2025 (9) TMI 747 - AT - Income Tax

Reopening under s.147 valid; AO to verify demonetization-era SBN cash sales, protective GP rate fixed at 4%

Reopening under s.147 upheld: ITAT held AO had reason to believe unexamined cash deposits during demonetization and other unverified deposits, rejecting ... Reopening of assessment u/s 147 - cash deposited in the bank account during the demonetization period - reason to believe or suspect - HELD THAT:- Assessment in the case of the Assessee was completed u/s 143(1) of the Act and there was no examination carried out on the part of the AO with respect to the source of such cash deposited during demonstration in SBN. Besides this, there were cash deposits during the remaining of the previous year which also remained unverified. Under these circumstances, we are not in agreement with the argument advanced by Assessee's Representative that the ‘Reason to Believe’ is merely based on the fact that the cash deposited in bank account. Decided against assessee. Addition on account of cash deposited during the demonetization in SBN - CIT(A) directed the A.O. to estimate the profile on the cash deposited during the demonetization period by treating the same as sales - HELD THAT:- Books of accounts maintained by the Assessee were also rejected by invoking the provision of Section 145 (3) of the Act and the A.O. has already reduced this amount of cash deposited in SBN during demonization from the total turnover declared by the Assessee. Therefore, the only question remained to be answered is with respect to the genuineness of the source of such cash sales. As observed above, the Assessee has not filed complete details in support of the source, therefore, in the interest of justice we set aside the order of the CIT(A) and remand this issue to the file of the AO with a direction to make necessary verification of the sales claimed to have been made in cash in SBN which was deposited during the demonetization period in Bank. G.P rate @8% on the cash deposited (as reduced by the cash deposited during the demonetization in SBN) which is part of the total turnover - We find that the Assessee has declared GP rate of 3% on the turnover of 81.04 crores where as in the year under Appeal, it was reduced to 2.79% on the turnover of 51.39 crores. There was cash deposited during the demonetization for which no satisfactory explanation given by the Assessee, in our considered opinion, GP rate of 4% on this turnover will meet the end of justice and would be reasonable by considering the facts and circumstances of the case. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147 was valid where original assessment was completed under section 143(1) and cash deposits (including Specified Bank Notes (SBN) during demonetization and other cash deposits) were not examined during original assessment. 2. Whether the reasons recorded for reopening under section 147 met statutory requirement of a 'reason to believe' and showed independent application of mind by the Assessing Officer. 3. Whether prior approval as per section 151 (prior sanction for reassessment) was obtained and whether absence thereof vitiates reassessment proceedings. 4. Whether cash deposits in SBN during the demonetization period amounting to a specified sum could be treated as unexplained cash sales and, if so, whether the proper relief is to estimate profit treating deposits as sales or to treat them as income under section 69A/section 115BBE. 5. Whether cash deposits during the non-demonetization period could be added by estimating income at a stated profit rate (AO applied 8%) and whether rejection of books under section 145(3) supported such estimation. 6. What is the appropriate methodology and quantum (rate of gross profit) to be applied for estimating income on unexplained cash deposits where books are rejected and supporting records (day-to-day cash book, stock register, sales bills) are not produced. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Reopening under section 147 where original assessment was under section 143(1) and deposits were not examined Legal framework: Section 147 permits reopening where the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment; section 143(1) refers to summary assessment based on returned income without detailed enquiries. Precedent treatment: No specific precedents were cited in the impugned orders or in the Tribunal's reasoning; the Tribunal applied statutory principles regarding sufficiency of reasons for reopening where material was unexamined in original assessment. Interpretation and reasoning: The Tribunal found that original assessment under section 143(1) involved no examination of cash deposits (both SBN during demonetization and other cash deposits) and that substantial cash deposits remained unverified. The lack of prior verification of substantial transactions constituted a legitimate basis for a reason to believe that income had escaped assessment. Ratio vs. Obiter: Ratio - Reopening is permissible where material facts (large cash deposits) remained unexamined in the original summary assessment and such omission gives the AO a reasonable basis to form belief under section 147. Conclusion: Reopening under section 147 was valid on the facts; grounds challenging reopening (Grounds 2-5) were dismissed. Issue 2 - Sufficiency of reasons and independent application of mind for reopening Legal framework: Section 147 requires recorded reasons showing belief that income has escaped assessment; the belief must be based on material and an independent application of mind. Precedent treatment: No judicial authorities were expressly relied upon by the Tribunal; analysis rested on record review. Interpretation and reasoning: The Tribunal noted the absence of examination of cash deposits in original assessment and the presence of unverified cash deposits in the year. These circumstances, combined with the AO's recorded reasons, were sufficient to demonstrate a live nexus between the facts and the belief formed. There was no finding of want of independent application of mind by the AO on the record. Ratio vs. Obiter: Ratio - The recorded reasons were held adequate where material facts justifying the belief (unexamined large cash deposits) existed; absence of prior examination supports reopening. Conclusion: The challenge that reasons were inadequate or that there was no independent application of mind was rejected. Issue 3 - Validity of reassessment without prior approval under section 151 Legal framework: Section 151 prescribes prior approval for certain reassessment actions where required by the Act's scheme. Precedent treatment: No material or argument was advanced by the assessee on this point before the Tribunal; the Tribunal dismissed the ground for lack of supporting material. Interpretation and reasoning: The assessee did not press or produce evidence supporting that prior approval was required and absent; accordingly the Tribunal dismissed the ground for want of argument and material. Ratio vs. Obiter: Obiter in respect of the record-specific basis for dismissal (procedural non-argument) rather than a determinative legal holding on section 151's application. Conclusion: Ground challenging absence of prior approval under section 151 was dismissed for lack of supporting argument/material; reassessment not set aside on this ground. Issue 4 - Treatment of SBN cash deposits during demonetization: whether to treat as unexplained cash sales and method of taxation Legal framework: Section 68 (sum credited without explanation), section 69A (special provisions for unexplained investments in SBN during demonetization), and section 115BBE (special taxation of unexplained cash credits) provide statutory mechanisms to tax unexplained credits or deposits; estimation as sales/profit is another alternative when source claimed to be business receipts. Precedent treatment: The Tribunal and CIT(A) considered evidence on file (sale bills, books) and whether AO had pointed to defects; no external case law was invoked. Interpretation and reasoning: The CIT(A) found that the assessee offered explanation that deposits represented sales, produced sale bills and admitted revenue receipt; AO had not pointed to specific defects in books nor rejected them on this issue. Accordingly CIT(A) directed AO to estimate profit treating deposits as sales (rather than invoking section 69A/115BBE directly). The Tribunal, however, observed that the assessee had not produced complete supporting records (day-to-day cash book, day-to-day stock register, branch cash books) and that books had been rejected under section 145(3). Given incomplete proof of genuineness and the rejection of books, the Tribunal set aside the CIT(A) direction and remanded the matter to the AO for verification of claimed cash sales in SBN, directing necessary verification rather than making a final tax determination on that sum. Ratio vs. Obiter: Ratio - Where an assessee claims SBN deposits are cash sales and produces sale bills and books without identified defects, appellate authority may direct estimation of profit treating deposits as sales; conversely, where key supporting records are missing and books are rejected under section 145(3), the matter may be remitted for verification. Obiter - Observations on relative sufficiency of sale bills versus day-to-day records are context-specific. Conclusion: The Tribunal remitted the question of genuineness of SBN cash sales to the AO for verification; the CIT(A)'s direction to treat deposits as sales for profit estimation was set aside for further factual inquiry. Ground on SBN deposits partly allowed (remand for verification) and Revenue ground on that issue allowed for statistical purpose. Issue 5 - Addition on cash deposits during non-demonetization period by estimating profit at 8% and rejection of books under section 145(3) Legal framework: Section 145(3) permits rejection of books of account if not properly maintained; where books are rejected or not relied upon, AO may estimate income by application of reasonable profit rates based on records and industry norms. Precedent treatment: No external precedents were cited; Tribunal assessed reasonableness of profit rate in light of tax audit report and declared gross profit (GP) rates. Interpretation and reasoning: The AO applied GP rate of 8% on cash deposits (excluding SBN portion). The Tribunal noted tax audit report GP rates: 3% in prior year and 2.79% for the year under appeal. Considering declared GP rates and unexplained cash deposits, Tribunal found 8% excessive and, to meet ends of justice, directed use of a 4% GP rate on the relevant turnover for recomputation. The Tribunal upheld the AO's invocation of section 145(3) given failure to produce day-to-day stock and cash records and observed the assessee did not rebut AO's findings before CIT(A) or the Tribunal. Ratio vs. Obiter: Ratio - Where books are rejected and the assessee fails to produce supporting day-to-day records, AO may estimate income; the rate of estimation must be reasonable in light of declared GP and records, and the Tribunal may adjust the rate to a reasonable figure. Obiter - Specific selection of 4% as reasonable is fact-driven and not a universal benchmark. Conclusion: Additions on non-demonetization cash deposits were upheld in principle, but quantum was adjusted - AO directed to recompute addition using GP rate of 4% on the specified turnover; Grounds 8-9 of the assessee partly allowed. Issue 6 - Appropriate methodology when books are rejected and necessary records not produced (day-to-day cash book, stock register, sales bills) Legal framework: Section 145(3) consequence of non-maintenance or non-producing of books; estimation under general income-tax powers when records are incomplete. Precedent treatment: No case law cited; Tribunal applied statutory scheme and fact analysis. Interpretation and reasoning: Tribunal emphasized that presence of sales bills alone is insufficient when day-to-day books and stock register are not maintained/produced and the audit report itself notes the absence. In such circumstances, AO's rejection of books was justified and estimation of income was permissible; however, estimation must be proportionate and justified by available records (e.g., tax audit report GP rates) - hence reduction of AO's 8% to 4% on recomputation. Ratio vs. Obiter: Ratio - Rejection of books under section 145(3) empowers AO to estimate income; estimation should be anchored to available documentary material and industry/turnover-specific indicators, and appellate authority may moderate AO's estimate where excessive. Conclusion: Methodology of rejecting books and estimating income upheld; AO's estimation adjusted by Tribunal to a reasonable GP rate (4%) for recomputation. Overall Disposition The appeals were partly allowed and partly dismissed: reopening under section 147 upheld; the SBN-deposit issue remitted to AO for verification of claimed cash sales; additions relating to non-demonetization cash deposits upheld in principle but the AO directed to recompute the addition applying a GP rate of 4% (reducing AO's 8% estimate).