Joy Thomas Vs ITO (ITAT Cochin)
The Income Tax Appellate Tribunal (ITAT), Cochin bench, has remitted the tax assessment case of an individual, Joy Thomas, back to the Assessing Officer (AO) for a fresh examination. The tribunal found that the tax authorities had failed to adequately consider key aspects of the taxpayer’s explanation regarding cash deposits in bank accounts and the disallowance of cash expenditure on interest, issues that arose during a faceless assessment proceeding.
The case pertains to the assessment year 2020-21. Joy Thomas, an individual deriving income from business and agriculture, had filed his return declaring a total income of Rs. 24,95,020/-. However, the Income Tax Officer (ITO), Ward-1, Kottayam, completed the assessment under Section 143(3) read with Section 144B of the Income Tax Act, 1961 (the Act), determining a total income of Rs. 1,13,78,620/-.
The significant increase in assessed income was primarily due to three additions made by the AO. First, the AO added Rs. 63,71,381/- as unexplained money, representing cash deposits in the assessee’s bank account. The assessee’s explanation that these deposits were from the sale proceeds of agricultural products was rejected by the AO. Second, a further amount of Rs. 16,00,219/- was added as unexplained money, representing other cash deposits. The assessee had explained that this amount was collected as interest from three specific parties, but this explanation was also rejected. Lastly, the AO invoked Section 40A(3) of the Act to disallow an expenditure of Rs. 9,12,000/- incurred as interest paid in cash.
Aggrieved by the assessment order, the assessee filed an appeal before the National Faceless Appeal Centre [CIT(A)]. However, the CIT(A), through an order dated June 18, 2024, confirmed the additions made by the AO.
The assessee then appealed to the ITAT Cochin bench, challenging the CIT(A)’s order. Before the tribunal, the learned Authorized Representative (AR) for the assessee raised several contentions. It was argued that the lower authorities had overlooked cash withdrawals amounting to Rs. 29,74,000/- made by the assessee during the relevant previous year, which could account for subsequent cash deposits in the bank account.
Regarding the cash deposits attributed to agricultural income, the assessee’s representative submitted that the assessee cultivated cardamom on a substantial land area of 142 acres. It was contended that the cash deposits were indeed sourced from the sale proceeds of cardamom. Citing a decision of the ITAT Cochin Co-ordinate Bench in the case of Laigy George Pattanayil v. ITO ([2019] 55 CCH 0093), the assessee argued that the mere fact that agricultural income was not explicitly shown in the return of income should not be the sole basis for disbelieving the explanation that cash deposits originated from agricultural sales.
Concerning the disallowance of interest expenditure under Section 40A(3), the assessee submitted that the cash payments were made to a close friend. It was argued that such payments might fall under the exceptions enumerated in Rule 6DD of the Income Tax Rules, 1962, which allows cash payments in specific circumstances.
Based on these arguments, the assessee’s representative prayed for the matter to be remanded back to the AO for a de novo (fresh) assessment, allowing a complete and proper examination of all facts and explanations.
The learned Senior Departmental Representative (Sr. DR) appearing for the Revenue stated that they had no serious objection to the contentions raised by the assessee, implicitly accepting the possibility that the matter warranted a fresh look by the AO.
The ITAT, after considering the rival submissions and reviewing the case records, expressed the considered opinion that it was a “fit case to remand the matter to the AO for de novo assessment.” The tribunal identified specific shortcomings in the approach of the lower authorities. The ITAT noted that neither the AO nor the CIT(A) had considered the cash withdrawals of Rs. 29,74,000/- while examining the cash deposits.
Furthermore, the tribunal found that the AO had failed to examine the exceptions enumerated under Rule 6DD of the IT Rules before invoking the provisions of Section 40A(3) to disallow the interest expenditure paid in cash.
Significantly, the ITAT also agreed with the assessee’s submission, which was supported by the co-ordinate bench’s decision in Laigy George Pattanayil v. ITO. The tribunal reiterated that merely because the appellant had not shown agricultural income in his return, it cannot be the sole ground to reject his explanation that the cash deposits were made out of the sale proceeds of cardamom.
Finding that the AO and CIT(A) had failed to take these crucial aspects into consideration, the ITAT decided to send the case back to the primary authority.
Accordingly, the ITAT allowed the appeal filed by the assessee for “statistical purposes,” which means the appeal is allowed not on merits definitively, but for the purpose of directing a fresh assessment. The entire matter was remitted back to the file of the AO for conducting a de novo assessment in accordance with the law. The tribunal directed the AO to afford a reasonable opportunity of hearing to the appellant during the fresh proceedings and stated that all contentions raised by the appellant before the ITAT would remain open for consideration by the AO.
The ITAT’s order underscores the importance of a thorough examination of the taxpayer’s explanations and the applicability of relevant rules and exceptions, even in the context of faceless assessment procedures, and highlights the tribunal’s power to ensure due process is followed by the tax authorities.
FULL TEXT OF THE ORDER OF ITAT CACHIN
