2025 (6) TMI 719 - AT - Income Tax

ITAT upholds deletion of unexplained cash deposits addition but sustains disallowance of improvement costs for capital gains calculation

Phoola Rani Chadha Versus ACIT, Circle 30 (1) Civic Centre, New Delhi And (Vice-Versa)

ITAT Delhi dismissed assessee's appeal regarding unexplained cash deposits, upholding CIT(A)'s deletion of addition under section 69 as source of fixed ... Unexplained cash deposit - source, creditworthiness and genuineness of deposits - CIT(A) deleted addition - HELD THAT:- There is no infirmity in the order of the CIT(A) compelling us to take different view as total FD made during the year and the source of making these FD's are also verified. However the AO has made the same addition 6 times. Basic enquiries regarding SFT information were not conducted by the AO with the bank, may be due to paucity of time. In the absence of any other information even as remand report, the appellant's contention that Time Deposits of only Rs. 2,04,00,000 was invested, have to be accepted. As the appellant has explained the source of this FD with bank statement, the addition u/s 69 is held to be unwarranted. Capital gains on sale of commercial properties - deduction u/s 48 towards cost of acquisition and towards cost of improvement was disallowed - CIT(A) has recalculated the capital gain - HELD THAT:- DR failed to pin point the pertinent additional evidence as was submitted by the assessee. Hence, the ground referred violation of Rule 46A is rendered infructous. The action of CIT(A) is circumscribed u/s 250(4) of I.T. Act, 1961 and no irregularity is visible. Rejecting the claim of indexation and the amount spent on the flats sold during the year is bad in law - HELD THAT:- The assessee has failed to submit any evidence regarding cost of improvement considering that the flat has been acquired in 1988-89 there is no evidence regarding the cost of improvement. The prayer of appellant is not established by any cogent and reliable evidence. Accordingly, the ground is dismissed. Thus, the addition is sustained. Taxability on sale of flat at Dehradun short term capital gain -HELD THAT:- The capital gain should be long term in nature, since, the property was held w.e.f 21.11.2009 and assessee has held the property for more than 36 months. The nature of capital gain is accordingly long term in nature. The period of holding must be considered from date of allotment. Possession and payment are only follow up activities. The departmental representative failed to controvert the issue. However, we do not concur with the methodology to calculate the indexed cost of acquisition. The indexation must be linked with the payment schedule. AO is directed to recomputed long term capital gain accordingly. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in this matter are:Whether the deletion of additions on account of unexplained cash deposits by the Commissioner of Income Tax (Appeals) (CIT(A)) was justified without verifying the source, creditworthiness, and genuineness of deposits.Whether the CIT(A) erred in partly deleting additions relating to unexplained investments and cash deposits without affording the Revenue an opportunity to examine evidence submitted during appellate proceedings, thereby violating Rule 46A of the Income Tax Rules.Whether the additions made on account of unexplained investments without calling for a remand report from the Assessing Officer (AO) were justified.Whether the CIT(A) correctly recalculated capital gains on sale of properties, including the acceptance of purchase agreements in absence of sale deeds, and the allowance of indexation benefits.Whether the claim of capital gains on sale of flats should be treated as long-term or short-term capital gains, particularly in cases where possession was not taken but allotment letters and payments were made.Whether the AO's methodology for calculating indexed cost of acquisition was correct or needed adjustment in line with payment schedules.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Deletion of additions on account of unexplained cash depositsRelevant legal framework and precedents: The Income Tax Act, 1961, Section 69 deals with unexplained cash credits. The principle that earlier cash withdrawals can be shown as source for subsequent cash deposits is well established. The Karnataka High Court in S.R. Venkataratnam vs CIT held that once the assessee discloses the source as earlier withdrawals, the Revenue cannot disbelieve the explanation merely on surmise. The Delhi ITAT in Neeta Breja and the coordinate bench in ACIT vs Baldev Raj Charla have also held that time gap between withdrawal and deposit does not warrant rejection of explanation if no evidence shows the cash was spent elsewhere.Court's interpretation and reasoning: The CIT(A) accepted the appellant's explanation that cash deposits were made from prior withdrawals, noting absence of any evidence that the cash was used for other purposes. The CIT(A) relied on the above precedents to hold that the Revenue failed to disprove availability of cash at the time of deposit. The Tribunal concurred, finding no infirmity in the CIT(A)'s order.Key evidence and findings: Bank statements showing prior cash withdrawals and deposits; no evidence from Revenue disproving availability of cash.Application of law to facts: The explanation of source of cash deposits from earlier withdrawals was accepted as per settled law.Treatment of competing arguments: Revenue argued that the CIT(A) erred in deleting additions without verifying source and creditworthiness; however, no evidence was produced to counter the assessee's explanation.Conclusion: Deletion of additions on account of unexplained cash deposits was upheld.Issue 2: Deletion of additions relating to unexplained investments and violation of Rule 46ARelevant legal framework and precedents: Rule 46A of the Income Tax Rules mandates that additional evidence submitted during appellate proceedings must be given an opportunity for examination by the Revenue. Section 69 of the Act deals with unexplained investments.Court's interpretation and reasoning: The CIT(A) deleted additions related to fixed deposits after verifying bank statements showing investments of Rs. 2.04 crores and noting that AO had made the same addition multiple times without conducting basic enquiries such as obtaining SFT (Specified Financial Transactions) information from banks. The Tribunal found no infirmity in the CIT(A)'s acceptance of the source of fixed deposits and noted that the Revenue failed to point out any irregularity or violation of Rule 46A.Key evidence and findings: Bank statements reflecting fixed deposits; absence of remand report or further enquiry by AO; no evidence that additions were justified.Application of law to facts: Since the source was verified and no further evidence was submitted during assessment proceedings, deletion of additions was warranted.Treatment of competing arguments: Revenue contended that CIT(A) erred in deleting additions without affording opportunity to examine evidence; however, Tribunal found that no additional evidence was submitted during assessment proceedings and no violation of Rule 46A occurred.Conclusion: Deletion of additions on account of unexplained investments was upheld.Issue 3: Recalculation of capital gains and acceptance of purchase agreements in absence of sale deedsRelevant legal framework and precedents: Sections 48 and 50C of the Income Tax Act deal with computation of capital gains and valuation of transfer of immovable property. The burden of proof for cost of acquisition and improvement lies on the assessee. The acceptance of purchase agreements in absence of sale deeds is a matter of evidence and discretion.Court's interpretation and reasoning: The CIT(A) accepted the purchase agreement dated 06.01.1990 as proof of cost of acquisition for a flat, granting benefit of doubt despite absence of sale deed. However, the CIT(A) disallowed cost of improvement of Rs. 17,03,880 due to lack of documentary evidence. The Tribunal noted that the assessee failed to submit cogent evidence to substantiate cost of improvement and upheld the disallowance.Key evidence and findings: Purchase agreement submitted; no sale deed or proof of payment for cost of improvement.Application of law to facts: Benefit of doubt was given for cost of acquisition based on purchase agreement; disallowance of cost of improvement was justified due to absence of evidence.Treatment of competing arguments: Assessee argued for acceptance of all claimed costs; Revenue challenged lack of documentary proof.Conclusion: Partial acceptance of cost of acquisition; disallowance of cost of improvement sustained.Issue 4: Treatment of capital gains on sale of flats and determination of holding period for long-term capital gainsRelevant legal framework and precedents: Section 2(42A) defines long-term capital asset holding period; Section 2(47) defines 'transfer' including extinguishment of any rights; Sections 54 and 54F provide exemptions for capital gains on residential property. CBDT Circular Nos. 478 and 672 clarify that allotment letter and payment confer title and rights, and possession is a formality.Court's interpretation and reasoning: The Tribunal relied on a precedent from the Indore Bench wherein allotment letter and payment were held to confer ownership rights, making the holding period commence from date of allotment rather than possession or registration. The Tribunal held that possession and payment are follow-up activities, and the period of holding should be reckoned from allotment date. Accordingly, capital gains on sale of the flat were to be treated as long-term. However, the Tribunal did not concur with the AO's method of calculating indexed cost of acquisition and directed recomputation linked to payment schedule.Key evidence and findings: Allotment letter, payment schedule, builder's letters, and sale agreement; absence of registered sale deed; dates of possession and payment.Application of law to facts: Applying the principle that rights vest on allotment and payment, the holding period was more than 36 months, qualifying for long-term capital gains treatment.Treatment of competing arguments: Revenue argued for short-term capital gains based on date of sale and possession; Tribunal rejected this, following binding precedents and CBDT Circulars.Conclusion: Capital gains on sale of flats were long-term; reassessment of indexed cost of acquisition was directed.Issue 5: Violation of Rule 46A and opportunity to examine evidenceRelevant legal framework: Rule 46A mandates that additional evidence filed during appeal must be shared with the Revenue for examination.Court's interpretation and reasoning: The Tribunal found that the Revenue failed to specify any additional evidence submitted by the assessee during appellate proceedings that was not available during assessment. Hence, the ground alleging violation of Rule 46A was rendered infructuous. The CIT(A)'s action was within the scope of Section 250(4) of the Act and no irregularity was found.Key evidence and findings: No specific additional evidence identified by Revenue; assessment record and appellate submissions considered.Application of law to facts: No violation of Rule 46A occurred as no new evidence was improperly admitted.Treatment of competing arguments: Revenue alleged procedural lapse; Tribunal rejected for lack of substantiation.Conclusion: No violation of Rule 46A.3. SIGNIFICANT HOLDINGS'The law well settled that assessee can show earlier cash receipts or withdrawals from bank account as source of subsequent cash deposits unless the revenue is able to show that the cash so available is used for some other purposes. In this case there is no information that the cash withdrawn was consumed elsewhere.''The allottee gets title to the property on the issue of the allotment letter and the payment of instalment is only a follow up action and taking the delivery of possession is only a formality.''The period of holding must be considered from date of allotment. Possession and payment are only follow up activities.''Basic enquiries regarding SFT information were not conducted by the AO with the bank, may be due to paucity of time. In the absence of any other information even as remand report, the appellant's contention that Time Deposits of only Rs. 2,04,00,000 was invested, have to be accepted.''The action of CIT(A) is circumscribed under Section 250(4) of I.T. Act, 1961 and no irregularity is visible.'Core principles established include:The principle that cash deposits can be explained by prior withdrawals unless disproved by Revenue.Acceptance of purchase agreements as proof of cost of acquisition in absence of sale deeds, subject to evidence.Recognition that allotment letters and payment confer ownership rights, making the holding period for capital gains calculation start from allotment date.Requirement for AO to conduct basic enquiries such as obtaining SFT information before making additions on unexplained investments.Strict adherence to procedural safeguards under Rule 46A, ensuring no evidence is improperly admitted without opportunity to Revenue.Final determinations on each issue were:Revenue's appeal was dismissed in respect of additions on unexplained cash deposits and investments.CIT(A)'s deletion of additions was upheld due to lack of evidence and procedural compliance by AO.Assessee's appeal was partly allowed on the issue of capital gains, holding the gains as long-term and directing recomputation of indexed cost linked to payment schedule.Disallowance of cost of improvement was sustained due to lack of documentary evidence.