2025 (6) TMI 35 - AT - Income Tax

ITAT finds no Section 69 addition warranted when assessee adequately demonstrates sources for cash deposits

Shri Mukesh Kumar Munjal, Munjal Paper Mart, Old DSP Road, Fatehabad Versus The ITO, Ward - I, Fatehabad.

Shri Mukesh Kumar Munjal, Munjal Paper Mart, Old DSP Road, Fatehabad Versus The ITO, Ward - I, Fatehabad. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the reopening of the assessment for the assessment year 2012-13 under Section 147 of the Income Tax Act was valid and justified;(b) Whether the addition of Rs. 48,10,000/- made by the Assessing Officer (AO) under Section 69 of the Income Tax Act, representing unexplained cash deposits in bank accounts, was justified;(c) Whether the AO was justified in rejecting the Cash Flow Statement and other evidences furnished by the assessee to explain the source of cash deposits;(d) Whether the procedural requirements, including issuance of inquiry letter and approval from competent authority, were complied with prior to initiating reassessment proceedings;(e) Whether the additional ground raised by the assessee regarding the assessment order not bearing a document identification number had any merit (although not pressed at hearing).2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of Reopening of Assessment under Section 147Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act permits reopening of assessment if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The reopening must be based on tangible reasons recorded in writing. Procedural safeguards include approval from competent authority before issuance of notice under Section 148.Court's Interpretation and Reasoning: The assessee contended that the inquiry letter issued prior to reopening was without approval from competent authority and thus bad in law. The assessee relied on precedent where it was held that no inquiry can be conducted without pendency of assessment proceedings and requisite approval.Key Evidence and Findings: The AO did not place on record any evidence of approval for inquiry letter issuance. The order sheet entries did not show any proposal or approval under Section 133(6). The Tribunal noted absence of such approval.Application of Law to Facts: The Tribunal observed that the assessee raised this ground but did not press it at hearing. Consequently, the Tribunal rejected this ground without detailed adjudication.Treatment of Competing Arguments: The Revenue did not specifically counter this procedural objection. The Tribunal's rejection was based on non-pursuance by the assessee.Conclusions: The validity of reopening was not contested substantively; hence, the Tribunal did not interfere with the reopening.Issue (b) and (c): Justification for Addition of Rs. 48,10,000/- under Section 69 and Rejection of Cash Flow StatementRelevant Legal Framework and Precedents: Section 69 empowers the AO to treat unexplained cash credits as income. However, the assessee is entitled to explain the source of such cash deposits with credible evidence. The AO must examine the genuineness of the explanation and documentary proof before making an addition.Court's Interpretation and Reasoning: The AO made an addition of Rs. 48,10,000/- representing cash deposits in two bank accounts, disbelieving the Cash Flow Statement and other explanations furnished by the assessee. The AO cited discrepancies in the Cash Flow Statement and did not allow credit for opening cash balance, prior withdrawals, and receipts from relatives.The Tribunal conducted a detailed scrutiny of the cash deposits, withdrawals, and sources as explained by the assessee. The assessee had submitted a tabulated Cash Flow Statement and supporting affidavits and sale deeds evidencing the source of funds, including:Opening cash-in-hand of Rs. 1,35,000/-;Withdrawal of Rs. 9,00,000/- from Fixed Deposit Receipts (FDRs) in the preceding year;Sale proceeds of immovable properties belonging to the assessee's relatives;Gifts received from brother and sister, supported by affidavits;Sale of business assets and machinery;Payments made to wife as per divorce settlement;Personal expenses and bank withdrawals reconciled with deposits.The Tribunal noted that the AO failed to examine the basic entries and documentary evidence supporting the Cash Flow Statement. The AO did not point out any specific defect in the FDRs or sale deeds. The AO's reasons were limited to alleged discrepancies in the Cash Flow Statement without detailed analysis of the underlying evidence.Key Evidence and Findings: The Tribunal relied heavily on the detailed cash-book reconciliations, affidavits, sale deeds, and bank statements submitted by the assessee. The cash flow demonstrated sufficient source of funds to justify the deposits. The Tribunal observed that the AO did not calculate the peak deposits or consider withdrawals and receipts properly.Application of Law to Facts: The Tribunal applied the principle that unexplained cash credits cannot be added if the assessee provides a plausible and credible explanation supported by evidence. The Tribunal found that the assessee had discharged this burden.Treatment of Competing Arguments: The Revenue's argument rested on the AO's rejection of the Cash Flow Statement due to discrepancies. The Tribunal found this insufficient without examination of documentary proof. The assessee's detailed submissions and documentary evidence were accepted.Conclusions: The Tribunal concluded that the addition of Rs. 48,10,000/- was not justified and deleted the addition.Issue (d): Procedural Compliance Regarding Inquiry Letter and Competent Authority ApprovalRelevant Legal Framework and Precedents: Section 133(6) and related provisions require prior approval of competent authority before conducting inquiries for reassessment.Court's Interpretation and Reasoning: The assessee alleged that the AO issued an inquiry letter without approval, rendering proceedings invalid. However, as noted above, this ground was not pressed at hearing and was rejected.Conclusions: No substantive ruling was made on this issue.Issue (e): Additional Ground Regarding Document Identification Number on Assessment OrderThe assessee raised a ground that the assessment order lacked a document identification number and was therefore invalid. This ground was not pressed at hearing and was rejected by the Tribunal.3. SIGNIFICANT HOLDINGSThe Tribunal made the following significant holdings:'In my opinion, assessee has demonstrated sufficient sources available with him for making the alleged cash deposit in the bank accounts. The AO has not pointed out any specific defect in the source. His reasons are only with regard to certain discrepancies in preparing the Cash Flow Statement.''The AO simply incorporated the cash flow submitted by the assessee instead of examining the basic entries in that Cash Flow Statement with the help of documentary evidence.''Therefore, no addition is required to be made in the total income of the assessee.'Core principles established include:An addition under Section 69 cannot be sustained if the assessee satisfactorily explains the source of cash deposits with documentary evidence;The AO must examine documentary evidence and reconcile cash flows before making an addition;Discrepancies in Cash Flow Statement alone, without examination of underlying evidence, are insufficient to justify addition;Procedural objections not pressed at hearing may be rejected without detailed adjudication.Final determinations:The reopening of assessment was not challenged substantively and was upheld;The addition of Rs. 48,10,000/- under Section 69 was deleted as the assessee satisfactorily explained the source of cash deposits;The additional ground regarding document identification number was rejected as not pressed;The appeal was partly allowed accordingly.