2025 (9) TMI 787 - AT - Income Tax

Addition under section 69A deleted for alleged unexplained demonetisation sale proceeds as livestock sales proven by Aadhaar PAN

ITAT, Mumbai deleted the addition made under section 69A relating to alleged unexplained sale proceeds deposited during demonetisation, allowing the ... Addition u/s 69A - unexplained sale proceeds of the milk business and the sale of cattle - addition being 75 per cent of aggregate cash deposited in the bank accounts during the demonetisation period - live-stock were under the hypothecation of the bank. HELD THAT:- No merit in the emphasis laid on hypothecation of live-stock for availing the loan, which, as noted above, was repaid by the assessee. Therefore, after repayment of the loan, the hypothecation has no relevance. Even in the event of a breach of the hypothecation condition, the bank may not have any grievance against the assessee, since the loan itself has been repaid. As regards the livestock purchases, the assessee has placed on record the confirmations along with their Aadhaar and PAN Card. Therefore, the identity of these parties was not rightly doubted by the lower authorities. Regarding creditworthiness, the Revenue, apart from raising doubts, did not conduct any independent enquiry despite having the necessary details. Therefore, not even an iota of material has been brought on record by the Revenue to doubt the creditworthiness of the purchases of livestock. Therefore, once the assessee was found to have the net cash flow and in the absence of any material to doubt the submission of the assessee that part cash deposited during the demonetisation period was from the sale of live-stock, we agree with the submissions of the assessee and delete the balance addition upheld by the learned CIT(A) u/s 69A - Accordingly, the impugned addition made under section 69A is deleted, and the grounds raised by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits made during the demonetisation period, when unexplained on initial scrutiny, can be treated as unexplained money and added to income under section 69A where the assessee claims the source as business receipts (sale of milk) and sale of hypothecated livestock. 2. Whether hypothecation of livestock as primary security for a bank loan, without specific identification of individual animals, precludes the assessee from selling such livestock and treating sale proceeds as legitimate source of cash deposits. 3. What evidentiary standard and burden applies to the Revenue to displace the assessee's explanation of cash deposits (including assessment of purchaser confirmations, identity and creditworthiness), and the consequence where Revenue does not undertake independent enquiry despite available details. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of addition under section 69A for cash deposits during demonetisation Legal framework: Section 69A treats money found to be in the possession of the assessee as unexplained and exigible to tax where the assessee fails to offer a satisfactory explanation as to its source; onus lies on assessee to explain and on Revenue to rebut by pointing to inconsistencies or documentary infirmities. Precedent Treatment: No specific judicial precedents were relied upon in the impugned order; the Tribunal proceeded on statutory principles and evidentiary record. Interpretation and reasoning: The assessee produced a detailed statement of cash inflows and outflows showing gross cash receipts from sale of milk and a computed net cash inflow of INR 23,26,016 for the year. The AO recorded total cash deposits of INR 27,70,985 during the demonetisation period but treated those deposits as unexplained due to perceived lack of documentary substantiation. The CIT(A) accepted the possibility of cash flows from milk sales but nonetheless sustained 75% addition. The Tribunal examined the cash book, periodical receipts and expenses, timing of inflows (notably second half October and first week November 2016), purchaser confirmations for livestock along with identity documents, and the AO's own finding that deposits were made into loan accounts as loan repayment. Ratio vs. Obiter: Ratio - where the assessee furnishes a coherent cash flow statement supported by contemporaneous records and purchaser confirmations, and where the AO's own findings indicate cash deposited were used for loan repayment, unexplained-money addition under section 69A cannot be sustained absent contrary material brought on record by Revenue. Obiter - observations regarding timing of receipts during demonetisation and general caution about inconsistencies in assessee's submissions. Conclusion: The Tribunal deleted the impugned addition under section 69A, accepting that the net cash inflow derived from the assessee's dairy business and confirmed livestock sales explained the deposits. The assessee's grounds regarding excess addition were allowed. Issue 2 - Effect of hypothecation on ability to dispose of livestock and accept sale proceeds as source Legal framework: Hypothecation creates a charge over movable property in favour of a creditor but does not necessarily confer an exclusive, identifiable property interest preventing the debtor from dealing with fungible or non-specifically identified items; repayment of loan extinguishes hypothecation. Precedent Treatment: Not expressly invoked; Tribunal relied on general principles distinguishing hypothecation of movable livestock from hypothecation of specifically identifiable immovable or motor vehicle assets. Interpretation and reasoning: The loan sanction letter described primary security as 'hypothecation of live stock i.e. Cow and Buffaloes purchased through bank finance and other materials,' without identification of specific animals. The Tribunal reasoned that such hypothecation, lacking specific identity of individual livestock, does not preclude the assessee from selling animals in the ordinary course; moreover, the AO himself recorded that deposits were in loan accounts and were used as loan repayment, and repayment renders hypothecation irrelevant. The Tribunal therefore rejected the AO/CIT(A) inference that sale of hypothecated livestock was necessarily a fabricated explanation. Ratio vs. Obiter: Ratio - hypothecation of non-specifically identified livestock does not ipso facto prevent sale by debtor nor negate receipts treated as legitimate source where loan has been repaid; such hypothecation is distinguishable from hypothecation/charge over specifically identifiable assets. Obiter - potential bank remedies on breach of hypothecation and whether bank would object where loan is repaid. Conclusion: Hypothecation in the circumstances did not invalidate the assessee's explanation; the Tribunal accepted the possibility and actuality of sale proceeds being applied to loan repayment and forming part of the cash deposits. Issue 3 - Sufficiency of purchaser confirmations and Revenue's duty to investigate creditworthiness Legal framework: Explanation offered by assessee must be credible and supported by evidence; Revenue, if disputing, must bring material demonstrating unreliability or conduct independent enquiries where necessary and possible. Precedent Treatment: No authorities cited; Tribunal applied evidentiary principles to record before it. Interpretation and reasoning: The assessee produced confirmations of livestock purchases with purchasers' Aadhaar and PAN details. Revenue merely questioned creditworthiness without conducting independent enquiries or producing material to impeach purchasers' identity or transactions. The Tribunal held that absent any positive material from Revenue to doubt purchaser identity or creditworthiness, mere suspicion or bald assertions are insufficient to displace the assessee's explanation. The Tribunal cross-referenced the AO's own finding that deposits were loan repayments to reinforce acceptance of the explanation. Ratio vs. Obiter: Ratio - where assessee produces purchaser confirmations and identifying particulars and Revenue fails to undertake available enquiries or to produce contrary material, Revenue cannot sustain an addition under section 69A merely by raising doubts about creditworthiness. Obiter - note that stronger documentary or corroborative evidence may be required in other factual matrices. Conclusion: The purchaser confirmations together with bank statements and cash flow statement constituted sufficient evidence; Revenue's failure to investigate or produce contrary material meant its objections were untenable and the addition was deleted. Cross-references and Interplay between Issues 1. The acceptance of cash flows from milk sales (Issue 1) was reinforced by purchaser confirmations and the absence of rebuttal by Revenue (Issue 3). 2. The legal character of hypothecation (Issue 2) was material to assessing the plausibility of livestock sale as source of funds; the AO's own recording of loan-account deposits and loan repayment bridged Issues 1 and 2 by showing the transactions' economic reality. Final Disposition Given the assessee's contemporaneous records, cash flow computation, purchaser confirmations with identity particulars, and the AO's finding that deposits were into loan accounts as loan repayment, and in the absence of any independent enquiry or contrary material by Revenue, the addition under section 69A was deleted and the appeal allowed.