2025 (7) TMI 1164 - AT - Income Tax

Revenue appeal partially allowed on unexplained deposits under sections 68/69A requiring fresh verification by AO

Rashmin Kantilal Vakta Prop: Dinesh Paper Traders Versus The DCIT, Cent. Cir. 1 (2) Aayakar Bhavan Ahmedabad. And (Vice-Versa)

The ITAT Ahmedabad partially allowed the revenue's appeal against CIT(A)'s relief granted to the assessee regarding unexplained deposits under sections ... Addition u/s 68/69A - Large deposits made in its bank account - AO treated the entire deposits as unexplained, whereas CIT(A) granted partial relief after analysing each component of deposit in detail Business receipts / sales - HELD THAT:- The explanation furnished by the assessee with respect to business receipts merits verification. It is a matter of record that all supporting documents and bifurcation were furnished for the first time before the CIT(A), and no remand report was called for. The mere fact that the receipts were by cheque and reflected in the sales register is insufficient in the peculiar circumstances of this case, particularly when the AO had categorically doubted the genuineness of transactions on the ground of accommodation entry routing, and the CIT(A) has not conducted any field-level or third-party verification. Further, the percentage of cheque receipts is significantly low as compared to the total sales and cash deposits claimed, casting serious doubt on the veracity of the recorded sales. Accordingly, we are of the view that the deletion of Rs. 3,64,53,850/- by the CIT(A) cannot be sustained without independent verification. The matter is therefore restored to the file of the Assessing Officer for limited purpose of examining the genuineness of these business receipts afresh in light of the documents furnished before the CIT(A), after giving due opportunity to the assessee. Inter-bank transfers between the assessee’s own accounts - CIT(A) has accepted this explanation after noting that these transactions are duly recorded as contra entries and correspond to internal transfers, with no third-party involvement. The entries are supported by bank statements, do not involve any unexplained cash or credit from external sources, and are verifiable from the assessee’s own records. We also note that no adverse finding has been recorded by the Assessing Officer in respect of this component, as the source-wise bifurcation was not before him at the reassessment stage. During appellate proceedings before us, no material has been brought on record by the Departmental Representative to controvert the assessee’s explanation or to dispute the conclusion drawn by the CIT(A). Accordingly, we find no infirmity in the conclusion of the CIT(A) in treating the amount as explained inter-bank transfers. The same does not attract the mischief of section 68. Cash sales and re-deposit of withdrawals - In the present case, the assessee’s explanation hinges on an uncorroborated assertion that cash deposited in the Society was either from cash sales or from earlier withdrawals, without any external evidence, stock movement proof, or matching entries in third-party ledgers. In our view, such a claim cannot be accepted at face value without detailed field-level verification, especially in a case involving alleged accommodation entries and substantial cash movement. It is also significant that this entire explanation was brought on record only at the appellate stage, and no remand report was called for by the CIT(A), thereby depriving the Assessing Officer of an opportunity to verify the cash flow trail and reconcile it with stock and sales tax compliance. In view of the foregoing, and considering the incomplete evidentiary backing, absence of bifurcation of cash flow, and lack of third-party validation, we hold that the claim of the assessee that the deposits were sourced from genuine cash sales and re-deposits of withdrawals is not conclusively established on the basis of material available on record. The treatment of this amount as explained by the CIT(A), without requisite verification, is therefore unsustainable. Accordingly, we set aside the finding of the CIT(A) in respect of this component and restore the matter to the file of the AO for de novo verification. Temporary loans from various parties - AO is entitled to examine the source of the source. Mere filing of PAN, bank statements, or ITRs by itself does not establish creditworthiness or genuineness. AO is duty-bound to investigate the matter when a prima facie case of accommodation entry is made. In the present case, the transactions are large in volume, involve parties with potentially circular dealings, are non-interest bearing, and were repaid within the year. These characteristics, taken together, justify a deeper scrutiny to determine whether the loans are real or merely accommodative entries designed to explain the otherwise unaccounted cash deposits in the Society. We hold that the relief granted by the CIT(A) in respect of Rs. 15,14,78,000/- was premature and not based on thorough verification. The explanation offered by the assessee regarding temporary loans, though supported by some documents, was not adequately tested, particularly with regard to source of funds in the hands of the creditors, creditworthiness as per audited financials, commercial rationale for interest-free temporary loans, correlation (if any) with “Deposits” in the balance sheet and whether the creditors were acting independently or in a structured, circular arrangement. We set aside the decision of the CIT(A) in respect of this component and restore the matter to the file of the Assessing Officer for a de novo examination. Unexplained Cash Deposits - assessee claimed to have been sourced from cash withdrawn earlier from its Axis Bank account during the year - As observed earlier, the pattern of repeated large cash withdrawals and immediate or proximate redeposits, without identifiable business transactions or necessity, does give rise to doubts regarding the commercial substance of these movements. The nature of the assessee’s business, which otherwise operates largely through banking channels, does not explain the need for such substantial and frequent cash circulation. We further note that the CIT(A), while rightly questioning the absence of nexus, did not call for a remand report or direct the Assessing Officer to verify the explanation through a date-wise cash flow analysis. In a case involving large cash movements and allegations of accommodation entries, such verification becomes imperative. We are of the view that the addition cannot be confirmed outright, nor can the assessee’s explanation be accepted without scrutiny. Therefore, in the interest of justice and fair adjudication, we deem it appropriate to restore this issue to the file of the AO for fresh verification of the claim. The Assessing Officer shall examine the date-wise withdrawal and deposit pattern, assess whether the same cash was redeposited and remained unutilised in the interim, evaluate the business necessity for cash withdrawals and draw appropriate conclusions in accordance with law after granting a reasonable opportunity of being heard to the assessee. Additions u/s 68 - In the present case, however, the assessee has claimed substantial cash deposits to be sourced from temporary loans, cash sales, and redeposit of cash withdrawals without demonstrating a clear nexus or commercial justification. Several of the creditors also appear in the books of the assessee as customers or suppliers, raising a serious concern of accommodation layering. The alleged transactions were neither verified by the Assessing Officer through independent enquiry nor supported by VAT returns, stock movement, or purchase trail. The outstanding deposits of ₹51.55 crore as on 31.03.2013 also remained unexplained and potentially correlated with the same entries. Thus, in the absence of independent verification and in view of the complex factual setting involving significant cash transactions and potential circularity, we are of the view that the reliance placed by the CIT(A) on those decisions do not assist the assessee in the present case, as the foundational facts necessary to invoke their applicability are not comparable. ISSUES: Validity of reopening assessment under section 147 of the Income-tax Act, 1961.Whether large cash deposits in the assessee's bank account with a Multi-State Urban Co-operative Credit Society constitute unexplained cash credits under sections 68 and 69A of the Act.Whether the assessee satisfactorily explained the nature, source, and genuineness of deposits claimed as business receipts, inter-bank transfers, cash sales, loans from various parties, and redeposits of cash withdrawals.Whether the Assessing Officer's additions under sections 68/69A were justified in light of the evidence and explanations furnished by the assessee.Whether the Commissioner of Income Tax (Appeals) erred in deleting substantial portions of additions without independent verification or remand to the Assessing Officer.Whether penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars are justified. RULINGS / HOLDINGS: The reopening of assessment under section 147 was held valid as the Assessing Officer had credible information and formed a belief that income had escaped assessment, with due compliance of procedural safeguards including issuance of notices and opportunity of hearing.The entire deposits in the assessee's bank account with the credit society could not be treated as unexplained cash credits wholesale; a detailed bifurcation and explanation of components was necessary.Business receipts (cheque sales) and inter-bank transfers were accepted as satisfactorily explained and genuine, subject to verification; additions relating to these components were deleted by the CIT(A).The explanation regarding cash sales and redeposits of cash withdrawals was not conclusively established due to lack of corroborative evidence such as VAT returns, stock movement records, and third-party confirmations; the CIT(A)'s deletion of additions on this component was set aside and remanded for fresh verification.The claim of temporary loans from various parties was not adequately verified as the Assessing Officer did not conduct independent inquiries into creditworthiness or genuineness; the CIT(A)'s deletion of additions on this ground was set aside and remanded for detailed examination.The residual unexplained cash deposits confirmed by the CIT(A) were not accepted outright nor rejected; the matter was restored to the Assessing Officer for detailed date-wise cash flow verification and nexus examination.The CIT(A)'s reliance on judicial precedents was found distinguishable on facts, as those cases involved verified confirmations and no allegations of circular or accommodation entries.The appeals were partly allowed with directions for the Assessing Officer to verify the genuineness of various components of deposits and complete reassessment accordingly. RATIONALE: The legal framework applied includes sections 68, 69A, 147, 148, 143(3), and 271(1)(c) of the Income-tax Act, 1961, and judicial precedents interpreting the burden of proof on the assessee to establish identity, genuineness, and creditworthiness of creditors or sources of cash credits.The Court emphasized that reopening under section 147 requires credible information and proper satisfaction, which was found present in this case.The Assessing Officer's approach of treating entire deposits as unexplained without itemized verification was improper; however, the assessee's explanations introduced at the appellate stage required independent verification, including third-party confirmations, stock movement, VAT returns, and cash flow nexus.The Court recognized the complexity of layered cash transactions and potential accommodation entries, necessitating detailed scrutiny beyond documentary submissions.The CIT(A)'s deletion of substantial additions without remand or verification was a procedural lapse, as the Assessing Officer must be given opportunity to verify the newly submitted evidence.The decision reflects a doctrinal insistence on rigorous verification in cases involving large cash deposits and potential accommodation entries, balancing the assessee's burden of proof with procedural fairness.