2025 (5) TMI 1948 - AT - Income Tax

Taxpayer wins partial relief on unexplained cash deposits under section 69A, presumptive taxation scheme accepted

Nilesh Manohar Thopate Versus ITO, Ward 6 (3), Pune

ITAT Pune partially allowed the assessee's appeal against addition under section 69A for unexplained cash deposits. The tribunal directed the AO to accept ... Addition u/s 69A - unexplained cash deposits in the assessee's bank account - difference between the cash deposit and the income declared by the assessee - CIT(A) / NFAC upheld the addition on the ground that the assessee failed to satisfactorily explain the source of cash deposit found in the bank account with necessary evidences. HELD THAT:- Assessee has received various loan amounts on different dates from different parties which were subsequently advanced to different parties as loans. There are withdrawals which clearly show as expenses. Despite noting all the details in the body of the assessment order, the AO proceeded to conclude that there are no withdrawals towards expenses and the assessee has utilized the cash deposits towards loans to Satish Sawant Group and Omkar Enterprises. Since the assessee has opted for the provisions of section 44AD of the Act on account of business receipts, we are of the considered opinion that the AO should not have disturbed the same. We therefore, direct the AO to accept the profit declared by the assessee as per provisions of section 44AD of the Act. So far as the loans received by the assessee from various parties are concerned, it is the duty of the assessee to give the details of the persons who have advanced the loans along with their creditworthiness. Since only the names are appearing but neither their creditworthiness has been verified by the AO nor given by the assessee, we deem it proper to restore the issue to the file of the AO with a direction to give an opportunity to the assessee to substantiate the identity and creditworthiness of the loan creditors who have given loans to the assessee which in turn has been utilized by the assessee by giving the loans to and decide the issue as per fact and law. Appeal filed by the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:- Whether the addition of Rs. 76,30,760/- made by the Assessing Officer under section 69A of the Income Tax Act, 1961 (the Act), on account of unexplained cash deposits of Rs. 83,00,000/- in the assessee's bank account, was justified.- Whether the assessee satisfactorily explained the source of cash deposits by producing credible evidence, including details of loans received and their utilization.- Whether the provisions of section 44AD of the Act, relating to presumptive taxation for business income, were correctly applied or could be invoked to estimate the profit and negate the addition under section 69A.- Whether the identity and creditworthiness of the persons from whom loans were received by the assessee were properly verified and substantiated.- Whether the matter requires remand for further verification of the genuineness of loans and their source or whether the addition under section 69A should be upheld.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of addition under section 69A on unexplained cash depositsRelevant legal framework and precedents: Section 69A of the Income Tax Act, 1961, deals with unexplained cash credits. It empowers the Assessing Officer to treat any sum found credited in the books of account or bank account of the assessee as income if the assessee fails to satisfactorily explain the nature and source of such sum.Court's interpretation and reasoning: The Assessing Officer observed that the assessee deposited Rs. 83,00,000/- in cash in bank accounts but failed to provide satisfactory details of the nature of business activity, names and addresses of persons to whom services were rendered, and confirmation of receipts. The Assessing Officer noted the absence of records for material purchases or labour payments, and that large cash deposits were made without corresponding withdrawals for business expenses. Consequently, the entire cash deposit was treated as unexplained income under section 69A, leading to an addition of Rs. 76,30,760/- after deducting declared income.Key evidence and findings: The Assessing Officer relied on the bank statements, receipts and payments accounts, and the absence of corroborating documentary evidence for business expenditures. The assessee's explanation of cash deposits as business receipts was found unsatisfactory.Application of law to facts: The Assessing Officer applied section 69A to treat the unexplained cash deposits as income. The Tribunal noted that the Assessing Officer's conclusion was based on the lack of detailed evidence and the pattern of cash deposits and withdrawals.Treatment of competing arguments: The assessee argued that the cash deposits represented loans received from various persons, which were subsequently advanced as loans to others, and that the business income was declared under section 44AD. The Department maintained that the identity and creditworthiness of loan creditors were not verified, and the source of cash was not satisfactorily explained.Conclusions: The Tribunal found force in the assessee's argument that loans were received and given out, and that the Assessing Officer had noted these loans in the assessment order but failed to appreciate them fully. However, the Tribunal also emphasized the need to verify the identity and creditworthiness of loan creditors before accepting the loans as genuine.Issue 2: Applicability of section 44AD presumptive taxation and estimation of profitsRelevant legal framework and precedents: Section 44AD provides for presumptive taxation of business income, allowing a taxpayer to declare income at a prescribed rate of turnover or gross receipts without maintaining detailed books of account.Court's interpretation and reasoning: The assessee claimed that the business income was declared under section 44AD at a profit rate of 8.01%. The Assessing Officer rejected this claim, stating that the profit rate under section 44AD for contract businesses varies between 8% and 20%, and the bank transactions did not support the business activity claimed.Key evidence and findings: The assessee's receipts and payments account showed loans received and advanced, and some withdrawals for expenses. The Tribunal noted that the Assessing Officer ignored these details when rejecting the presumptive income declaration.Application of law to facts: The Tribunal held that since the assessee had opted for section 44AD and declared income accordingly, and given that the cash deposits were shown as loans received and advanced, the Assessing Officer should not have disturbed the presumptive income declared under section 44AD without sufficient cause.Treatment of competing arguments: The Department argued that the cash deposits were unexplained and diverted, but the Tribunal found that the assessee's explanation and documentary evidence of loans and expenses warranted acceptance of the declared presumptive income.Conclusions: The Tribunal directed the Assessing Officer to accept the profit declared by the assessee under section 44AD and not to make addition under section 69A on this ground.Issue 3: Verification of identity and creditworthiness of loan creditorsRelevant legal framework and precedents: Under section 68 of the Income Tax Act, any unexplained cash credit, including loans, can be added to income if the assessee fails to prove the identity and creditworthiness of the lender and the genuineness of the transaction.Court's interpretation and reasoning: The Tribunal noted that the assessee produced the names of loan creditors and receipts of loans, but neither the assessee nor the Assessing Officer had verified the creditworthiness or genuineness of these loans. The Tribunal emphasized that it is incumbent upon the assessee to substantiate these facts.Key evidence and findings: The receipt and payment account extracted by the Assessing Officer showed loans received from various persons on different dates and loans advanced to others. However, no further verification of these parties was conducted.Application of law to facts: The Tribunal held that in the absence of verification of identity and creditworthiness, the addition under section 68 may be justified if the assessee fails to substantiate. However, since the issue was not examined in detail, the matter was restored to the Assessing Officer for fresh verification.Treatment of competing arguments: The Department agreed to remand the matter for verification, while the assessee was directed to cooperate and substantiate the identity and creditworthiness of loan creditors.Conclusions: The Tribunal directed restoration of the issue to the Assessing Officer with a clear mandate to verify identity, creditworthiness, and genuineness of loans. The assessee was directed to appear and produce evidence without seeking adjournments.3. SIGNIFICANT HOLDINGS- 'A perusal of para 8 of the assessment order clearly shows that the assessee has received various loan amounts on different dates from different parties which were subsequently advanced to different parties as loans. Further there are withdrawals which clearly show as expenses.'- 'Since the assessee has opted for the provisions of section 44AD of the Act on account of business receipts, we are of the considered opinion that the Assessing Officer should not have disturbed the same.'- 'Addition, if any, can be made u/s 68 of the I T Act only in respect of loans received by the assessee for which assessee fails to substantiate the identity and creditworthiness of the loan creditors.'- 'The assessee is also hereby directed to appear before the Assessing Officer on the appointed date and make his submissions, if any, without seeking any adjournment under any pretext failing which the Assessing Officer shall be at liberty to pass appropriate order as per law.'Core principles established include the necessity for the Assessing Officer to verify the identity and creditworthiness of loan creditors before making additions under section 68, and that the presumptive income declared under section 44AD cannot be disturbed without cogent reasons. The Tribunal emphasized the importance of considering all documentary evidence and not disregarding receipts and payments accounts that reflect loans and expenses.Final determinations on each issue were:- The addition under section 69A on unexplained cash deposits was not sustainable as the assessee had explained the cash as loans received and declared income under section 44AD.- The presumptive income declared under section 44AD was to be accepted.- The issue of genuineness and creditworthiness of loans was remanded to the Assessing Officer for fresh verification with directions to the assessee to cooperate fully.