2022 (6) TMI 895 - AT - Income Tax

Appellant's Cash Deposit Disallowance: Analysis of Income Tax Act Section 68 Ruling

Shri Amit Champaklal Shah Versus ITO, Ward-7 (4), Ahmedabad

The appellant's cash deposit of Rs. 23,92,400 was partially disallowed under section 68 of the Income Tax Act, with the CIT(A) restricting the ... Addition u/s 68 - Unexplained cash credit/cash deposited in the bank account - CIT (A) restricted the disallowance to 25% of additions made by AO - HELD THAT:- We note from the above facts that the assessee is working in the unorganized sector where most of trading is carried out in cash. During the year under consideration, we note from the assessment order, that while the assessee has deposited a sum of Rs. 23,93,400/- in cash in his bank accounts held with ICICI Banks (two accounts), but the assessee has also during the year under consideration withdrawn a sum of Rs. 23, 69,098/- from his bank account. It has been held in a number of ITAT decisions that unless the Assessing Officer brings any material on record to show that the cash withdrawn was utilized / used for other purpose, it could not be said that such cash withdrawals might not have been redeposited in the bank account - See M/S. MURLIDHAR ICE-CREAM AND SWEET PARLOUR AND VICA-VERSA [2015 (9) TMI 274 - ITAT AHMEDABAD] In the case of Smt. Satya Bhama Bindal [2013 (8) TMI 1162 - ITAT CHANDIGARH] ITAT held that that the concept of peak theory needs to be applied both in respect of the opening introduction of cash in hand and various transactions of cash deposits and withdrawals during the year under consideration. Now, in the instant facts, it needs to be appreciated that while making the disallowance, the assessee’s set of facts and the nature of business he is engaged has to be given due consideration while making any disallowance. In the case of ACIT v. Armee Infotech [2022 (1) TMI 649 - ITAT AHMEDABAD] after taking into consideration the assessee’s set of facts, the line of business he was engaged in, the typical gross profit earned in such line of business etc. restricted the disallowance on account of bogus purchase to 7%. As considering the assessee’s set of facts, in the interests of justice, we are restricting the disallowance to 10% of the deposits made. - Decided partly in favour of assessee. Issues:- Disallowance of cash deposit under section 68 of the Income Tax Act- Proper appreciation of submissions, evidence, and supporting documents- Business model and structure of the appellant in the unorganized sector- Application of peak theory in cash deposit and withdrawal analysis- Comparison with relevant ITAT decisions for similar casesAnalysis:1. Disallowance of Cash Deposit: The Assessing Officer disallowed a cash deposit of Rs. 23,92,400 under section 68 of the Income Tax Act, treating it as unexplained cash credit. The appellant argued that the cash withdrawals and deposits were related to the nature of the business, which involved transactions in cash due to dealing with unorganized traders. The CIT(A) partially allowed the appeal, restricting the disallowance to 25% of the total amount, amounting to Rs. 5,98,100. The decision was based on the appellant's explanation and the lack of proper documentation for the cash transactions.2. Appreciation of Submissions: The appellant contended that the business, involving diamond trading, operated in a sector where cash transactions were prevalent due to the informal nature of dealings with suppliers and customers. The appellant's argument emphasized the necessity of cash transactions in the business model, supported by the cash book entries showing cash received and paid. The CIT(A) considered these factors while arriving at the decision to limit the disallowance to 25% of the questioned purchases, as per the IT Act provisions.3. Business Model in Unorganized Sector: The appellant's business structure, being an individual unorganized jeweler, was a crucial factor in determining the allowability of expenditures. The CIT(A) acknowledged the informal nature of the business, where cash transactions were predominant due to the lack of formal documentation from suppliers. The decision highlighted the need to consider the unique circumstances of the appellant's business while assessing the cash deposits and withdrawals.4. Peak Theory Application: The ITAT decision referenced the application of the peak theory in analyzing cash deposits and withdrawals. The principle stated that unless there is evidence showing alternative use of withdrawn cash, redepositing cash in the bank account is a plausible explanation. Several ITAT decisions were cited to support the proposition that cash withdrawals and subsequent deposits should be analyzed based on the business context and the absence of evidence indicating undisclosed income sources.5. Comparison with ITAT Decisions: The judgment drew parallels with previous ITAT decisions dealing with similar cases of cash deposits and withdrawals. The decisions highlighted the importance of considering the business line, gross profit margins, and overall turnover while determining the extent of disallowance. By referencing relevant ITAT cases, the judgment justified restricting the disallowance to 10% of the deposits made by the appellant, aligning with the principles established in previous rulings.In conclusion, the judgment provided a detailed analysis of the issues related to the disallowance of cash deposits under section 68 of the Income Tax Act, emphasizing the need to consider the unique business circumstances of the appellant in the unorganized sector. The decision, guided by relevant ITAT precedents, balanced the requirements of the law with the practical realities of the appellant's business operations.