Case Law Details

Case Name : Shri Shivraj Mishrilal Bafna Vs ITO (ITAT Pune)
Appeal Number : ITA No.434/PN/2013
Date of Judgement/Order : 17/06/2015
Related Assessment Year : 2009-10
Courts : All ITAT (7345) ITAT Pune (250)

Brief about the case

Assessee was engaged in the business of trading in gold ornaments. A.O. during the assessment proceedings through AIR Information noted that assessee has made cash deposit of Rs.2471500/-in his saving bank account. On questioning by A.O. about source of such cash deposit, assessee denied for having any such account and any such cash deposit. A.O. asked the information from the bank of the assessee. From the details furnished by the banks, A.O. noted that an amount of Rs.4057265/- has been deposited on various dates in two bank accounts which have not been reflected in the balance sheets/capital accounts filed by the assessee. Assessee failed to reply to the satisfaction of A.O. about the source of such deposits, hence A.O. made an addition of Rs.4057265/- to the total income of the assessee u/s 68 of the I.T. Act. Further, during the assessment proceeding, A.O. also observed that the assessee has purchased gold from various customers on different dates in cash of Rs.347600/-. Hence the same was also added u/s 40A(3) of the I.T. Act.

Assessee filed the appeal before CIT(A). During the assessment proceedings before CIT(A), assessee accepted the fact of maintaining the said two bank accounts which were disclosed to the income tax authorities, wherein deposits and withdrawals were made out of the unaccounted business of share trading, labour job of making of ornaments etc. The assessee expressed his inability to provide details of such transactions in the said bank accounts. He also argued that only the income earned out of said unaccounted transaction should be taxed in his case instead of deposits/credit entries as only deposits cannot be the income of the assessee. Alternatively, the assessee requested for addition of only the peak credit amount to the total income of the assessee which was accepted by the CIT(A).

Aggrieved with the decision, revenue filed the appeal before ITAT.

Contention of the Revenue

The assessee has not kept any details of such receipts and payments vouchers which he could produce the same before the Assessing Officer. The assessee also failed to explain the source of deposits in the bank accounts. Further, concept of peak credit theory should also not be acceptable as there was nothing on record to show that withdrawals made were not utilised and were available for re-depositing in the same bank account, which is necessary for accepting Peak credit theory. CIT(A) also erred in admitting fresh evidence without giving opportunity to the AO. Ld. Departmental Representative also submitted that as against cash deposit of more than Rs.40 lakhs in the bank accounts, the profit and loss account of the assessee shows a turnover of hardly about Rs.10 lakhs. It was further submitted that there is no evidence whatsoever to support the claim made by the assessee that the deposits in the bank account are out of cash withdrawn on various dates and sale of shares.

Contention of the Assessee

In respect of the deposits in the bank accounts, assessee pleaded that the entire credits in the unaccounted bank accounts of the appellant cannot be treated as income. In such situation only the peak credit theory should be applied which is well accepted by various Benches of the Tribunal as well as High Courts in similar situations. In support of his claim various judgments were sighted. Based on these, he also agreed to accept addition on account of peak credit balance in the said two accounts along with interest earned on such deposits total amounting to Rs. Rs.667576/- (439640 + 227936).

So far as the addition u/s.40A(3) is concerned it was submitted that the purchase of gold from customers is a regular practice being followed by the jewelers and most of the persons who come to sell the gold are indeed from very far flung areas. Since seller were new and not known to the assessee, they always insist for cash payment for selling of the gold and due to exceptional circumstances and business expediency cash payments were made which are covered by the provisions of section40A(3) read with the Rule 6DD. The assessee further argued that all the bills and vouchers were produced before the Assessing Officer during the course of assessment proceedings. Further, if any doubt was there in the mind of the Assessing Officer he could have called the parties and should have carried out independent investigation to prove his point as all the details of the parties were available.

Held by ITAT

Although initially the assessee denied to have made any such cash deposits, however, before the CIT(A) assessee made a plea that the deposits in the said accounts relate to his unaccounted business of share trading and labour job of making of gold ornaments. It may be pertinent to note here that cash was deposited in the said bank accounts whereas most of the withdrawals are by inward clearing and only few instances of cash withdrawal. The theory of peak credit as argued by the assessee before CIT(A) will be applicable only when there are deposits in cash and withdrawals in cash. In the instant case when the deposits are made in cash and most of the withdrawals are by way of clearing and not cash withdrawn, therefore, the theory of peak credit is not fully applicable to the facts of this case. Beside the number of inward clearing entries are almost equal to the number of cash withdrawals. Further, there is one transfer of Rs.1 lakh on 21-04-2008 from S.B. A/c.No.11817, the nature of this entry is not known. The Ld. CIT(A) without applying his mind and without verifying the nature of transactions has simply carried away by the arguments made before him which is not at all justified. Hence, A.O. is being directed to ascertain the nature of entries first and to make thorough scrutiny before coming to a final conclusion.

So far as the addition u/s 40A(3) is concerned the last sentence of the proviso i.e. ‘having regard to the nature and extent of banking facilities available’, considerations of business expediency and other relevant factors, is the guidelines for the authority making such disallowances, which mean the AO has to apply his mind before taking decision regarding the disallowances to be made u/s. 40A(3). There is nothing on record to show whether the persons to whom payments were made for purchase of gold ornaments are having bank accounts or not and whether the places where they reside was covered by the banking facilities or not. Without ascertaining this vital aspect the CIT(A) has jumped to conclusion that it was for business expediency and also accepted the contention of the assessee of independent investigation in case of any doubt. In view of the above the observations of Ld. CIT(A) is not acceptable. Considering the totality of the facts and circumstances of the case and in the interest of justice, the matter was restored back to the file of the Assessing Officer with a direction to adjudicate both the issues afresh in the light of above observations.

In the result, the appeal of the Revenue as well as the CO filed by the assessee are allowed for statistical purposes.

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