2022 (9) TMI 1093 - AT - Income Tax

Tribunal allows appeal for peak balance in undisclosed bank accounts under tax law

The Tribunal partially allowed the appeal, directing the addition of the peak balance in undisclosed bank accounts for taxation under section 115BBE. The ... Taxability of unexplained deposits under section 115BBE - peak bank balance as measure of unexplained cash deposits - treatment of undisclosed bank account deposits as sales outside books - presumptive taxation under section 44AD - addition on account of unexplained investment shown in balance sheetTaxability of unexplained deposits under section 115BBE - peak bank balance as measure of unexplained cash deposits - treatment of undisclosed bank account deposits as sales outside books - presumptive taxation under section 44AD - Whether the entire cash deposits in two undisclosed bank accounts can be treated as unexplained income and taxed under section 115BBE, or only the peak balance is exigible, and whether deposits representing sales outside books should be taxed under presumptive scheme. - HELD THAT: - The Tribunal found it established that the assessee, a jeweller, maintained two undisclosed bank accounts with frequent cash deposits and withdrawals in round figures. The AO had added the aggregate of all deposits as unexplained income. The Tribunal held that where deposits and withdrawals regularly flow through an account, the correct measure of unexplained cash for the purpose of charging unexplained income is the peak (maximum) balance standing to the credit of each account, not the total of all deposits. Further, the assessee consistently maintained that deposits represented sales and withdrawals funded purchases of jewellery; if deposits are treated as sales outside books, those sales would attract tax under the presumptive scheme at the same rate (8%) offered by the assessee on declared turnover. Accordingly, the Tribunal directed two separate consequences: (a) add the peak balance from each bank account as unexplained income taxable under the provision relating to unexplained deposits; and (b) treat the deposits representing sales outside the books as trading receipts chargeable to tax under the presumptive provisions at the applicable rate, rather than adding the entire deposit turnover as unexplained income. The AO had not shown that withdrawals were diverted elsewhere, and thus could not justify adding total deposits. [Paras 4, 5]Addition limited to peak balance in each undisclosed bank account; deposits representing sales outside books to be taxed as trading receipts under the presumptive scheme at the declared rate.Addition on account of unexplained investment shown in balance sheet - presumptive taxation under section 44AD - Whether the amount shown as investment in gold jewellery in a balance sheet produced during assessment proceedings could be treated as unexplained investment and added to income where the assessee is assessed under the presumptive scheme. - HELD THAT: - The Tribunal noted that the assessee is regularly engaged in the jewellery trade and had filed return under the presumptive scheme. The AO relied upon a balance sheet furnished during assessment to pick up inventory shown as investment and made an addition. The Tribunal observed that in a no account case assessed under the presumptive scheme, the AO cannot selectively use the balance sheet produced during assessment to make additions by picking up asset items like inventory; such an approach would permit the AO to make unfounded additions across balance sheet items. In absence of any justification for treating the declared inventory as unexplained investment, the addition was unsustainable. [Paras 7]Addition of the amount shown as investment in gold jewellery in the balance sheet deleted.Final Conclusion: Appeal partly allowed: addition relating to undisclosed bank accounts is restricted to peak balances (with deposits representing sales to be taxed under the presumptive scheme at the offered rate); addition of unexplained investment shown in the balance sheet is deleted. Issues:1. Addition of unexplained income deposited in bank accounts and its taxability under section 115BBE.2. Addition of unexplained investment in gold jewellery.Analysis:1. The first issue pertains to the addition of Rs.96,61,500 deposited in two undisclosed bank accounts by the assessee engaged in the sale and purchase of jewellery. The Assessing Officer (AO) treated the entire deposits as unexplained income and taxed it under section 115BBE of the Income-tax Act, 1961. The assessee contended that the deposits were related to jewellery sales and purchases. The Tribunal observed that only the peak balance in the bank accounts should be added to the total income, subject to tax under section 115BBE. Additionally, profits from the sale of jewellery recorded in the bank accounts should be taxed at the normal rate of 8%, similar to the rate declared by the assessee on regular sales.2. The second issue concerns the addition of Rs.22,84,500 as unexplained investment in gold jewellery based on the balance sheet submitted by the assessee during assessment. The Tribunal noted that the assessee, being in the jewellery business, must maintain stock. As the assessee had declared income under section 44AD and the case was a no-account case, the AO could not rely on the balance sheet to add the inventory value of gold jewellery. All assets in the balance sheet cannot be subject to addition. Consequently, the Tribunal ordered the deletion of this addition.In conclusion, the Tribunal partly allowed the appeal, directing the addition of the peak balance in the undisclosed bank accounts for taxation under section 115BBE and rejecting the addition related to unexplained investment in gold jewellery.