ITAT deletes Addition for wrong entry of cash deposit in bank

ACIT Vs Dr. Radhey Shyam Garg (ITAT Jaipur)

During the course of assessment proceedings, the AO noted that the assessee has deposited cash of Rs. 2,90,000/- in the Central Bank of India whereas on the said date i.e. 16.11.2015 there was a negative cash balance in the cash book of Rs. 1,01,773.84. The AO accordingly made an addition of Rs. 1,01,774/- under section 69 of the IT Act read with section 115BBE of the IT Act. The assessee challenged the action of the AO before the LD. CIT (A) and submitted that the AO has made the addition without giving him any show cause notice and opportunity to explain the source of cash deposited in the bank account. The AO has called for a copy of cash book for the designated date to verify the cash deposit with the bank and in compliance the assessee filed copy of the cash book for the required date only. Thus the assessee has contended before the LD. CIT (A) that without giving show cause notice and opportunity to explain the availability of cash, the addition made by the AO is not justified and liable to be deleted. The assessee further explained that it is a wrong entry passed on 17.11.2015 instead of 16.11.2015 or 14.11.2015 for Rs. 1,20,000/-being cash shown as deposited with the Bank on 14.11.2015. Since there was no actual cash deposited in the bank on the said date, therefore, a reverse entry was passed on 17.11.2015. The LD. CIT (A) deleted the addition after considering the facts explained by the assessee.

The AO has made the addition on the basis of copy of the cash balance in the cash book on a particular date. It is manifest from the assessment order that the AO has not issued any show cause notice to the assessee or even asked the assessee to explain the source of cash deposit in the bank account.

Thus the entries made in the cash book from 14.11.2015 to 17.11.2015 were considered by the LD. CIT (A) and it was found that it was only a genuine mistake on the part of the Data Entry Operator who has made the entry of 17.11.2015 instead of 16.11.2015. In view of the above facts as discussed by the LD. CIT (A) and no contrary material brought before us, we do not find any error or illegality in the impugned order of LD. CIT (A).

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the revenue and cross objection by the assessee are directed against the order dated 5th September, 2019 of LD. CIT (A), Alwar for the assessment year 2016-17. The revenue has raised the following grounds :-

“ 1. Whether on the facts and circumstances of the case and in law ld. CIT (A) is justified in deleting addition of Rs. 1,01,774/- made by the AO on account of cash deposited in bank account despite of the fact that sufficient cash was not hand as per cash book.

2. Whether on the facts and circumstances of the case and law, the CIT (A) is justified in deleting the action of the AO in considering Rs. 4,07,77,191/- as business income as against of Long Term Capital Gain of Rs. 3,51,17,040/- declared by the assessee in the return of income, without appreciating material facts of the case.”

Due to the prevailing situation of COVID 19 pandemic, the hearing of the appeal was concluded through Video Conference.

Ground No. 1 is regarding an addition of Rs. 1,01,774/- made by the AO on account of cash deposit in the bank account of the assessee was deleted by the LD. CIT (A).

2. The assessee is an Individual and running a Hospital in the name and styled as M/s. Mayuri Surgical Hospital.  The assessee has filed his return of income on 14.10.2016 declaring total income of Rs. 3,80,07,400/- including Long Term Capital Gain of Rs. 3,51,17,040/-. During the course of assessment proceedings, the AO noted that the assessee has deposited cash of Rs. 2,90,000/- in the Central Bank of India whereas on the said date i.e. 16.11.2015 there was a negative cash balance in the cash book of Rs. 1,01,773.84. The AO accordingly made an addition of Rs. 1,01,774/- under section 69 of the IT Act read with section 115BBE of the IT Act. The assessee challenged the action of the AO before the LD. CIT (A) and submitted that the AO has made the addition without giving him any show cause notice and opportunity to explain the source of cash deposited in the bank account. The AO has called for a copy of cash book for the designated date to verify the cash deposit with the bank and in compliance the assessee filed copy of the cash book for the required date only. Thus the assessee has contended before the LD. CIT (A) that without giving show cause notice and opportunity to explain the availability of cash, the addition made by the AO is not justified and liable to be deleted. The assessee further explained that it is a wrong entry passed on 17.11.2015 instead of 16.11.2015 or 14.11.2015 for Rs. 1,20,000/-being cash shown as deposited with the Bank on 14.11.2015. Since there was no actual cash deposited in the bank on the said date, therefore, a reverse entry was passed on 17.11.2015. The LD. CIT (A) deleted the addition after considering the facts explained by the assessee.

3. We have heard the ld. D/R as well as the ld. A/R and carefully perused the orders of the AO and LD. CIT (A). The AO has made the addition on the basis of copy of the cash balance in the cash book on a particular date. It is manifest from the assessment order that the AO has not issued any show cause notice to the assessee or even asked the assessee to explain the source of cash deposit in the bank account. The LD. CIT (A) after considering the facts as explained by the assessee has deleted the addition in para 4.3 as under :-

“ 4.3. I have perused the assessment order as well as submissions filed by the appellant including judicial citations given therein. Following facts have emerged :

1, That the appellant has submitted that cash of Rs. 1,20,000/- was handed over to the cashier for deposit in the bank but being a Saturday the same could not have been deposited but in the cash book entry was made on 14.11.2015. However, on Monday i.e. 16.11.2017 a total cash of Rs. 2,90,000/- including Rs. 1,20,000/- was deposited and the contra entry in the cash book was made in the cash book on 17.11.2015 instead of 16.11.2015 due to oversight of the computer operator. I have considered the submission along with the cash book entry and it is my considered view that it is a genuine mistake on the part of data entry operator. The AO has also not rejected the books of accounts. Therefore, the addition of Rs. 1,01,774/- is deleted and the appellant’s ground o f appeal on the issue is allowed. ”

Thus the entries made in the cash book from 14.11.2015 to 17.11.2015 were considered by the LD. CIT (A) and it was found that it was only a genuine mistake on the part of the Data Entry Operator who has made the entry of 17.11.2015 instead of 16.11.2015. In view of the above facts as discussed by the LD. CIT (A) and no contrary material brought before us, we do not find any error or illegality in the impugned order of LD. CIT (A).

Ground No. 2 of the revenue’s appeal and ground in the Cross Objection are common regarding the Long Term Capital Gain declared by the assessee was treated as Business income by the AO and subsequently bifurcated by the LD. CIT (A) into Long Term Capital Gain as well as Business income as per provisions of section 45(2) of the IT Act. Thus the revenue as well as the assessee are aggrieved by the order of LD. CIT (A) and filed respective appeal and cross objection on this issue.

4. The ld. D/R has submitted that the assessee has shown the Long Term Capital gain on sale of various plots and shops after claiming deduction under section 54F. Since the assessee has developed a residential colony and divided the land into 102 residential plots in the colony named as Mayuri Nagar Colony, therefore, the AO has rightly considered this activity of the assessee as a business activity instead of investment in capital asset. The AO has rightly treated the income arising from the sale of the said plots as Income from business and consequently the deduction under section 54F was denied. The ld. D/R has further submitted that this is not the only activity of the assessee in the real estate business but the assessee has also sold shops during the year under consideration. Therefore, it is evident from the facts that the assessee is purchasing and selling the real estate property and even developing the land and then selling, some of which even constructed as commercial property and shops are sold. He has relied upon the order of the AO.   The activity is a regular business activity and the assessee has specifically devoted his time to develop the colony by preparing a lay out plan, site plan, ear marking the blocks in the colony A, B, C, D, E, F, G, H, I, J, K and thereafter the plots were sold as residential plots and not agricultural land. Therefore, the income arising from sale of these plots is nothing but the business income of the assessee. The assessee is otherwise engaged in the business of running the Hospital and hence bifurcation of the said income into Long Term Capital Gain and Business income by the LD. CIT (A) is not based on the facts of the case.

5. On the other hand, the ld. A/R of the assessee has submitted that there is no dispute that the assessee purchased the agricultural land in the village Mehemadpur, District Dholpur in the year 2000 as an Investment without any intention to derive profit by selling the same. The assessee was holding this land for a long time till it was sold in the year under consideration. The assessee was using the land for agricultural purposes till the land was divided into plots and sold. Since the nearby area of the land has been developed and people started residing along with farming their lands, therefore, to avoid the illegal encroachment on the land, the assessee decided to sale the land after dividing the same into residential plots. Thus the ld. A/R has submitted that the assessee has sold the agricultural land though after dividing the same into plots and, therefore, gain arising from the sale of the land is nothing but Long Term Capital Gain as the assessee purchased the land as an investment and at the time of sale it cannot be treated as business activity. He has relied upon the decision of Hon’ble Jurisdictional High Court in the case of Sohan Khan & Mohan Khan, 304 ITR 194 (Raj.).

6. We have considered the rival submissions as well as the relevant material on record. The undisputed fact as emerging from the record is that the assessee purchased the agricultural land in question in the year 2000-01. During the year under consideration, the assessee has sold various plots of land and the description of the land given in the sale document clearly reveals that what is sold by the assessee is residential plot to each buyer. Therefore, undisputedly the assessee has developed the land into a residential colony by carving out 102 residential plots, ear-marking the plots as A, B, C, D, E, F, G, H, I, J, K as well as number of the plots. This exercise of the assessee, whereby the assessee has prepared a lay-out plan and which has been executed on the ground the plots have been carved out as per the lay-out plan and the map under which a proper residential colony is developed. Therefore, the plots are sold by the assessee as residential plot in a colony developed by the assessee though the colony was yet to be approved by the Authorities. When there were proper roads and pathways in the said colony, then it cannot be said that the agricultural land was simply divided and sold by the assessee for maximizing the valuation of the land. The AO has reproduced the contents of the registered documents through which the plots of land were sold by the assessee. The assessee has not disputed those contents and facts that what is sold by the assessee are the residential plots in the colony developed by the assessee in the name of Mayuri Nagar Colony. This description is given by the assessee in the Sale Deed whereby the plots were sold. The AO has also given the details of the plots sold by the assessee during the previous year relevant to the assessment year under consideration at pages 4 & 5 of the assessment order as under :-

Thus it is clear that the assessee has sold the plots as well as shops in the colony developed by assessee. The LD. CIT (A) though upheld the finding of the AO to the extent that what was sold by the assessee were the residential plots and, therefore, the activity of developing the colony is a business activity of the assessee which is adventurous in nature. However, the LD. CIT (A) has also held that initially the assessee has invested in capital assets and, therefore, the capital asset was converted into stock-in-trade and thereby the profit arising from sale of plots has been bifurcated by the LD. CIT (A) into capital gain as well as business profit. The LD. CIT (A) has applied the fair market value for the purposes of arriving at the capital gain and the difference of the sale consideration and the fair market value is treated as Business income of the assessee. The relevant finding of the LD. CIT (A) on this issue is in para 5.3 as under :-

“ 5.3. I have perused the assessment order as well as submissions filed by the appellant including judicial citations given therein. Following facts have emerged:

1. That the appellant had purchased agricultural land vide registered deed dated 27.09.2000 & 12.02.2001 for an amount of Rs. 3,73,234/­.

2. That in the year 2015-16, the appellant had divided the agricultura l land into small plots and developed a colony under the name o f Mayuri Nagar Colony.

3. That the appellant had also constructed shops on the land for sale.

4. That after plotting has been done, the appellant has started selling the plots. Such plots were sold during the year under consideration and declared the income as long term capital gain.

5. That the AO had considered the income arisen out of the above mentioned sale as business income by treating it as ‘business income’. ”

On principle, we agree with the order of the LD. CIT(A) on the point that initially the assessee has invested in the land in question, however, subsequently when the assessee has decided to develop the residential colony on this land then the capital asset has been converted into stock-in-trade. However, the bifurcation of the profit arising from the sale of the plots of land ought to have been based on the FMV on the date when the assessee has decided to develop the land into residential colony. The timing and date of such conversion is taken by the LD. CIT(A) as on 1st day of financial year 2015-16 i.e. 01.04.2015. However, the said date is not the actual date coming from the relevant material/record. The preparation of the site plan for developing the colony shall be the actual date of conversion of the agricultural land into stock-in-trade. The LD. CIT(A) has not examined this issue as on when the capital asset was converted into stock-in-trade. The LD. CIT(A) has just taken the 1st day of previous year relevant to assessment year as the date of conversion which is not based on any documentary evidence. Accordingly, the computation of capital gain as well as the business income arising from the sale of land is dependent on the fair market value of the undeveloped land in question on the date when the assessee decided to develop the land. The documentary evidence on this point would be the lay out plan prepared by the assessee or any other document which was prepared by the assessee for the purpose of development of the land. Therefore, the bifurcation and computation of Long Term Capital Gain and Business income requires a proper verification and re-consideration. Accordingly we set aside this limited issue to the record of the AO for determining the actual date of conversion of the capital asset into stock-in-trade and then apply the provisions of section 45(2) of the IT Act to bifurcate the profit into Long Term Capital Gain and Business income.

6.1. As regards the deduction under section 54F is concerned, the LD. CIT (A) has not considered this issue. The AO has denied the claim solely on the ground that the profit on sale of the land is Business income whereas the LD. CIT (A) has not adjudicated this issue while passing the impugned order. Accordingly the AO is directed to examine the claim of deduction under section 54F and then decide the same after giving an opportunity of hearing to the assessee.

6.2. As regards the income arising from sale of shops, the LD. CIT (A) has allowed the claim of the assessee as Income from Capital gain, we find that once the assessee has decided to develop the land by construction of shops for the purpose of sale, then a different para meter cannot be applied as applied in the case of development of land in a residential colony. Accordingly, the profit arising from the sale of shops is also required to be bifurcated as per the provisions of section 45(2) of the IT Act. The AO has to compute the capital gain as well as the Business income in view of our observations as regards the conversion of the agricultural land into residential colony. Hence the appeal of the revenue is partly allowed for statistical purposes and the Cross Objection of the assessee is dismissed.

7. In the result, appeal of the revenue is partly allowed for statistical purposes and the Cross Objection of the assessee is dismissed.

Order is pronounced in the open court on 10/08/2020.