ITAT reduces unexplained credit addition under Section 68 to 0.75% for cheque discounting business

The ITAT Surat partially allowed the assessee's appeal regarding unexplained credit under section 68. The assessee, who earned 0.50% commission per Rs. 100 for cheque discounting services, failed to provide customer details or transaction documentation. The AO added the entire credit entry as income. However, the ITAT found that merely being unable to file party-wise details cannot result in entire bank transactions being taxed as income. Following precedent in similar cases, the Tribunal restricted the addition to Rs. 75 per lakh (0.75%) on the net credit amount of Rs. 2.07 crores in the bank account, considering the peculiar nature of the business requiring no capital investment.

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Issues:
1. Addition of unexplained cash credit under Section 68 of the Income Tax Act for AY 2010-11 and 2012-13.
2. Estimation of reasonable profit on business activity of cheques/draft discounting.

Analysis:

Issue 1: Addition of unexplained cash credit under Section 68 of the Income Tax Act
The case involved two appeals by the assessee against separate orders for AY 2010-11 and 2012-13. The Assessing Officer reopened the case based on cash deposits and credit entries in the assessee's bank account. The AO believed that income had escaped assessment due to unexplained credit entries. The assessee claimed to earn commission income on demand drafts issued through the bank account. However, the Assessing Officer considered the explanation insufficient and treated the entire deposit amount as unexplained credit under Section 68. The ld. CIT(A) upheld this decision, leading to the appeal before ITAT Surat. The assessee argued that the business involved cheque/draft discounting, and commission income was earned on transactions. The Tribunal restricted the addition to Rs. 75 per lakh, considering similar cases and the nature of the business. The appeal was partly allowed based on this restriction.

Issue 2: Estimation of reasonable profit on business activity of cheques/draft discounting
The assessee contended that the business involved cheque/draft discounting and providing demand drafts to customers on a commission basis. The nature of the business was described as a Shroff business, where commission income was earned without the need for significant capital investment. The assessee's argument focused on the lack of party-wise details due to the peculiar nature of the business. The ld. CIT(A) and the Assessing Officer had not accepted the explanation provided by the assessee, leading to the addition of unexplained credit. However, the Tribunal considered the peculiar nature of the business, restricted the addition to Rs. 75 per lakh, and partially allowed the appeals for both AYs 2010-11 and 2012-13 based on consistency and similar set of facts.

In conclusion, the ITAT Surat partially allowed both appeals by restricting the addition of unexplained cash credit under Section 68 of the Income Tax Act to Rs. 75 per lakh, considering the peculiar nature of the business involving cheque/draft discounting and commission income earned by the assessee.

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