Section 68 Addition Deleted as Bank Entries Not Considered Books of Account

ITO Vs Surekha Ashok Mukkawar (ITAT Nagpur)

The Income Tax Appellate Tribunal (ITAT), Nagpur, adjudicated an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] for Assessment Year 2017–18, concerning deletion of addition made under Section 68 of the Income Tax Act.

The assessee had not filed a return of income for the relevant year. The Assessing Officer (AO), based on information of cash deposits amounting to Rs. 2.49 crore in a bank account, reopened the assessment under Section 147. Due to non-response from the assessee during assessment proceedings, the AO treated the entire deposit as unexplained cash credit under Section 68 and passed an ex parte order under Sections 147 read with 144.

Before the CIT(A), the assessee submitted that she was engaged in the business of operating a warehouse for storage of agricultural produce. The deposits in the bank account were explained as part of transactions involving farmers who stored produce in the warehouse and availed loans from banks against such stored goods. These transactions were routed through a control account. Upon repayment of loans, goods were released, and the assessee earned only storage rental income.

The assessee further contended that the bank transactions represented loan disbursements and repayments linked to stored goods, and not income. Detailed records, including bank statements and transaction trails, were furnished to establish a nexus between deposits and withdrawals. Sample data of transactions involving farmers was also submitted to demonstrate the nature of entries.

The CIT(A), after examining the submissions and evidence, held that the assessee’s explanation was satisfactory. It was found that the deposits were part of a systematic flow of funds relating to loans against agricultural produce stored in the warehouse, and that the assessee’s income was limited to rental receipts. The CIT(A) also observed that Section 68 applies only to credits recorded in the books of account, whereas the impugned entries were in a bank account and not in the books. Accordingly, the addition of Rs. 2.49 crore was deleted.

The Revenue challenged the order on multiple grounds, including improper admission of additional evidence under Rule 46A, lack of remand report, and failure to verify identity, capacity, and genuineness of transactions. It was argued that the CIT(A) did not follow procedural requirements and that the matter should be remanded to the AO.

The Tribunal considered these arguments and noted that the assessee had provided a reasonable explanation for non-submission of evidence during assessment, citing the Covid-19 pandemic. It also observed that the CIT(A) had co-terminus powers with the AO and could examine evidence where circumstances justified it. The Tribunal found that the evidence submitted was verifiable and had been examined on a test-check basis.

The Tribunal upheld the findings of the CIT(A), noting that the transactions in the bank account were linked to loan activities and had a clear nexus with deposits and withdrawals. It also agreed that Section 68 was not applicable as the entries were not recorded in the books of account of the assessee.

Accordingly, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the addition.

FULL TEXT OF THE ORDER OF ITAT NAGPUR

1. This appeal by Revenue is directed against the order of National Faceless Appeal Centre, Delhi (NFAC)/learned Commissioner of Income Tax (Appeals) (in short, the Id. CIT(A)) dated 14/08/2024 for the Assessment Year (AY) 2017-18. The Revenue has raised following grounds of appeal:

“1. The Ld. CIT(A) has erred in law and in fact in admitting the additional evidences when none of the conditions laid down in Rule 46A of the Income Tax Rules, 1982 are fulfilled in this case.

2. The Ld. CIT(A) has erred in admitting additional evidence without recording reasons in writing as required by Rule 46A(2) of the Income Tax Rule, 1962.

3. The Ld. CIT(A) has erred in deleting the addition of Rs.2,49,47,979/- made u/s 68 of the I.T. Act without calling for a remand report from the Assessing Officer on the submissions made by the assessee during appellate proceedings.

4. The Ld. CIT(A) has erred in deleting the addition of Rs.2,49,47,979/- made u/s 68 by accepting the contention of the assessee regarding the source of funds for depositing in her bank account without ascertaining the identity of the various farmers. their financial capacities and the genuineness of the transactions.

5. The Ld. CIT(A) erred in deleting the addition of Rs.2,49,4Z979/- made u/s 68 of the I.T. Act on the basis of 10 sample vouchers furnished by the assessee without giving any reasons in writing about accepting the contention of the assessee.

6. The Ld. CIT(A) erred in deleting the addition of Rs.2,49,4Z979/- made u/s 68 of the I.T. Act without analysing the bank account statements and examining the source of various credits therein.

7 The Ld. CIT(A) erred in failing to discuss the nature of ‘difference income’ as shown by the assessee in the chart submitted in her response and relationship of the same with the ‘rental income’.

8. The Ld. CIT(A) erred in accepting the rental income as contended by the assessee without analysing the basis for the same.

9. Any other ground that may be raised at the time of hearing.”

2. Brief facts of the case are that no return of income was filed by assessee for A.Y. 2017-18. The Assessing Officer (AO) was having information in the system that assessee made cash deposit of Rs. 2.49 crore in his bank account during relevant financial year. The AO after recording the reasons reopened the case of assessee under section 147. Notice under section 148 dated 27.03.2021 was issued electronically to the assessees144 file return of income. The AO recorded that no return of income was filed, in response to notice under section 148. The AO recorded that various notices were issued to assessee for calling information and source of cash deposit. On page 2 of assessment order, the AO recorded that assessee is engaged in the business activity under the name of Shri Sai Agro Warehouse. A sum of Rs. 2.49 crore was deposited in Yavatmal Urban Co-op Bank Ltd, which is in the name of Shri Sai Agro Warehouse. In absence of any response from assessee, entire cash deposit was treated as unexplained cash deposit under section 68 in the assessment order passed under section 147 rws 144 dated 31.03.2022.

3. Aggrieved by the additions in the assessment order, the assessee filed appeal before Id CIT(A). Before Id CIT(A), the assessee filed detail statement of fact. The statement of fact of assessee are recorded in para 3 of order of Id. CIT(A). The assessee in her statement of fact contended that she is proprietor of Shri Sai Agro Warehouse, engaged in the business of marketing and storage of food grain and other agricultural produce of farmers on commission basis. As per banking arrangements with Bank, agriculturist can raise funds from bank on storage of agricultural produce at assesses warehouse and on repayment of such loan to bank, the agricultural produce / goods kept with assessee are released. Since goods were store in assesses warehouse, transaction of loans was routed through Control Account (Specific Bank Account). The goods are stored by farmers and on quantity of storage loan is issued to farmers and on repayment warehouse, receipt for released of agriculture produce are issued by bank. In the entire transaction, the assessee is entitled only for storage rentals and source of income of assessee is rent of warehouse. For the year under consideration, the assessee has not filed regular return of income as the income of assessee was below threshold limit of income. The assessee also objected against the reopening.

4. In response to show cause notice by Id. CIT(A), the assessee also filed her written submission, reiterating the similar contentions as raised in statement of fact. The assessee further stated the entire transaction in the bank cannot be treated as unexplained cash credit to attract addition under section 68. The assessee also objected against making addition under section 68, which is merely on transaction in bank. As all the credit entry are recorded in the books. Bank account is not the books of account. As a matter of fact, the deposits are made to the loan account, money withdrawn at the same point of time to deposit in loan account and the repayment has direct nexus with the withdrawal which cannot be treated as undisclosed income for initiating action under section 147/148. The assessee is maintaining proper trail amount taken and given, the date wise trail of amount taken from party exactly tallies with each entry in the bank account, details were furnished in the form of Annexure A. Bank statement was also furnished in the form of Annexure B. The assessee further reiterated that only income of assessee by way of rental receipt from warehouse which is below the taxable limit. The assessee on sample basis also provided the name of 10 agriculturists, the type of their agricultural yield (product), date of deposit, the amount given (credit by bank) and date of taking / return of the amounts and aggregating amount receipt which reproduced below:

5. On the basis of aforesaid explanation, the assessee submitted that the amounts so deposited on account of repayment of loan which was given to farmers, by no means is income of assessee and the addition is not justified. To support his submission, the assessee also relied on certain case law.

6. The Id. CIT(A) on considering the submission of assessee and after verification of details, deleted the entire addition as per his finding in para 5.3 and 5.4 of his order. The Id. CIT(A) held that assessee is a proprietor of Shri Sai Agro Warehouse wherein she is engaged in the business of marketing and storage of food grain and other agricultural produce. On the basis of quantity of agriculture product at assesses warehouse, loans (credits) were given to the farmers and on repayment thereof, goods stored with assessee in his warehouse are released. The transaction of loan and repayment are routed through one control account. The goods are stored (kept by farmers) and on the basis of such storage receipt, loan is raised and on repayment receipt is issued by bank to release to product to the farmers. The assessee is entitled only for rental of storage. As per section 68 of the Act, any sum found credited in the books of assessee, for which no explanation is offered about the entire and source or the explanation and offered by assessee, in the opinion of AO is not satisfactory, he may charge to income tax such credit to income tax. In the present case, no such entry is credited in the books of account of assessee, thus, section 68 is not attracted. The Id. CIT(A) further noted that the deposits are made to loan account, money withdrawn at same point of time is deposited to loan account and the repayment has nexus to withdrawal and prima facie repayment. On the basis of such observation, the Id. CIT(A) held that date wise trail of amount taken from parties is tallied with each entry in the bank account. The only income of assessee is rental income from warehouse which is below taxable limit. The deposit and withdrawal amount in the bank account is out of the loan amount taken and given to various farmers on storing different types of times in her warehouse. Such withdrawal and deposits are not income of assessee and accordingly addition of Rs. 2.49 crore under section 68 is not sustainable and deleted the same. Aggrieved by the order of Id. CIT(A), the Revenue has filed present appeal before Tribunal.

7. We have heard the submissions of learned Senior Departmental Representative (Id. Sr. DR) for the Revenue and the learned Authorized Representative (Id. AR) of the assessee. The Id. Sr. DR for the Revenue submits that before AO, the assessee has not filed any evidence or explanation for explaining the credit in his bank account. The assessment was completed under section 144. The Id. CIT(A) allowed relief to the assessee without giving opportunity to the AO and accepted the additional evidence. The Id. CIT(A) violated the provisions of Rule 46A of Income Tax Rules, 1962. No opportunity of remand report was given to assessing officer. The Id. CIT(A) was required to record specific reasons before admitting such additional evidence. The Id. Sr. DR for the Revenue submits that order passed by Id CIT(A) may be set aside and the matter may be restored back to the file of AO for verification of evidence and passing the order afresh.

8. On the other hand, the Id. AR of the assessee supported the order of Id. CIT(A). The Id. AR of the assessee submits that during the assessment, it was a severe Covid-19 pandemic. The AO completed the assessment during Covid period. However, before Id. CIT(A), the assessee explained the fact by filing statement of fact as well as written submission with all supporting evidences. The Id. AR of the assessee submits that he has three-fold submissions, firstly, the entry in the bank account cannot be treated credit entry. Entry in bank account/ statement is not books of account of assessee. The transaction of deposit and withdrawal cannot be considered as books of assessee; therefore, addition under section 68 has no legs to stand. To support his submission, the Id. AR relied upon the decision of Raipur Bench in Kuldeep Jiwan Mahant vs ITO in ITA No. 105/RPR/2019 reported in (2022) 36 NYPTTJ 887 TTJ (Raipur). Secondly, the assessee while explaining the fact furnished the bank statements and the guidelines of Rural Godown Scheme. Such evidence was accepted appreciated and the credit in the bank was explained to the satisfaction of Id. CIT(A). The Id. CIT(A) has co-terminus power as of AO. Each & every evidence does not require verification, if it is self-admissible and verifiable on the face of it. Thirdly, during the relevant year, the assessee has no taxable income hence no return of income was filed. The Id. AR of the assessee further submits that he has placed on record, copy of written submission filed before Id. CIT(A) which may be considered. The Id. AR of the assessee while explaining the facts further submits that the assessee is proprietor of Shri Sai Agro Warehouse wherein, she is engaged in the business of storage of food grain and other agricultural produce of farmers. The storage facility was built up under Rural Go-down Scheme that is Gramin Bhandaran Yojana. The farmers keep their produce in the go down and under such scheme are eligible to avail pledge loans on hypothecation of their produce. The terms and conditions of such scheme are issued by Reserve Bank of India (RBI)/NABARD and are normal banking practice followed by financial institution. As per such guidelines, the farmers on keeping their produce in the godown is eligible to avail loan to the extent of 75% of value of produce pledged for a period of 12 months. The banking institution accepts the godown receipts duly endorsed and delivered to bank for pledge loans against hypothecation of produce. On repayment of loan, the agricultural produce kept in the warehouse are released. As the goods are stored in a private godown, transactions are routed through one control account. The credit in the banks or part of transaction of loans. The Id. CIT(A) verified the fact on the basis of sample transaction and find complete nexus of repayment and withdrawal and allowed relief to the assessee. The Id. AR of the assessee submits that he fully supports the order of Id. CIT(A), which was passed on verification of facts and evidence.

9. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the AO made addition of Rs. 2.49 Crore on account of credit entry in the bank account which is in the name of Shri Sai Agro Warehouse. The assessee is proprietor of Shri Sai Agro Warehouse. The AO made addition by taking view that no response was filed during assessment. We find that before Id CIT(A), the assessee explained that during assessment, it was severe Covid pandemic. Before Id CIT(A), the assessee filed detailed statement of facts as well as written submissions, with evidence to substantiate the facts about entire credit entries in the bank account. The facts explained by assessee are not repeated here for the sake of brevity as such facts are recorded by us in preceding paras of this order. We find that Id CIT(A) on considering the facts held that assessee is a proprietor of Shri Sai Agro Warehouse, is engaged in the business of marketing and storage of food grain and other agricultural produce. We find that business activities of assessee are duly accepted by AO on page -2 of his order.

10. We further find that Id CIT(A) on considering the contention of the assessee held on the basis of quantity of agriculture product at assesses warehouse, loans (credits) were given to the farmers and on repayment thereof, goods stored with assessee in his warehouse are released. The transaction of loan and repayment are routed through one control account. The goods are stored (kept by farmers) and on the basis of such storage receipt, loan is raised and on repayment receipt is issued by bank to release to product to the farmers. It was noted by Id CIT(A) that the assessee is entitled only for rental of storage. The Id. CIT(A) further noted that the deposits are made to loan account, money withdrawn at same point of time is deposited to loan account and the repayment has nexus to withdrawal and prima facie repayment. On the basis of such observation, the Id. CIT(A) held that date wise trail of amount taken from parties is tallied with each entry in the bank account. The only income of assessee is rental income from warehouse which is below taxable limit. We find that Id CIT(A allowed relief to the assessee after verification of facts and the credit entries in the control account, which are tallied with the repayments by the farmers.

11. The Id CIT(A) also held that as per section 68 of the Act, any sum found credited in the books of assessee, for which no explanation is offered about the entire and source or the explanation and offered by assessee, in the opinion of AO is not satisfactory, he may charge to income tax such credit to income tax. In the present case, no such entry is credited in the books of account of assessee, thus, section 68 is not attracted.

12. Before us, the Id SR DR vehemently argued that no satisfaction was recorded by Id CIT(A) before admitting additional evidence and no opportunity was given to AO to give his comment. We find that Hon’ble Jurisdictional High Court in Smt. Prabhavanti S Shah Vs CIT(1998) 100 Taxman 404 (Bom) held that a conjoint reading of section 250 and Rule 46A, make it clear that restrictions placed on the appellant to produce evidence do not affect the power of CIT(A) under section 250(4). The purpose of Rule 46A appear to be to ensure that evidence is primarily led before the AO. We find that before Id CIT(A) the assessee explained that assessment was carried out during Covid period, thus, it was a reasonable explanation for non-submission of evidence before AO as it was extraordinary circumstances for every individual. Moreover, the assessee relied on the evidence which were verifiable on the face of it and was verified on test check basis. Thus, keeping in view the peculiar facts of the case in hand, we do not find merit in the submissions of Id Sr DR for the revenue. In the result, the grounds of appeal raised by the revenue are rejected.

13. In the result, the appeal of the Revenue is dismissed.

Order pronounced on 24.03.2026 as per Rule 34 of Income Tax (Appellate Tribunal) Rules-1963.