Demonetised Cash Deposit Addition on mere presumption not sustainable

Arbuda Builders Vs ACIT (ITAT Ahmedabad)

The Income Tax Appellate Tribunal (ITAT) Ahmedabad recently addressed a case involving Arbuda Builders, a civil construction firm, and the Assistant Commissioner of Income Tax (ACIT) concerning cash deposits made during India’s demonetization period in 2016. Arbuda Builders filed an appeal against a National Faceless Appeal Centre (NFAC) order dated October 31, 2023, upholding a portion of the assessment related to unexplained cash deposits.

Background of the Case

Arbuda Builders, a firm engaged in civil construction work for the National Dairy Development Board (NDDB), submitted its income tax return for the assessment year (AY) 2017-18. The return, filed on August 31, 2017, declared a total income of ₹1,20,92,670. The tax authorities selected the return for scrutiny due to significant cash deposits during the demonetization period and discrepancies between the turnover reported in the firm’s service tax returns and its income tax return.

The scrutiny centered on two key issues:

1. Unexplained Cash Deposits: Arbuda Builders deposited ₹39,00,000 into its bank accounts on November 10 and 11, 2016, during the demonetization window. After examining the firm’s bank accounts, the Assessing Officer (AO) credited ₹20,75,000 of these deposits to earlier cash withdrawals but added the remaining ₹18,25,000 as unexplained income under Section 68 of the Income Tax Act.

2. Discrepancy in Turnover: The AO noted a difference between the turnover figures in Arbuda Builders’ service tax return and income tax return. However, the NFAC deleted the ₹91,28,993 addition related to this turnover discrepancy, focusing only on the cash deposits.

Appeal Arguments by Arbuda Builders

Challenging the NFAC’s decision, Arbuda Builders appealed to ITAT Ahmedabad, arguing that the cash deposits were adequately supported by previous cash withdrawals from the firm’s bank accounts. Representing the firm, counsel Mehul Patel outlined the cash movement in the period leading up to the demonetization.

Patel presented the following breakdown:

• Total Cash Deposited during Demonetization: ₹39,00,000
• Less: Cash Withdrawals Preceding Demonetization: ₹20,75,000

Patel emphasized that cash withdrawals in the weeks before demonetization had left Arbuda Builders with a substantial cash balance. He contended that assumptions made by the AO about the firm’s cash usage were speculative and unsupported by concrete evidence. According to Patel, the AO’s stance that cash withdrawals were spent immediately on expenses was incorrect, as Arbuda Builders’ expenses were managed periodically.

Comparative Financial Data

Patel also referenced a multi-year analysis of Arbuda Builders’ cash expenditure in relation to its work completed:

These figures, Patel argued, reflected a steady cash-to-work ratio. The firm’s cash expenditure was consistent with previous years, disputing the AO’s view that Arbuda Builders might have deferred expenses for cash deposits during demonetization.

Tribunal’s Observations

Upon reviewing the case, ITAT Ahmedabad examined prior similar rulings, including a 2023 decision from the Delhi Tribunal in ACIT Vs. M/s. Omaxe Forest SPA And Hills Developers Ltd. In that case, the tribunal held that when cash withdrawals exceeded cash deposits during demonetization, the source of the deposits could not be disputed without solid evidence that withdrawals were used otherwise.

ITAT Ahmedabad considered several points:

• Cash Withdrawals Validity: The tribunal recognized Arbuda Builders’ pattern of cash withdrawals and deposits, noting that these transactions aligned with routine financial practices.
• Time Gaps: Although the AO questioned the time gap between withdrawals and deposits, the tribunal acknowledged that the interval between these actions was not unusually lengthy.

The ITAT referred to the High Court ruling in Kulwant Rai and Jaya Aggarwal, where the court opined that cash withdrawals preceding demonetization could serve as valid sources for cash deposits unless evidence suggested otherwise. The court underscored that assumptions alone cannot override legitimate business practices in the absence of contrary evidence.

Conclusion

ITAT Ahmedabad’s ruling emphasized that additions based solely on presumptions, without direct evidence, could not be upheld. The tribunal acknowledged Arbuda Builders’ cash flow justifications and rejected the AO’s approach, which it found reliant on assumptions rather than factual substantiation.

This case is one among numerous legal challenges arising from demonetization-related cash deposit inquiries, where firms argue against unexplained income additions based on previous cash withdrawals. As demonstrated in Arbuda Builders Vs ACIT, courts have generally upheld appeals when the cash deposits can be logically attributed to prior withdrawals.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee as against the appellate order dated 31.10.2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2017-18.

2. The brief facts of the case is that the assessee is a firm engaged in the business of civil construction contract awarded by National Dairy Development Board (NDDB). For the Asst. Year 20 17-18, assessee filed its Return of Income on 31.08.2017 admitting total income of Rs. 1,20,92,670/-. The return was taken for scrutiny assessment on account of

(a) Abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period.

(b) Higher Turnover reported in Service Tax Return as compared to ITR.

2.1. The assessing officer found that the appellant firm deposited Rs.9,00,000/- and Rs.30,00,000/- on 10-11-2016 & 11-11-2016 totaling Rs .39,00,000 / – during demonetization period. After examining the bank account, the A.O. given credit to the tune of Rs.20,75,000/- namely cash withdrawn on 26.10.2016 and 21.10.2016. Thus the balance cash deposit of Rs. 18,25,000/- was added as unexplained cash deposit u/s. 68 of the Act.

2.2. Similarly, the Assessing Officer made addition of Rs.9 1,28,993/- being the difference between the Service Tax Return and Income Tax Return and added as unexplained income u/s. 68 of the Act.

3. Aggrieved against the assessment order, assessee filed an appeal before Ld. CIT(A) who confirmed the addition of Rs. 18,25,000/- being the cash deposit made during demonetization period. However he deleted the addition of Rs.91,28,993/- being the difference between the Service Tax Return and ITR.

5. Aggrieved against the same, the assessee is in appeal before us raising the solitary ground of appeal:

(1) That on facts, in law, and on evidence on record, the learned National Faceless Appeal Centre (NFAC) has grievously erred in confirming the addition of Rs. 18,25,000/- made U/s. 68 of the Act in respect of cash deposited in bank account of appellant.

(2) That on facts, in law, and on evidence on record, the learned National Faceless Appeal Centre (NEAC) ought to have deleted the entire addition as prayed for.

(3) That on facts, in law, and on evidence on record, the learned AO and National Faceless Appeal Centre (NFAC) has grievously erred in confirming the charging of tax u/s 115BBE of the Act.

(4) The appellant craves leave to add, alter, amend any ground of appeal.

6. Ld. Counsel Mr. Mehul Patel appearing for the assessee submitted the cash deposits and withdrawal during the demonetization period as follows:

6.2. The Ld. Counsel submitted the Bank statement, Bank Book Register and Cash Book from 01-09-2016 to 3 1-12-2016. The Ld.

A.O. has made addition simply on an assumption that cash withdrawal or from immediate expenses and has considered withdrawal of only three preceding weeks as cash in hand, but the assessee firm was having surplus money on hand as on 09-11- 2016 which was also deposited in its bank account as the Public are Prohibited from receiving the Specified Bank Note currencies of Rs.500/- and Rs. 1000/- as not a legal tender. The contention of the A.O. that cash withdrawal of immediate expense is only an assumption, whereas the assessee had incurred all legitimate expenses in periodical manner. Further the total cash expenditure ratio with work done by the assessee firm for the financial year 2014-15 to 2016-17 are worked out as follows:

6.3. From the above table preceding years cash expenses ratio is in confirmatory with the current year’s ratio. If the assessee had deferred the cash expenditure the ratio would have fallen from 0.81%. Similarly the assessee shown the cash expenditure vs work done for the Financial Year 2016-17 before demonetization period, during demonetization period and after demonetization period as follows:

6.4. From the above table, it could be verified that in the period of demonetization, assessee firm has no work done even though cash expenses are incurred. Thus the assessee had not deferred any expenditure and all legitimate business expenditure have been paid in respective time. Since the assessee was having cash on hand, out of bank account withdrawals and same was not necessitated to hold on as there was no work-in-progress during the demonetization period, therefore the same was re-deposited in the bank account. The Ld. CIT(A) failed to appreciate the above facts and confirmed the addition of Rs. 18,25,000/- made by the A.O. which is liable to be deleted.

7. Per contra Ld. Sr. D.R. appearing for the Revenue supported the orders passed by the Lower Authorities and requested to uphold the same.

8. We have given our thoughtful consideration and perused the materials available on record. It is seen from Page No. 18 of the Paper Book namely the reply submitted by the assessee during the course of assessment proceedings before the assessing officer, the assessee submitted details of cash withdrawn from its two bank account namely Bank of India and Bank of Baroda, just two months preceding the demonetization period as follows:

8.1.The assessee also submitted source of cash deposited as out of cash withdrawal from bank. However Ld. A.O. has considered only preceding three weeks cash withdrawal of Rs. 20,75,000/- and balance amount of Rs. 18,25,000/- was added as the unexplained income of the assessee, on the sole reason that there is a time gap of five months from the date of withdrawal from bank account and redeposit the same. Whereas the time gap between the bank account withdrawal and cash redeposit is only two months and 10 days.

8.2. On identical issue, the Co-ordinate Bench of the Delhi Tribunal in the case of ACIT Vs. M/s. Omaxe forest SPA And Hills Developers Ltd. in ITA No. 2/Del/2023 dated 18.08.2023 held as follows:

“7. After noting above factual position of trend of deposits and withdraws by the assessee from its bank account the ld. CIT(A) further observed that the assesseee has prepared cash book in the manner showing that nearby cash withdrawals can be seem shown or seem as cash deposited during demonetization period and the fact that the bank withdrawals or deposits duly reflected in the bank accounts, statements as well as cash book which cannot be manipulated by the assessee in any manner. The ld. CIT(A) noted that the side cash books as well as main cash books clearly show balance of Rs. 2,07,23,542/- as on 08.11.2016. The ld. CIT(A) went in detail and gathered that the AO has ignored main cash books of assessee and has considered only the side cash books of assessee in arriving at the cash balance as on 08.11.2016 which is not a correct approach. Since the assessee company, as per the AO is in the business of real estate, then the keeping cash on sites of construction and keeping main cash books in the central office is a normal practice to be adopted by such company therefore ignoring main cash book is a vital omission on the part of AO which was resulted into difference in the amount of cash deposit and cash balance only based on site cash books ignoring the main cash book.

8. The ld. CIT(A) has relied on the judgment of Hon’ble jurisdictional High Court of Delhi in the case of Kulwant Rai and Jaya Aggarwal observed that when the assessee has shown cash withdrawals during pre demonetization period more than the cash deposited during demonetization then the source cannot be disputed merely on the assumption that such withdrawn amount may have spent by the assessee for some other purpose without any adverse positive material showing such facts. The Hon’ble jurisdictional High Court held that in absence of any material in support of the view that withdrawals were spent for some other purpose, the conclusion of Tribunal has to be held has right in treating the cash withdrawals from the bank as source of cash found. In the present case said preposition rendered by the Hon’ble High Court of Delhi supports the conclusion of ld. CIT(A) that the source of cash deposited during demonetization period by the assessee was opening cash balance and cash withdrawals during pre demonetization period which are higher than the amount of cash deposited by the assessee. As we have noted above, the AO has ignored main cash book while disputing the source of cash and making addition and the ld. CIT(A) considered entire facts and circumstances in the right prospective and thereafter considering the totality of facts and circumstances and prepositions rendered by Hon’ble jurisdictional High Court of Delhi (supra) granted relief to the assessee. Thus, we are unable to see any ambiguity perversity or any valid reason to interfere with the findings arrived by the ld.

CIT(A) and hence we uphold the same. Accordingly, grounds of revenue being devoid of merits are dismissed.”

9. It is undisputed fact that during the demonetization period, there were no works carried out by the assessee firm. Hence the cash in hand was re-deposited by the assessee firm in its bank account being old demonetization Specified Bank Notes namely 500/- and Rs. 1000/- which is not a legal tender. Thus the addition made mainly on the presumption by the Ld. A.O. is not sustainable in law. Therefore the addition is liable to be deleted and the grounds raised by the assessee is hereby allowed.

10. In the result, the appeal filed by the Assessee is hereby allowed.

Order pronounced in the open court on 09 -10-2024