2025 (8) TMI 1247 - AT - Income Tax

Demonetisation cash addition deleted; large tracts treated as stock-in-trade, smaller plots capital; s.24(b) rental deduction sustained

ITAT upheld CIT(A)'s orders and dismissed the revenue's grounds. The addition for cash deposited during demonetisation was deleted because the factual ... Addition on account of cash deposited during demonetization - assessee has not been able to justify the reason for accumulation of cash from July, 16 to Nov, 16 as the cash purchase of property was prohibited by law w.e.f. 01.06.2015 - CIT(A) deleted addition HELD THAT:- Revenue before us did not challenge the finding of fact that the assessee was having sufficient cash on hand. Since that fact of having the sourced cash on hand is not disputed other presumption and assumption as to the reasons of having cash on hand will not help to the revenue. We also considered the various judgment cited by the ld. AR of the assessee to support the view of the ld. CIT(A). Thus, no merits in the ground no. 1 raised by the revenue and thereby the same is dismissed. Correct head of income - sale transaction of property - business income OR Capital Gain - nature of business of the assessee is 'builder/property developer' as declared in column 10(a) of the 3CD form - CIT(A) has categorically given finding that the assessee has filed the details of the lands which are held as stock in trade and the registry of the plots treated as capital assets - HELD THAT:- On going through that records ld. CIT(A) has noted that big chunk of land are forming of the stock in trade and small plots which were for investment and consistently shown under the head capital assets even for the earlier years and thereby the claim of the assessee was considered after careful going on all the aspect of the matter. Against that detailed finding of the ld. CIT(A), ld. AO through the ld. DR did not brough on record anything contrary to the finding of facts so recorded in the order of the ld. CIT(A) and therefore, merely based on the nature of the business for tax audit purpose will not determine the nature of other head of income. In the light of the above discussion, we do not find any infirmity in the detailed finding of the ld. CIT(A) and therefore, the ground no. 2 raised by the revenue stands dismissed. Deduction u/s 24(b) on rental income from plots of land - As per revenue there is no constructed house or building on these plots HELD THAT:- In the return the same has been wrongly mentioned as plot rent instead of building rent. CIT(A) considered those explanation and allowed the claim of the assessee in part. Ld. AR of the assessee also submitted that the similar claim of the same property was allowed in the appellate proceeding by the CIT(A) while dealing with the appeal of the assessee for A.Y. 2018-19. The revenue could not provide any justification as why the said detailed and consistent finding of the CIT(A) does not hold good when it is supported by the facts already placed on record before the ld. AO and thereby, we dismiss the ground no. 3 raised by the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether addition of cash deposits made during demonetization can be sustained under the deeming provisions (section 68 read with section 115BBE) where assessee explains deposits as arising from prior bank withdrawals recorded in accepted books of account. 2. Whether profits on sale of certain immovable properties should be assessed as business income (adventure in the nature of trade / stock-in-trade) or as capital gains, having regard to the intention at time of acquisition, ledger classification (fixed assets v. stock-in-trade) and surrounding facts. 3. Whether deduction under section 24 (deduction against income from house property) is allowable in respect of rent received from certain plots / premises where factual material (rent agreement, utility bills, nature of premises) determine head of income (house property v. other sources) and entitlement to section 24 deduction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Additions in respect of cash deposits during demonetization (section 68 r.w.s.115BBE): Legal framework Section 68 applies to unexplained cash credits; section 115BBE prescribes special tax treatment where unexplained income is determined. Burden on assessee is to satisfactorily explain nature and source of deposits; revenue must show explanation is unacceptable or point to use of withdrawn cash for undisclosed purposes. Precedent Treatment Tribunal relied upon and considered coordinated decisions holding that where books of account (including cash book) are maintained and accepted, and withdrawals/deposits are recorded without contrary material showing diversion or undisclosed source, additions based on suspicion are impermissible. Several ITAT and High Court decisions were cited supporting deletion where no evidence contradicted the recorded cash flow. Interpretation and reasoning The Tribunal examined the cash-book reconciliations showing opening cash, periodic bank withdrawals, cash utilizations and subsequent deposits. The AO did not produce evidence that withdrawn cash was expended for other undisclosed purposes; AO's objections were largely speculative (why a prudent person would withdraw given cash-in-hand, prohibition on cash property purchases post-1.6.2015). The Tribunal (following the CIT(A)) treated the admitted and verifiable cash withdrawals and accepted books as sufficient to explain source of deposits. The legal principle applied: where the source is recorded in books accepted by AO and not contradicted by material showing diversion, section 68 cannot be invoked merely on suspicion. Ratio vs. Obiter Ratio: Where audited books and bank records corroborate withdrawals and no evidence shows utilization elsewhere, addition under section 68 is not sustainable. Obiter: Remarks about 'prudent person' conduct and policy considerations (e.g., prohibition on cash purchase) are not determinative absent evidence of misuse. Conclusion The Tribunal upheld deletion of the Rs. 80,00,000 addition: the assessee's explanation of source (earlier bank withdrawals recorded in accepted cash book) was verifiable and uncontradicted, rendering AO's addition unjustified. Issue 2 - Characterisation of gains on sale of immovable property: business income v. capital gains Legal framework Income is taxed under different heads depending on character: business income (including 'adventure in the nature of trade' / stock-in-trade) versus capital gains. Section 2(13) defines 'business' to include adventure in the nature of trade. The decisive test revolves around the intention at acquisition, nature and quantity of asset, subsequent acts, incidents of purchase/sale, repetition/continuity and whether the transaction is allied to the usual business. Precedent Treatment AO relied on Supreme Court and High Court pronouncements (e.g., G. Venkataswamy Naidu and other authorities) establishing multi-factorial inquiry for 'adventure in the nature of trade' and business characterization. Assessee and CIT(A) invoked precedents and CBDT guidance recognizing that an assessee can maintain separate portfolios (investment v. trading) and that character is governed by intention at acquisition and ledger treatment. Interpretation and reasoning The Tribunal (following CIT(A)) applied the established multifactor test: it examined whether the particular plots were shown as fixed assets consistently in earlier years, whether the plots forming stock-in-trade were of different character (large tracts) than plots held as investments (small plots), and whether the assessee's ledgers and registries supported the claim of investment intent. The AO's reliance solely on the declared nature of business in tax audit form (builder/property developer) and on the fact of regular buying/selling was held insufficient to displace documentary and ledger evidence showing specific plots were held as capital assets. The Tribunal emphasized that intention at acquisition and consistent classification in books are material and that mere engagement in property business does not preclude holding certain properties as capital assets. Ratio vs. Obiter Ratio: Characterization depends on the totality of facts with primary importance to intention at acquisition and consistent ledger treatment; an assessee engaged in property business may still hold distinct assets as investments, and such assets' gains can be chargeable under capital gains head. Obiter: Observations on prudence or commercial advantages (e.g., conversion for higher sale value) do not override intention-based characterization. Conclusion The Tribunal dismissed the revenue challenge and directed taxation of the contested gains as capital gains as declared, holding the CIT(A)'s finding on intention and consistent ledger classification to be supported by record and not contradicted by the AO. Issue 3 - Allowability of deduction under section 24 for rental income from plots / premises Legal framework Income from house property and associated deductions under section 24 apply where income arises from a building or house property; income from open land/plots ordinarily falls under 'other sources' and does not attract section 24 deductions. Characterization depends on nature of premises let out and documentary evidence (rent agreement, utility bills, nature of structure). Precedent Treatment Tribunal considered documentary proof and prior appellate findings; principle applied is fact-sensitive: where rent relates to constructed premises and documentary evidence supports that, section 24 deduction is allowable; where rent is for open land, deduction is not available. Interpretation and reasoning CIT(A) (and Tribunal) analyzed rent agreements, water/electricity bills and admitted facts. For certain plots (T-03, T-03A, T-04A) assessee conceded these were open land rents and disallowance under section 24 was correctly sustained in part. For other properties (Sl. 05, 9, 10) documentary evidence demonstrated rent from constructed building; AIS/earlier filings and rent deed supported house property treatment. The Tribunal gave weight to documentary evidence and past consistency (including similar allowance in another assessment year) and rejected revenue's bald objection that absence of 'constructed house' precluded section 24 deduction when contrary documents existed. Ratio vs. Obiter Ratio: Entitlement to section 24 deduction turns on the factual nature of the leased premises as shown by contemporaneous documentary evidence; where evidence shows rent from building, section 24 deduction is allowable even if initial return mis-described the property. Obiter: Renewal of lease or past appellate allowance supports consistency but is not decisive sans evidentiary basis. Conclusion The Tribunal affirmed partial allowance of section 24 deductions: disallowance confirmed for open-land rents (small component) and deletion of disallowance for rents supported by rent agreement and utility bills for constructed building (larger component). Overall Disposition The Tribunal dismissed the departmental appeal on all three grounds: (1) deletion of the section 68 addition upheld due to verifiable book records and absence of contrary evidence; (2) reclassification of certain property sales as capital gains upheld given intention and consistent ledger treatment; (3) section 24 deductions allowed/partly allowed in accordance with documentary proof distinguishing building rents from open-land rents.