated the same penalty for underreporting of income can be levied.
Facts of the Case:
Narayanan Sundaramahalingam Rajkumar is individual engaged in the business of developing the plots of housing. In F.Y year 2014-15 the assessee sold his land in Madambakkam Village to M/s. Prathishri Properties. His residential and business premises were also searched along with the Asvini Fisheries Pvt. Ltd. Group pursuant to a search under Section 132 of the Income Tax Act. This led to the initiation of proceedings u/s 153C and the AO disallowed 30% of the indexed cost of development expenses amounting to Rs.16,63,384 due to failure supporting vouchers were not provided. Underreporting income was the reason for which penalty proceedings under section 270A were initiated and the penalty of Rs. 7,88,122 was imposed at 200% of the tax payable on the underreported income.
Submissions by the Assessee:
It was accepted by the assessee that 30% was disallowed on the indexed cost of development expenses and tax to the extent demanded was paid. However urged that disallowance was based on the non availability of some vouchers and there was no deliberate intent to suppress income. The assessee submitted that disallowance only on opinion bases so no penalty levied u/s. 270A. Moreover it was further submitted that no concealment of income or furnishing of inaccurate particulars existed.
Observations by the Income Tax Officer:
For failing to report the income on account of the development expense disallowed the AO initiated penalty proceedings under Section 270A. The AO held that it was on account of failure to produce the vouchers for the development expense that the expenses were disallowed and thus amounted to income underreported. A penalty of Rs 7,88,122 being 200% of the tax payable on the income underreported was Imposed.
Observations by the CIT:
The CIT upheld the AO’s Order where penalty was levied since the assessee failed to adequately substantiate the expenditure claimed with proper evidence. The CIT felt that disallowance is validly made the penalty and therefore confirmed the penalty for underreporting income.
Tribunal’s Decision:
Tribunal ruled in favor the assessee and observed that disallowance of 30% of the development expenses was base on the AO’s estimation because some few vouchers are not available. The Tribunal found that the explanation given by the assessee was bonafide and accepted the fact that the missing vouchers had been misplaced and cannot be furnished during the assessment proceedings. The Tribunal further observed that the disallowance was on an estimated basis and that such estimation does not automatically produce an inference of under reporting of income. Referring to Section 270A(6)(a) which states that where the explanation offered by the assessee is found bonafide and supported by all material facts, there cannot be any levy of the penalty. The Tribunal accordingly held this to be not a fit case for the levy of a penalty under the head of under reporting of income. So the penalty was struck out.
Key Takeaway:
- Section 270A penalty:
When the disallowance is on estimated expenses and the assessee satisfactorily explains the discrepancy no penalty under Section 270A can be levied for underreporting of income.
Estimation of Income:
Under allowances arising out of estimation may not be said to justify imposition of penalty for under or misreporting of income, particularly when the explanation given is reasonable.
Bonafide Explanation:
If an assessee presents bonafide and reasonable explanation of disallowance of expenses provided that all the material facts are disclosed penalty under Section 270A ought not to be imposed.
4. Tractors & Farm Equipment Ltd. v. ACIT (2024 Tax Pub(DT) 2344 Chen-Trib)
This case related to the levied of penalty u/s. 271(1)(c) of Income Tax Act 1961 on account of filling inaccurate particulars of income. The penalty was imposed subsequent to the entire deductions which were made u/s. 35(2AB) of the Act pertaining to research and development expenses were entirely disallowed. The core issue revolved around whether the assessee had provided inaccurate particulars through claims of deduction prior to availing the approval from the Department of Scientific and Industrial Research
Facts Of the Case :
The Assessee Tractors & Farm Equipment Ltd. Produced automobiles and auto parts. Assessee Uploaded ITR on A.Y.2015-2016 and claim deduction u/s 35(2AB) for capita and revenue expenditure on R & D. The claimed deduction amount were Rs. 1,07,98,057 on capital expenditure and RS. 22,10,000 on revenue expenditure. These deductions were based on R&D expenses but exceeded amount certified later by DSIR in Form 3CL. The DSIR subsequently approved a lower amount for both capital and revenue expenditures leading to disallowance by Assessing Officer .
Submission by the Assessee:
The assessee submitted that it had claimed deduction under guidelines provided by DSIR and at filling of the return it had not received approval from DSIR. Further the assessee submitted that the excess claim was made in good faith and based on its understanding of eligibility of weighted deduction under Section 35(2AB). The certificate from DSIR was presented after income tax return is filed and assessee could not know this limitation being imposed by DSIR at t time of filing of return of income. The dependence of assessee on judgment of the SC in CIT v. Reliance Petro Products Pvt. Ltd. to claim that merely because inaccurate claim has been made is not adequate to arrive at conclusion that the particulars of income furnished are incorrect.
Observations by the Income tax Officer:
The AO held the excess deductions not allowable by pointing out that the assessee had furnished incorrect particulars of income by claiming amounts above what were certified by DSIR. Ao levied penalty u/s. 271 (1)(C) on ground that there was no scope for holding multiple views on the claim of deduction and that the assessee should have only claimed the amount certified by DSIR.
Observations by the CIT:
The CIT confirmed the AO’s decision to impose the penalty by holding the fact of the assessee having inflated its claim for deduction u/s. 35(2AB). ). The CIT reasoned that had the assessee’s case not been selected for scrutiny the inflated deductions would have gone unseen. Thus, on this ground also, penalty for furnishing inaccurate particulars of income is justified..
Tribunal’s Decision
ITAT ruled in favor of the assessee. The Tribunal held that at the time of filing the return of income itself it was stipulated that DSIR approval was not available and this claim was brought into view by the assessee in good faith based upon the best information existing at the material time. The Tribunal relied on the decision of the Madras High Court in CIT v. Balaji Distilleries Ltd. for pronouncing that mere absence of due care would not make the assessee guilty of furnishing inaccurate particulars or attempting to conceal income. It also relied on the Supreme Court decisions in the following cases: CIT v. Reliance Petro Products Pvt. Ltd. and Price Waterhouse Coopers Pvt. Ltd. v. CIT It is said that even if there was an erroneous claim, it does not necessarily imply giving wrong particulars of income. It was held that as the return is filed prior to the receipt of the DSIR certificate, penalty could not be imposed on account of such disallowance. So, penalty under Section 271(1)(c) was deleted.
Key Takeaway:
- Inaccurate particulars of Income: A claim genuinely made with such information available to him at the time of making a return, cannot be construed as inaccurate incomes if subsequently claimed for later to be disallowed on grounds of regulatory approval received only after submitting the return.
- Penalty under Section 271(1)(c): The Tribunal reiterated that a penalty for furnishing incorrect particulars cannot be levied without direct proof of intentional concealment or misreporting.
- Dependence on Judicial Precedents: The Tribunal reliance upon earlier Supreme Court and high court judgments to rule that mere wrong claims do not amount to furnishing of wrong particulars especially when the claim was based on bona fide understanding.
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