2020 (10) TMI 1127 - AT - Income Tax

ITAT Overturns Additions Due to Unjustified Rejection of Books; Old Currency Notes Deemed Valueless Post-Demonetization.

The ITAT overturned the AO's additions of Rs. 17,61,950 and Rs. 2,50,000 under Section 69A read with Section 115BBE. The ITAT found the AO's rejection of ... Rejection of books of accounts - HELD THAT:- In the instant case, the two observations made by the Assessing Officer cannot be said to be justifiable reasons to reject the books of accounts. Further, in case where the books of accounts are rejected u/s 145(3) then the assessment ought to have been completed u/s 144 of the Act. Section 144 provides for best judgment method of assessment by Assessing Officer and to complete the assessment u/s 144(1), the Assessing Officer has to afford an opportunity to the assessee to that extent. Since, the amounts have been duly reflected in the books of accounts and the reasons specified by the Assessing Officer are not justifiable and since the assessment has not been completed following the due procedure as mentioned u/s 144, we hereby hold that no addition in the case of the assessee is called for. Addition u/s.69A r/w Sec. 115BBE - unexplained cash found during search - search and seizure operation u/s 132 - Old currency notes which had zero intrinsic value as on the date of operation of locker No. 487 - HELD THAT:- The amount has been added as unexplained money u/s 69 A for the assessment year 2017-18. Hence, it needs to be considered as to whether for the period between 01.04.2016 to 25.04.2016, possession of these notes have any intrinsic value or not. On this issue, we are guided by the judgment of Hon’ ble High Court of Karnataka in the case of CIT Vs Andhra Pradesh Yarns Combines Pvt. Ltd. [2006 (1) TMI 66 - KARNATAKA HIGH COURT] Locker was last operated on 29.10.2015. The fact that the locker has not been operated in the assessment year 2017 -18 is before the revenue authorities. Hence, the amount deemed to have been undisclosed income for the assessment year 2016-17 whereas the amount has been brought to tax for the assessment year 2017 -18. Hence, the addition made in the AY 2017-18 cannot be upheld. Appeal of the assessee is allowed. Issues involved:1. Addition of Rs. 17,61,950 under Section 69A read with Section 115BBE for unexplained cash.2. Addition of Rs. 2,50,000 under Section 69A read with Section 115BBE for cash found in locker in old currency notes.Issue 1: Addition of Rs. 17,61,950 under Section 69A read with Section 115BBE for unexplained cashThe assessee challenged the addition of Rs. 17,61,950 made by the Assessing Officer (AO) under Section 69A read with Section 115BBE, arguing that the cash found during the search operation on 07.04.2016 belonged to the financial year (FY) 2015-16 and not FY 2016-17. The assessee contended that the statement admitting the cash as unaccounted income was made under coercion and subsequently retracted. The AO, however, dismissed the books of accounts as unreliable, stating that the cash was not disclosed during the search and the unsecured loans in the books of the assessee’s wife were not reflected in the assessee’s books.The appellate authority, CIT(A), upheld the AO’s decision, asserting that the assessee failed to substantiate the earning of such income in FY 2015-16 and that the cash found should be assessed in AY 2017-18.Upon appeal, the ITAT evaluated the correctness of the AO's decision to reject the books of accounts. The ITAT noted that the cash balances were duly reflected in the books of accounts for both the assessee and his wife. The ITAT found the AO’s reasons for rejecting the books of accounts unjustifiable, as the AO erroneously expected the unsecured loans in the wife’s books to be reflected in the assessee’s books. The ITAT emphasized that the AO must provide specific defects in the books of accounts to justify their rejection under Section 145(3). Since the AO did not follow the due procedure under Section 144 for best judgment assessment, the ITAT concluded that the addition of Rs. 17,61,950 was unwarranted.Issue 2: Addition of Rs. 2,50,000 under Section 69A read with Section 115BBE for cash found in locker in old currency notesThe assessee contested the addition of Rs. 2,50,000 found in locker No. 487, arguing that the cash, being in old currency notes, had zero intrinsic value post-demonetization and should be considered for AY 2016-17, as the locker was last operated on 29.10.2015.The ITAT referred to the judgment of the Hon’ble High Court of Karnataka in CIT v. Andhra Pradesh Yarns Combines Pvt. Ltd., which held that currency notes that have lost their representative value cannot be considered unexplained money. Since the locker was not operated in AY 2017-18 and the currency notes had no intrinsic value post-demonetization, the ITAT ruled that the addition for AY 2017-18 could not be upheld.Conclusion:The ITAT allowed the appeal of the assessee, setting aside the additions of Rs. 17,61,950 and Rs. 2,50,000 made by the AO. The ITAT emphasized the necessity of specific defects to justify the rejection of books of accounts and the importance of considering the intrinsic value of currency notes in determining unexplained money.