Consider Only Profit Element, Not Entire Cash Deposit as taxable- ITAT

Rama Mepa Odedara Vs ITO (ITAT Rajkot)

Introduction: In the case of Rama Mepa Odedara Vs ITO, the Income Tax Appellate Tribunal (ITAT) considered an appeal regarding the addition of cash deposits under section 69A of the Income Tax Act, 1961. The appellant challenged the initiation of proceedings under section 147 and the addition of unexplained money. The ITAT analyzed the facts, the legal precedents, and the appellant’s contentions.

Analysis: The appellant’s appeal centered around two main issues. Firstly, the challenge to the initiation of proceedings under section 147 of the Income Tax Act, 1961. The ITAT examined the sufficiency of material and precedent cases to ascertain if the assessing officer had a prima facie belief for reopening the case. The ITAT concluded that there was sufficient material to initiate proceedings under section 147.

Secondly, the appellant contested the addition of Rs. 32,70,525 as unexplained money under section 69A. The appellant claimed that the cash deposits were sourced from agricultural income and should not be entirely treated as undisclosed income. The ITAT noted discrepancies in the appellant’s statements throughout the proceedings. Despite the appellant’s assertions of agricultural income, the absence of proper documentation and inconsistent statements led the ITAT to conclude that only the profit element should be taxable, based on established legal principles.

Conclusion: The ITAT’s decision in the Rama Mepa Odedara Vs ITO case highlights the importance of consistent and substantiated claims in income tax proceedings. While the appellant contended that the cash deposits were from agricultural income, the lack of evidence and contradictory statements affected the outcome. The ITAT ruled that only the profit element should be considered taxable, reaffirming the legal principle established in precedent cases. This case emphasizes the significance of providing accurate and consistent documentation to support claims in income tax matters.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

This assessee’s appeal for A.Y. 2010-11, arises from order of the CIT(A), Jamnagar dated 29-08-2018, in proceedings under section 250 of the Income Tax Act, 1961; in short “the Act”.

2. The assessee has taken the following grounds of appeal:-

Condonation of Delay:

3. At the outset, we observe that the appeal is time-barred by 126 days. Before us, the counsel for the assessee submitted an application for condonation of delay, and argued that the reason for delay in filing appeal before ITAT was that the assessee was suffering from spinal injury and was advised complete bed rest by the doctors. In support of the above contention, the assessee also filed medical certificate with respect to the injury suffered by the assessee. Accordingly, in the interest of justice, we are hereby condoning the delay of 126 days in filing of the present appeal.

On jurisdiction

4. On jurisdiction, the assessee has challenged the initiation of proceedings under section 147 of the Act. However, we observe that in the instant set of facts, there was a substantial cash deposit made by the assessee in his bank account. Further, the assessee has been non-filer of income tax return. It is a well-settled principle of law that for initiation of proceedings under section 147 of the Act, only a prima facie belief has to be formed by the assessing officer that the income has escaped assessment. In the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC), the Hon’ble Supreme Court observed that the Court has only to see whether there was prima-facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. On the scope of re-opening u/s 147 of the Act observed as under:

We have only to see whether there was prima-facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.

4.1 In the case of Priya Blue Industries (P.) Ltd. v. ACIT [2022] 138 taxmann.com 69 (SC), the AO sought to reopen assessment in case of assessee on count that assessee was beneficiary of certain accommodation. The Assessee challenged impugned notice mainly on ground that jurisdictional facts were not established and hence, revenue could not have assumed jurisdiction and reopened assessment. The ITAT found that exercise of reopening had been made only after due inquiries and recording of statements of concerned persons and on having found  prima-facie material, impugned notice had been issued to assessee. The Gujarat High Court held that where Assessing Officer had reason to believe that income chargeable to tax had escaped assessment and basis for formation of such belief were several inquiries and investigation by Investigation Wing that there had been escapement of income of assessee from assessment because of his failure to disclose fully and truly all material facts, reopening of assessment was justified, SLP against said impugned order was liable to be dismissed.

4.2 In the case of Kottex Industries (P.) Ltd. v. ACIT [2021] 129 taxmann.com 151 (Gujarat), the Gujarat High Court held that at the time of recording the reason for satisfaction of Assessing Officer, there should be prima- facie some material on the basis of which, the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. It will be open to the assessee to prove that the assumption of fact made in the notice was erroneous at the time of assessment proceedings.

4.3 In the case of BharatkumarKalubhaiGhadiya [2021] 129 taxmann.com 306 (Gujarat), the High Gujarat Court observed that only a prima-facie belief is required for re-opening of assessment. The High Court made the following observations in this regard:

5.2 Further, the term “reason to believe”, however, is not defined in the Act but it can be gathered and available from the information, leading the Assessing Officer to reopen the assessment. The term  itself is suggestive of its prima-facie characteristics and not established or conclusive facts or information. Meaning thereby, it is the Assessing Officer’s prima-facie belief, of course, derived from the some material/ information, etc. leading him to reopen the assessment.

4.5 In the case ofPurviben Snehalbhai Panchhigar [2019] 101 taxmann.com 393 (Gujarat), the Gujarat High Court held that in the instant case the Assessing Officer has heard the material on record which would  prima- facie suggest that the assessee had sold number of shares of a company which was found to be indulging in providing bogus claim of long­term and short-term capital gain. The company was  prima-facie found to be a shell company. The assessee had claimed exemption of long-term capital gain of Rs. 1.33 crores by way of sale of share of such company.

4.6 This was again affirmed by the Gujarat High Court in the case of Sanjay Baulal Surana [2021] 129 taxmann.com 375 (Gujarat).

4.7 In the instant set of facts, Ld. CIT(Appeals) has made the following observations in the appellate order, while upholding initiation of proceedings under section 147 of the Act:

“But the fact is that appellant was non filer of return of income despite the fact that there was huge cash deposits of Rs. 32,55,500/- in his case and this was the sufficient ground for reopening of the case after recording the reason. It may be the case that as per appellant there was no any income In his case which was chargeable to tax, but so far AO is concerned it was his satisfaction which was recorded on the basis of specific information as per ITS data available in respect of huge cash deposits of Rs. 32,55,500/- and also on the basis of non filing of return despite the fact that there was huge cash deposit in the bank account. In my opinion this information (i.e. depositing of huge cash amounts of Rs. 32,55,500/- and at the same time non furnishing of return of income) was sufficient for reopening of the case of the appellant after recording the reason and the AO has done accordingly and correctly. The hon’ble court has only to see whether there was prima facie some material on the basis of which the department could reopen the case and the sufficiency or correctness of the material was not a thing to be considered at this stage. In this regard the support is drawn from the decision of hon’ble Supreme Court as given in the case of Raymond Woolen Mills Ltd. vs. ITO 236 ITR 34 In view of these facts, the ground of appeal no. 2 of the appellant is dismissed.”

5. Accordingly, in our view, the AO had sufficient material to form a prima facie belief that there was escapement of income in the instant set of facts. Therefore, we find no infirmity in the order of Ld. CIT(Appeals) when he held that proceedings under section 147 of the Act were validly initiated, looking into the facts of the instant case.

6. In the result, Grounds Number 1 of the assessee’s appeal is dismissed.

On merits

7. The brief facts of the case are that during the course of assessment, the AO observed that the assessee had made cash deposits amounting to  32,70,525/- in his bank account and the assessee was asked to prove the source of deposit of the aforesaid amount. However, the assessee submitted that the aforesaid deposit belongs to financial year 2009-10 and that he did not remember each entries for the concerned year, as at the relevant time of assessment, the assessee did not have documents relating to cash deposit the bank account. Accordingly, in absence of any details/explanation put forth by the assessee, the entire deposits amounting to  70 lakhs was treated as unexplained income of the assessee under section 69A of the Act.

8. In appeal, the assessee submitted that the entire deposits cannot be taxed in the hands of the assessee as it’s undisclosed income, and that addition of 8% the total deposits may be taxed hands of the assessee on presumptive basis. The Ld. CIT(Appeals) however, observed that there is nothing on record to show that the amount of deposits and cash withdrawals were made in the bank account on account of any business activities, as contended by the assessee. Further, Ld. CIT(Appeals) also observed that there is an apparent discrepancy in the submissions made by the assessee, since on one hand he has contended that the aforesaid income was out of business income, whereas in another submission, the assessee has contended that the aforesaid cash deposits have been made out of agricultural proceeds. However, the Ld. CIT(Appeals) agreed with the contention of the assessee that the entire amount cannot be taxed in the hands the assessee as its undisclosed income, and only the peak credit could be added as income in the hands the assessee. Accordingly, Ld. CIT(Appeals) directed the AO to work out the peak credit by considering only cash transactions i.e. cash deposits and cash withdrawals and add the same to the total income of the assessee. While passing the order, Ld. CIT(Appeals) made the following observations:

“5.3 The ground of appeal no. 4 of the appellant is that the Ld AO erred in law as well as on fact in making addition of entire deposit of Rs. 32,70,525/- instead of addition of 8 percent of the total deposit under presumptive taxation. The ground of appeal no. 5 of the appellant is that Ld AO erred in law as well as on fact in making entire addition of Rs. 32,70,525/- u/s. 69A whereas the entire source of money deposited in the bank is out of sale of agricultural product and past saving of the appellant and his family members. With regard to these grounds of appeal, the AR of the appellant in his submission dated 06/08/2018 has stated that the appellant has deposited total amount of Rs. 32,55,000/- in the bank account standing with State Bank of India and out of which an amount of Rs. 65,000/- deposited up to the month of December was from his agricultural income of earlier years and earlier withdrawals. For remaining amount of Rs. 31,19,000/- as deposited in the bank account, it is submitted by the AR of the appellant that the appellant had made subsequent withdrawals also. It is pleaded by the AR of the appellant that in case of deposit of cash in bank and subsequent withdrawals i.e. debit entries followed by credit entries, it is not correct to add entire amount of cash deposit to the income of the appellant. As per the AR addition should be made to the extent of profit element only which can be assumed at 8% as per the provision of section 44AD of the Act. In support of his contention, it is mentioned by the appellant’s AR that in subsequent year also the appellant has shown business income and filed return accordingly. But this entire submission of the AR of the appellant is not supported by any evidence and relevant records. There is nothing on record to show that the deposits and withdrawals of cash amounts of Rs. 31,90,000/- were made in the bank account because of any business activities. It is not explained by the appellant’s AR that which type of business activities were carried out by the appellant and from whom cash amounts were received because of such activities and to whom cash amounts were paid because of such activities. The name and address of the persons from whom cash amounts are claimed to have been received and also the name and address of the persons to whom cash .amounts are claimed to have been paid are not provided by the AR, No any relevant records and books of accounts have been produced to establish that the cash amounts were received and deposited in the bank and cash amounts were withdrawn and paid because of any particular business activities. Surprisingly at another place of this submission dated 06/08/2018, the AR of the appellant has further pleaded that the addition of Rs. 32,70,525/-u/s. 69A was made by the AO whereas the entire source of this money as deposited in the bank was out of sale of agricultural product and pass savings of the appellant and his family member. If the appellant has deposited the above amount of Rs. 32,17,525/- on account of sale of agricultural products, then he cannot be said to be a business man involved in any business activities and rather he can be held to be a mere farmer. Thus there is contradiction between the two statements of the AR of the appellant and which clearly proves that his statements are not correct. Even if it is considered that cash amounts of Rs. 32,70,525/-were deposited in the bank out of sale of agricultural products, then also in such case bills and vouchers for sale of agricultural products and bills and vouchers etc for incurrence of expenses to carry out agricultural activities are required to be produced before the AO as well as before the appellate authority. It is also pertinent to mention that the appellant has not taken any plea before the AO at the time of assessment proceedings that the cash amounts of Rs. 32,70,525/- were deposited in the bank because of any business activities or because of any agricultural activities. The reply of the appellant as submitted to the AO during the course of assessment proceedings has been incorporated by the AO in the assessment order and the same is reproduced hereunder for reference:

“In respect to other saving bank account in which cash Rs. 32,55,500/-was deposited the assessee stated that I want to inform you that as its belongs to FY 2009-10. I don’t remember each entries for the concern year as of now as I don’t have documents related to cash deposited with me right now.”

5.4 From the above it can be seen that the appellant merely replied to the AO that the cash deposits of Rs. 32,55,500/- belong to FY 2009-10 and he did not remember each entries for the concern year as of now as he did not have documents related to cash deposited with him right now. Obviously, the appellant failed to explain the sources of cash deposits of Rs. 32,55,500/- and he himself admitted to the AO that he did not have any documents related to this cash deposits. Even at appellate stage also no any documentary evidences with regard to sources of cash deposits are filed by the appellant’s AR. Considering all these facts, it is held that the appellant has failed to explain the sources of cash deposits of Rs. 32,55,500/- as made during the year under consideration. In view of the facts and circumstances of the case of the appellant as discussed in this appeal order, the various case laws as relied by the appellant are not applicable to his case. However, I agree with the contention of the appellant that in case of deposit of cash in bank and subsequent withdrawals i.e. debit entries followed by credit entries, it is not correct to add entire amount of Cash deposit to the income of the appellant. In my opinion the entire amount of credit side of Rs. 32,55,500/- cannot be added to the total income of the appellant by ignoring the debit entries of cash amounts as reflected in the bank account. The only peak amount if remained unexplained could be added as income in the hands of the appellant and not the aggregate of total credit side of the account. In this regard the support is drawn from the decision of hon’ble High Court of Gujarat as given in the case of CIT vs. Shri Indrajeet Zandusing Tomar, 2016 ITI 114. In view of this the AO is directed workout peak credit by considering only cash transactions (i.e. cash deposits and cash withdrawals) and add the same to the total income of the appellant. Thus the grounds of appeal of the appellant are partly allowed.”

9. Before us, the counsel for the assessee submitted that the assessee is having substantial landholdings, amounting to approximately 22 bighas. He submitted that the entire cash deposits have been made out of the agricultural produce of the assessee. The counsel for the assessee drew our attention to return of income filed by the assessee for assessment year 2012­13 to 2017-18, wherein the assessee had declared agricultural income in the return of income. Therefore, the counsel for the assessee submitted that it is beyond doubt that the assessee is an agriculturist and is engaged in earning of agricultural income. Further, the counsel for the assessee drew our attention to copy of land document 7/12 and 8-A to establish that assessee is having substantial agricultural landholdings amounting to 22 bighas. Further, the counsel for the assessee drew attention to pages 44-88 of the paper book to establish that assessee has cultivated coconuts and mangoes and sold the same and earned agricultural income. Accordingly, the counsel for the assessee submitted that the assessee is having agricultural income, which is evident from the return of income filed by the assessee, details of agricultural produce and details of agricultural holdings amounting to 22 bighas. In the alternative, the counsel for the assessee submitted that it is a well established law that the entire income cannot be subject to tax in the hands of the assessee and only the profit element embedded in such receipt which may be subject to tax in the hands of the assessee. He placed on record several judicial precedents in support of the above contention. Therefore, the counsel for the assessee submitted that a reasonable percentage (in the range of 8% on presumptive basis) may be subject to tax in the hands of the assessee.

10. In response, the Ld. DR placed reliance on the observations made by Ld. CIT(Appeals) in the appellate order. He further submitted that though the assessee has filed return of income, however such return of income only pertains to subsequent assessment years and not to prior assessment years, and therefore it cannot be concluded that the cash deposits have been made out of agricultural produce.

11. We have heard the rival contentions and perused the material on record. We observe that while the assessee is averring that it has been earning agricultural income over the years and the said cash deposits is out of the said agricultural receipts, however, we note that there has been certain discrepancy regarding the statements made by the assessee before the Department at various stages of proceedings. Before the AO, the assessee gave no explanation regarding the source of cash deposits during the impugned assessment year. The Ld. CIT(Appeals) made a specific observation that there is discrepancy regarding the statement was made by the assessee, wherein on one hand the assessee has stated that he has earned agricultural income, but on the other hand, the assessee stating that the source of deposits is out of “business income” earned by the assessee. However, considering the facts of the case, the Ld. CIT(Appeals) held that only the peak credit may be taxed in the hands of the assessee, and the entire cash deposits cannot be subject to tax in the hands of the assessee. Further, as observed by Ld. CIT(Appeals), the assessee has been taking contradictory strands at various stages of the proceedings and it was only during the appellate stage that the assessee took an argument that the cash deposits were out of agricultural income. Further, before Ld. CIT(Appeals) the assessee has also contended that he has earned business income and the aforesaid cash deposits were out of the business income earned by the assessee. Therefore, it is not very clear whether the assessee had earned agricultural income in the prior assessment years and the cash deposits were borne out of agricultural income only. However, looking into the facts of the case and in the interest of justice, and considering the well-established legal proposition that was only the profit element embedded in any receipts which may be taxed in the hands of the assessee, it would be fair to estimate profit @10% of the total cash deposits in the hands of the assessee, which may be subject to tax in the hands of the assessee. In the case of President Industries 124 Taxman 654 (Gujarat High Court), the Gujarat High Court held that the entire cash deposit should not be added to the income of the assessee had only the element of profit element should be considered as the taxable income of the assessee. The above proposition was also followed by the ITAT Ahmedabad in the case of Dineshbhai Mathai Vala 49 Taxman.com 583 (Ahmedabad Tribunal). Accordingly, looking into the facts of the instant case, in the interest of justice 10% of the total deposits may be taken as a taxable income and thus taxed in the hands of the assessee.

12. In the result, Ground No. 2 of the assessee’s appeal is partly allowed.

13. The other Grounds of Appeal are general in nature and do not require any specific adjudication.

14. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 30-06-2023