ITAT allows appeal on unexplained cash deposits from agricultural sources due to lack of specific legal provision cited

Shri Ram Lal Versus The ITO, Ward 1 (3), Alwar.

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the order of the learned CIT(A) dated 05-01-2024 was passed in violation of the principles of natural justice by not affording the assessee an opportunity of being heard.

2. Whether the learned CIT(A) erred in dismissing the appeal without adjudicating the grounds on merits and without considering the detailed submissions made by the assessee, particularly regarding the nature of income as agricultural or business income and the applicability of presumptive taxation under section 44AD.

3. Whether the learned CIT(A) erred in confirming the addition made by the Assessing Officer (AO) under section 68 of the Income Tax Act on account of unexplained cash deposits in the assessee's bank account.

4. Whether the addition made by the AO and confirmed by the CIT(A) was lawful and justified in the absence of evidence supporting the source of cash deposits claimed to be from agricultural produce sales.

5. Whether the AO and CIT(A) committed a legal error by failing to specify the precise statutory provision under which the addition was made, thereby rendering the addition bad in law.

Issue-wise Detailed Analysis

Issue 1: Violation of Natural Justice

The assessee contended that the CIT(A) passed the impugned order without affording an opportunity of being heard, thus violating the principles of natural justice. However, the Tribunal's review of the record did not reveal any procedural infirmity or denial of hearing. The CIT(A) had considered the submissions made by the assessee during the appellate proceedings, though ultimately dismissing the appeal. Hence, no violation of natural justice was established.

Issue 2: Dismissal Without Merits and Consideration of Submissions

The assessee argued that the CIT(A) failed to adjudicate the grounds of appeal on merits and ignored the detailed submissions, especially regarding the nature of income. The assessee claimed that income arose from business activities involving sale of agricultural produce and had opted for presumptive taxation under section 44AD, thereby declaring profits based on turnover.

The CIT(A) noted that the assessee had not filed any return for the relevant assessment year initially and had filed the return only after reopening under section 148. The CIT(A) observed that the assessee failed to produce any evidence substantiating the claim that cash deposits originated from agricultural produce sales or related expenditures. The CIT(A) emphasized that agricultural income is exempt only if properly established and that mere assertion without evidence is insufficient.

The Tribunal concurred with the CIT(A)'s reasoning, referencing the principle established by the Supreme Court that the onus lies on the assessee to prove exemption claims. The Tribunal also noted that the agricultural sector is largely unorganized but this does not absolve the assessee from furnishing evidence to support exemption claims. The Tribunal found the CIT(A)'s approach consistent with the statutory mandate under section 143(3) requiring the AO to verify claims based on evidence before allowing exemptions.

Issue 3: Addition under Section 68 on Account of Unexplained Cash Deposits

The AO applied the 'peak credit theory' to make an addition of Rs. 4,01,007/- representing the maximum credit balance in the assessee's bank account on a particular date, treating it as unexplained cash deposit under section 68. The AO observed frequent cash deposits and withdrawals and noted that the assessee failed to explain the source or purpose of these transactions.

The CIT(A) confirmed this addition, relying on the absence of evidence to support the agricultural income claim and the unexplained nature of the deposits.

The assessee challenged this addition, asserting that the cash deposits were from legitimate agricultural business activities and that the addition was excessive and unjustified.

Issue 4: Legality and Justification of Addition in Absence of Evidence

The Tribunal examined the submissions and found that the assessee did not produce any documentary evidence such as sale invoices, purchase bills, or expenditure records to substantiate the claim that the cash deposits were proceeds from agricultural produce sales. The Tribunal reiterated the settled legal position that the burden of proof for exemption or explanation of unexplained credits lies on the assessee.

The Tribunal also referenced the reports of the Third Tax Administration Reform Commission (2014) and the White Paper on Black Money (2012), highlighting the risk of misuse of agricultural income exemption by non-agriculturists to evade tax. The Tribunal held that the AO and CIT(A) were justified in rejecting the claim of agricultural income exemption in the absence of evidence.

Issue 5: Failure to Specify the Statutory Provision for Addition

A critical legal infirmity identified by the Tribunal was that neither the AO nor the CIT(A) specified the exact provision of the Income Tax Act under which the addition was made. Although the AO referred to the peak credit theory and unexplained cash deposits, the orders lacked explicit mention of section 68 or any other section authorizing the addition.

The Tribunal relied on binding precedents from coordinate benches which held that additions made without citing the precise statutory provision are bad in law. The Tribunal cited the following cases:

• A decision holding that sustaining an addition without specifying the section of the Income Tax Act under which it was made renders the addition legally unsustainable.
• Similar findings in subsequent cases emphasizing the necessity of clear statutory basis for additions to withstand legal scrutiny.

Applying these principles, the Tribunal concluded that the addition of Rs. 4,01,007/- was invalidated due to the failure to mention the relevant statutory provision, despite the factual justification for addition.

Significant Holdings

'It has not been mentioned either by A.O or by ld. CIT(A) as to under which section of the Income Tax Act, these closing credit balances appearing as on 31.03.2012 could be added. Therefore, non-mentioning the precise provision of law makes the impugned addition bad in law.'

'The onus lies on the assessee who claims exemption to establish it.'

'No where in Income Tax Act, 1961 says that for agricultural income, AO needs no evidence.'

'Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crore in revenue annually.'

'Non mentioning the precise provision of law makes the entire impugned addition bad in law.'

The Tribunal established the core principle that while unexplained cash deposits may justify addition under the Income Tax Act, such addition must be made under a clearly specified statutory provision. The burden of proof to establish agricultural income exemption lies squarely on the assessee, who must produce cogent evidence. Mere assertions without documentary support are insufficient, especially given the risk of misuse of agricultural income exemptions.

Consequently, the Tribunal allowed the appeal of the assessee on the legal ground of non-specification of the statutory provision for addition, notwithstanding the factual findings against the assessee's claim of agricultural income.