2017 (4) TMI 1636 - AT - Income Tax

AO's assessment erroneous for inadequate inquiry into unexplained cash deposits from money lending business u/s 263

Avathan Marimuthu Versus Asst. Commissioner of Income Tax, Circle-III, Trichy

The ITAT Chennai upheld the CIT's revision order u/s 263, finding the AO's assessment erroneous due to inadequate inquiry. The assessee failed to maintain ... Revision u/s 263 - as per CIT there is complete absence of enquiry by AO in passing the assessment orders - unexplained income u/s. 69/69A - HELD THAT:- No bills and vouchers stated to be accompanying non-existing books of account, were admittedly produced. It is also incomprehensible that the assessee is, as stated, not maintaining any books of account (in respect of the money lending business) and, in any case, that there is a complete absence of any record in respect of the advances made and recovered, as well as qua the interest/ commission earned in the process, and returned only on the basis of ‘memory’. The cash deposits in the bank account/s need to be satisfactorily explained, else are liable to be added as unexplained income u/s. 69/69A of the Act. There is no explanation as to the source of the deposit/s. Merely stating that the same are a return of the loans given earlier, without in any manner substantiating the same, i.e., the loans given earlier and/or their return, would be of little consequence, both in law and in fact in-as-much as the law mandates the same to be satisfactorily explained, so that the same would require being reasonably established as a fact. As already explained that a failure to make proper enquiry would make an order per se erroneous and prejudicial to the interest of the Revenue, liable for revision. This in fact represents trite law, and for which we may, apart from the decision in Gee Vee Enterprises [1974 (10) TMI 29 - DELHI HIGH COURT] - Decided against assessee. Issues Involved:Maintainability of the impugned order/s u/s. 263 of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Maintainability of the order u/s. 263 of the ActThe judgment involves two appeals by separate Assessees against Orders passed by the Pr. Commissioner of Income Tax, Chennai under section 263 of the Income Tax Act, 1961 for assessment year 2011-12. The key issue is the absence of proper enquiry by the Assessing Officer (AO) while passing the assessment orders. The Pr. CIT found the assessment orders erroneous and prejudicial to the interest of the Revenue due to lack of verification and inquiry. The Pr. CIT set aside the assessments and directed the AO to re-do them after thorough examination of the source of cash deposits in the bank accounts. The judgment cites the insertion of Explanation 2(a) to section 263 by the Finance Act, 2015, emphasizing the necessity of making inquiries and verifications before passing orders.Issue 2: Lack of Enquiry and VerificationThe judgment highlights that the Assessing Officer did not make proper inquiries or verifications, as required by law. The Assessees' returns were based solely on memory without maintaining any books of account. The AO failed to investigate the source of cash deposits in the bank accounts adequately. The judgment references the duty of the Income Tax Officer to ascertain the truth of facts stated in the return, especially when circumstances warrant further inquiry. The lack of proper examination of the Assessees' replies, unsubstantiated claims, and absence of records regarding advances made and recovered were deemed as serious deficiencies in the assessment process.Issue 3: Explanation of Cash DepositsThe judgment emphasizes the need for satisfactory explanation of cash deposits to avoid them being added as unexplained income under relevant sections of the Act. Mere claims of cash deposits being returns of previous loans without substantiation are insufficient. The law requires such explanations to be reasonably established as facts. The judgment discusses the legal implications of unexplained income and the necessity for proper estimation and taxation of capital invested in business activities. The absence of concrete evidence regarding interest/commission income and lack of clarity on capital investment further underscore the deficiencies in the assessment process.Conclusion:The judgment upholds the Pr. CIT's decision to set aside the assessment orders and directs the AO to re-do them after conducting thorough inquiries and verifications. The judgment cites various legal precedents and the amended law to support the decision. Ultimately, the Assessees' appeals are dismissed, affirming the importance of proper enquiry and verification in income tax assessments to safeguard the Revenue's interests.