2025 (8) TMI 883 - AT - Income Tax

Cash Deposits in Mosquito Net Business Not Fully Unexplained Under Section 69A, Profit Rate Applied Instead

Shri Madhappa Siva Versus The Income Tax Officer, Ward-1, Hosur.

Shri Madhappa Siva Versus The Income Tax Officer, Ward-1, Hosur. - TMI 1. ISSUES PRESENTED and CONSIDERED Whether cash deposits made by the assessee during the relevant assessment year constitute unexplained income under section 69A of the Income Tax Act, 1961. Whether the addition made on best judgment basis under section 144 read with section 147 of the Act is justified in absence of the assessee's response and non-filing of return for the relevant assessment year. Whether subsequent filing of returns and registration under VAT and GST can be relied upon to estimate or infer the nature and profitability of the business for the relevant assessment year. Whether presumptive taxation or adoption of average net profit percentage from subsequent years can be applied to determine the taxable income for the relevant assessment year. Whether the evidence furnished by the assessee (bank statements, purchase and sales registers, invoices) is sufficient to establish that cash deposits are business receipts and not unexplained income. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legitimacy of Cash Deposits as Unexplained Income under Section 69A Legal Framework and Precedents: Section 69A of the Income Tax Act provides that any sum found credited in the books of an assessee for which he offers no satisfactory explanation about the nature and source is deemed to be income. The burden lies on the assessee to explain the source of cash credits. Court's Interpretation and Reasoning: The AO treated the entire cash deposit of Rs. 33,94,516/- as unexplained income due to non-filing of return and non-response to notices. The CIT(A) accepted the assessee's contention to the extent of reducing the cash deposit figure to Rs. 21,64,516/-. The Tribunal observed that the assessee had demonstrated through bank statements, purchase and sales registers, and invoices that the deposits related to the business activity of sale of mosquito nets. Key Evidence and Findings: The assessee produced SBI bank statements showing cash deposits, VAT and GST registration certificates, purchase registers, sample purchase and sales invoices. These documents indicated a systematic business operation rather than unexplained credits. Application of Law to Facts: Given the documentary evidence, the Tribunal concluded that the entire amount cannot be treated as unexplained income under section 69A. Only the portion not explained by the profit margin could be added. Treatment of Competing Arguments: The Revenue relied on non-filing of return and non-response to notices to justify the addition. The assessee argued the deposits were business receipts. The Tribunal favored the assessee's evidence and submissions. Conclusion: The addition of the entire cash deposit as unexplained income under section 69A is not justified. The deposits are linked to business receipts. Issue 2: Validity of Best Judgment Assessment under Sections 144 and 147 Legal Framework and Precedents: Section 147 permits reopening of assessment if income has escaped assessment; section 144 allows best judgment assessment where the assessee fails to comply with notices or file returns. The AO followed this procedure due to non-filing and non-response. Court's Interpretation and Reasoning: The Tribunal acknowledged the procedural correctness of reopening and best judgment assessment but emphasized that the assessment must be based on fair and reasonable estimation, especially when evidence is available. Key Evidence and Findings: The assessee's subsequent filing of returns and registration under VAT and GST, along with business records, were considered relevant for estimating income. Application of Law to Facts: The Tribunal held that although best judgment assessment was permissible, the AO and CIT(A) should have considered the nature of business and available evidence to determine a reasonable income figure rather than making a blanket addition. Treatment of Competing Arguments: Revenue argued non-cooperation justified best judgment addition. Assessee argued for estimation based on business records and profit margins. Conclusion: Best judgment assessment must be fair and reasonable; blanket addition without consideration of business evidence is not tenable. Issue 3: Reliance on Subsequent Returns and Registrations to Infer Business Nature and Profitability Legal Framework and Precedents: Subsequent events and filings can be relevant to understand the business pattern and profitability, provided they are closely connected and reliable. Court's Interpretation and Reasoning: The CIT(A) rejected reliance on subsequent returns and registrations for the relevant year 2012-13, holding that subsequent events cannot justify claims for earlier years. The Tribunal disagreed, noting that the returns were filed before the impugned order and demonstrated a consistent business activity and profit pattern. Key Evidence and Findings: Returns filed from AY 2014-15 to AY 2022-23 showed turnover, taxable income, and net profit percentages. VAT registration was obtained in 2017 and GST registration was also in place. Application of Law to Facts: The Tribunal found that these subsequent returns and registrations provide a reasonable basis to estimate the profit margin and validate the business nature for the relevant year. Treatment of Competing Arguments: Revenue emphasized the irrelevance of subsequent filings for the year under assessment. The assessee highlighted the continuity and consistency of business operations. Conclusion: Subsequent returns and registrations are relevant and can be used to estimate income and profit for the relevant assessment year. Issue 4: Application of Presumptive Taxation and Average Net Profit Percentage Legal Framework and Precedents: Presumptive taxation or adoption of average net profit percentage is permissible when books of accounts are not maintained, and income estimation is necessary. Court's Interpretation and Reasoning: The assessee prayed for adoption of presumptive tax rates or average net profit of 11.72% based on subsequent years. The Tribunal accepted that since books were not maintained for AY 2012-13, an average net profit percentage derived from subsequent years' returns is a reasonable basis for estimation. Key Evidence and Findings: The average net profit ratio up to the date of assessment was 11.72%, with detailed figures for each subsequent year. The Tribunal adopted a net profit of 12% on the cash deposits of Rs. 21,64,516/- for estimation. Application of Law to Facts: Applying 12% net profit to the explained cash deposits yields a taxable income of Rs. 2,59,742/-, which meets the ends of justice. Treatment of Competing Arguments: Revenue did not dispute the net profit percentages but argued for full addition due to non-filing and non-response. The Tribunal balanced the interests by allowing partial addition based on profit margins. Conclusion: Adoption of average net profit percentage for income estimation in absence of books is appropriate and justified. Issue 5: Sufficiency of Evidence to Establish Business Receipts Legal Framework and Precedents: Documentary evidence including bank statements, purchase and sales registers, and invoices are relevant to establish the source of cash credits. Court's Interpretation and Reasoning: The Tribunal examined the purchase registers, sample purchase and sales invoices, and bank statements submitted by the assessee and found them to demonstrate systematic business activity. Key Evidence and Findings: The bank statements showed cash deposits consistent with sales proceeds. Purchase and sales registers and invoices corroborated the business of mosquito nets. Application of Law to Facts: The evidence sufficiently linked the cash deposits to business transactions, negating the presumption of unexplained income for the entire amount. Treatment of Competing Arguments: Revenue contended that absence of return filing and books justified addition. The assessee's documentary evidence was held sufficient to rebut unexplained income presumption. Conclusion: The evidence furnished is sufficient to establish that cash deposits are business receipts and not unexplained income.