2024 (6) TMI 922 - AT - Income Tax

Tribunal Upholds Assessment of Escaped Income, Partially Allows Appeal on Undisclosed Cash Deposits Under IT Act.

Shri Prakashbhai Amrutlal Pala Versus Income Tax Officer, Ward-3 (5), Jamnagar

The ITAT addressed the validity of assessment under s. 147 r.w.s. 143(3) of the IT Act, 1961, and the treatment of cash deposits as undisclosed income. ... Validity of assessment u/s 147 - Cash deposits in the bank account as undisclosed income - HELD THAT:- As cash deposit in the bank account of the assessee and the assessee has not filed any income-tax return under the provision of section 139(1) of the Act. Admittedly, the cash deposit in the bank account ipso-facto does not represent the income. There can be multiple reason for deposit of cash in a bank for example the money borrowed, sales of agricultural produce, sale proceeds of property, sale proceeds of household items or any other receipt which is not liable to tax. How to establish the fact that the cash deposited in the bank account does not represent the income of the assessee in the absence of any return of income filed by the assessee u/s 139(1) - We are of the opinion that the AO, in the absence of any return filed by the assessee, cannot draw any inference about the justification for the source of cash deposit based on documents. Regarding the transaction being cash deposits carried out by the assessee, there is no mechanism available with the AO except to initiate the proceeding u/s 147 of the Act. For initiating the proceedings u/s 147 AO has to form prima facie reason to believe that income of the assessee has escaped assessment which has been done, in out considered view, in the instant set of facts. The ground raised by the assessee challenging the validity of the assessment framed u/s 147 of the Act, is hereby dismissed. Cash deposits in the bank account treating the same as undisclosed income of the assessee - On perusal of the cash book and the bank statement available in paper book we note that there were sufficient withdrawals from the bank account in cash prior to the deposit of cash in the bank except the source of cash shown in the cash book - Revenue has not brought anything on record justifying that the withdrawal of cash from the bank account has been utilized by the assessee somewhere else either for making investment or incurring personal/ other expenditure. Accordingly, we can presume that the cash withdrawal from the bank has been used for the purpose of cash deposit in the bank. Accordingly, we hold that to that extent i.e. cash withdrawal claimed to be used for cash deposit, the addition is not warranted. AR at the time of hearing before us has not explained the source of cash therefore we hold that such cash deposits represent the income of the assessee. Thus, the addition of the same is liable to be sustained. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) was justified in initiating reassessment proceedings under section 147 read with relevant assessment provisions on the basis of cash deposits in the assessee's bank account where no original return under section 139(1) was filed. 2. Whether cash deposits of Rs. 15,23,106/- in the assessee's bank account could be treated as unexplained/escaped income and added to the assessee's total income where the assessee relied on cash book entries and bank withdrawals as source, and the AO/CIT(A) made additions for unexplained cash deposits. 3. (Procedural) Whether a short delay of two days in filing the appeal should be condoned (incidental to adjudication). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147 (prima facie belief of escaped income) Legal framework: Reopening under section 147 requires the AO to form a prima facie belief that income has escaped assessment; such belief must be based on material and not merely conjecture. The absence of a return under section 139(1) affects the AO's ability to verify sources from records filed by the assessee. Precedent treatment: A relied-upon tribunal decision was considered by the assessee but the Court found that the earlier decision rested on different reasoning and therefore was not applied to the facts at hand (distinguished). Interpretation and reasoning: The Tribunal recognized that cash deposits ipso facto do not equal taxable income because multiple non-taxable or non-income sources (e.g., loans, agricultural receipts, sale of property, household items) may explain deposits. However, where the assessee did not file a return under section 139(1), the AO lacked documentary material filed by the assessee to verify or negate the deposits' character. In that factual context the AO had no practical mechanism except to initiate reassessment to inquire into sources. The AO's formation of prima facie belief that income may have escaped assessment, based on unexplained cash deposits and absence of return, was held to be within jurisdiction and justified. Ratio vs. Obiter: Ratio - where there is no return filed under section 139(1), unexplained cash deposits in bank accounts can constitute sufficient material for the AO to form prima facie belief under section 147 to reopen assessment. Distinguishing prior tribunal authority on different facts is part of the holding (not followed). Conclusion: The reassessment proceedings were validly initiated; the ground challenging the validity of the assessment framed under section 147 is dismissed. Issue 2 - Treating cash deposits as unexplained income and additions Legal framework: Additions for undisclosed income can be made where deposits are unexplained. The assessee bears the onus to satisfactorily explain the source of deposits; contemporaneous evidence (cash book, bank statements) may be relied upon to show withdrawals or legitimate receipts. Precedent treatment: The Tribunal considered but declined to apply an earlier ITAT decision relied upon by the assessee because that decision was based on different reasoning and facts (distinguished). Interpretation and reasoning: The assessee produced cash book and bank statements. The Tribunal examined those records and found that substantial cash withdrawals from the bank preceded the deposits, indicating the withdrawals could have funded the deposits. The Revenue failed to demonstrate that the withdrawn cash had been spent elsewhere, thus permitting the Tribunal to treat withdrawals as the source of corresponding deposits. However, two specific cash deposit entries totaling Rs. 4,50,000/- (dated 01/08/2008 and 11/08/2008) had no explanation in the cash book; the assessee did not explain these amounts at hearing. On the available record the Tribunal applied a compartmentalized approach: accept explanation to the extent supported by withdrawals and records; sustain addition to the extent no explanation was furnished for specific deposits. Ratio vs. Obiter: Ratio - where bank withdrawals are contemporaneous and unexplained withdrawals are not shown to have been spent elsewhere, withdrawals may be presumed to be the source of subsequent deposits and no addition is warranted to that extent. Conversely, specific unexplained deposits not supported by books may be treated as income and added. Obiter - general observations on multiple possible non-taxable reasons for deposits are informative but not determinative of the specific factual finding. Conclusion: The appeal against addition was partly allowed. Additions were disallowed to the extent explained by prior bank withdrawals supported by records; additions were sustained in respect of unexplained cash deposits aggregating Rs. 4,50,000/-, which were treated as unexplained income. Issue 3 - Condonation of two-day delay in filing appeal Legal framework: Short procedural delays may be condoned in the interest of justice where delay is minimal and no prejudice is shown. Interpretation and reasoning: The delay of two days in filing the appeal was minor and the Revenue did not object to condonation. Ratio vs. Obiter: Ratio - a very short delay may be condoned where unopposed and not prejudicial. (Procedural and factual) Conclusion: The two-day delay in filing the appeal was condoned and did not bar adjudication on merits.