2024 (11) TMI 1526 - AT - Income Tax

Addition under s.69A for demonetisation cash deposits reduced to 20% due to AO failing to probe

ITAT reduced the addition under s.69A in respect of cash deposits made during demonetisation to a 20% disallowance, finding the AO unjustified in ... Addition u/s 69A - cash deposits during demonetization period - AO doubted the source of cash deposit and availability of cash in hand. HELD THAT:- From the copy of ITR of earlier years, find the assessee has shown agriculture income, which is accepted in past and he is filing regular return of income. AO has not investigated about the area of the land or agriculture activities carried out by the assessee, thus, in such circumstances, sustaining the entire cash deposit is not justifiable. Considering overall facts and circumstances of the case 20% of disallowance entire cash deposits during this financial year would be sufficient to avoid the possibility of revenue leakage. Thus AO is directed to restrict the addition to the extent of 20%. So far as addition u/s 69A assessee has not shown any law in his favour. Hence, in absence of any contrary law such submission is not acceptable. In the result, grounds of appeal raised by the assessee are allowed partly. ISSUES PRESENTED AND CONSIDERED 1. Whether unexplained cash deposits made during the demonetization period can be treated as unexplained money under section 69A where the assessee claims the deposits were from pre-existing cash in hand derived from agricultural receipts and maintains cash books. 2. Whether rejection of books of account is a pre-requisite for making additions under section 69A (or section 68/analogous provisions) and what evidentiary standard the Revenue must meet to treat cash as unexplained. 3. What is the appropriate quantum of addition where the Tribunal finds that the assessee's explanations and supporting records were not adequately investigated by the Assessing Officer and the Commissioner (Appeals), but some causal link to past agricultural income exists. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 69A to cash deposits during demonetization claimed to be from pre-existing cash in hand Legal framework: Section 69A treats unexplained money (cash, deposits, etc.) as income of the assessee if the assessee fails to satisfactorily account for it; the statutory scheme requires that deposits which cannot be satisfactorily explained can be added to income. Precedent Treatment: The lower authorities applied section 69A to treat the cash deposits as unexplained in the absence of a satisfactory explanation and documentation. The Tribunal does not cite or overrule specific precedents but follows the established principle that unexplained cash may be taxed under section 69A unless satisfactorily accounted for. Interpretation and reasoning: The Tribunal notes there is no dispute that the cash deposits (Rs. 20,80,000) were made. The assessee's case rests on the assertion that the deposits derived from an opening cash balance accumulated from agricultural receipts over previous years and maintained in cash books. The Tribunal finds the assessee has filed cash books, bank statements and earlier computations showing recurring agricultural income. However, the Assessing Officer did not probe the nature and extent of agricultural operations (area of land, production, buyers, etc.) nor reject the books; the AO simply doubted the existence of the cash balance because the return for an earlier year did not reflect cash in hand. The Tribunal holds that absence of an affirmative investigation by the AO into the agricultural source weakens the case for sustaining the entire addition, but since the assessee has not demonstrated by law or cogent evidence a full and satisfactory origin for the deposits, section 69A can lawfully be invoked to the extent the amounts remain unexplained. Ratio vs. Obiter: Ratio - Where an assessee makes cash deposits and fails to satisfactorily substantiate their source, the Revenue may invoke section 69A to tax such unexplained deposits. Obiter - Observations that the assessee's age, family medical needs and cash kept for emergencies are mitigating circumstances relevant to credibility. Conclusion: Section 69A is applicable in principle because the assessee did not fully satisfy the Revenue as to the source of the deposits; however, full addition of the deposited amount is not justified on the record because the AO/Appeal authority did not sufficiently investigate or test the agricultural source. Issue 2 - Necessity of rejection of books of account before making additions under section 69A; evidentiary standard Legal framework: The statutory provision does not prescribe that books of account must be formally rejected before invoking section 69A. The legal question is one of evidentiary sufficiency - whether the material placed on record satisfactorily accounts for the deposits. Precedent Treatment: The Tribunal reaffirms the principle that rejection of books is not a legal pre-requisite to making additions under sections akin to 68/69A; the absence of formal rejection does not bar treatment of amounts as unexplained if the explanations are not convincing. This follows the reasoning applied by the lower authorities as recorded. Interpretation and reasoning: The Tribunal observes that although the assessee produced cash books and other documents which were not formally rejected, the AO and the CIT(A) found the explanations insufficient. The Tribunal emphasises that mere production of cash books is not ipso facto proof of the generation of large cash balances; the Revenue is entitled to require cogent evidence linking the cash to lawful receipts (e.g., verifiable sales, buyer details, area/production corroboration). The Tribunal also notes that non-acceptance of evidence, where unsupported, effectively amounts to rejection for practical purposes; therefore, formal rejection is not determinative. Ratio vs. Obiter: Ratio - Formal rejection of books is not mandatory before treating deposits as unexplained if the explanations/evidence are inadequate. Obiter - The adequacy of proof should be judged on a fact-specific inquiry into whether the records demonstrably support the asserted source. Conclusion: The AO and CIT(A) were legally entitled to treat the deposits as unexplained given the insufficiency of cogent supporting evidence; however, the authorities should have conducted a fuller enquiry into the agricultural source before sustaining the entire addition. Issue 3 - Appropriate quantum of addition where partial credibility of source exists and Revenue's investigation is incomplete Legal framework: Assessing the correct quantum involves balancing the statutory power to add unexplained money against fairness where some admissible evidence points to a possible legitimate source; the Tribunal may moderate the addition where the Revenue's case is not entirely compelling. Precedent Treatment: The Tribunal invokes discretionary adjustment principles - where total disallowance is excessive given partial evidence and lack of thorough enquiry, a proportionate addition can be imposed to safeguard revenue while acknowledging evidentiary gaps. Interpretation and reasoning: The Tribunal finds the assessee consistently reported agricultural income in previous years and produced cash books and computations. The AO and CIT(A) did not investigate agricultural operations (area, production, verifiable buyers) that could corroborate the cash accumulation. Given this, fully sustaining the addition would be unjustified. To avoid revenue leakage while recognizing evidentiary uncertainty, the Tribunal exercises its fact-finding and remedial discretion to restrict the addition to 20% of the challenged deposits. The Tribunal explicitly directs the Assessing Officer to limit the addition to 20% of the deposits rather than sustaining the entire amount. Ratio vs. Obiter: Ratio - Where some credible but incomplete documentation exists and the Revenue has not fully investigated the asserted source, a Tribunal may moderate the quantum of addition to a proportionate amount to balance competing considerations. Obiter - The specific choice of 20% is a discretionary factual determination on the instant record and not a general rule. Conclusion: The Tribunal partly allows the appeal by reducing the addition to 20% of the cash deposits, directing the Assessing Officer accordingly; the remainder of the deposits are not sustained as additions on the present record. Cross-references and ancillary observations - The Tribunal notes that the assessee's submission that section 69A is 'not technically correct' was unsupported by legal authorities; absence of such legal support renders that contention untenable. - The claim that statutory book-keeping provisions (section 44AA) did not apply because the assessee's turnover was below threshold is noted but does not obviate the Revenue's right to test the veracity of claimed cash balances; maintenance of books is only one mode of substantiation. - The Tribunal's reduction of the addition is based on a factual finding of insufficient investigation by the Revenue and the presence of some corroborative material (cash books, prior returns showing agricultural income), and is therefore a decision on the facts rather than a new principle of law.