Appeal partly succeeds on cash deposits under Sections 68, 115BBE and estimated indexed capital gains expenses

ITAT Delhi partly allowed the assessee's appeal for statistical purposes. On the addition under s.68 r/w s.115BBE for cash deposits during demonetization, the Tribunal found that although cash withdrawals were shown in the cash flow, it was unclear whether such cash was retained and used for the deposits. The orders of AO and CIT(A) were set aside and the issue remanded to AO to verify the source of Rs. 35.75 lakh after giving due opportunity. On capital gains, the Tribunal held some improvement cost was incurred but not fully evidenced, and estimated allowable construction and land-filling expenses at Rs. 55 lakh with indexation, directing AO to recompute capital gains accordingly.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether cash deposits aggregating to Rs. 46.75 lakhs made during the demonetisation period were liable to be treated as unexplained cash credits under section 68 read with section 115BBE.

(2) Whether the assessee was entitled to claim indexed cost of improvement towards land filling and boundary wall expenses in computing capital gains, and to what extent such claim stood substantiated.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Addition under section 68 in respect of cash deposits during demonetisation

(a) Legal framework (as discussed)

The addition was made under section 68 by treating cash deposits in the bank account as unexplained cash credits, with tax consequences under section 115BBE. The appellate authority examined the nexus between earlier cash withdrawals and subsequent cash deposits, with reference to judicial precedent holding that where cash withdrawals are followed by deposits after a substantial time gap, and no satisfactory linkage is established, such deposits may be treated as unexplained.

(b) Interpretation and reasoning

(i) The assessee had deposited Rs. 46.75 lakhs in cash in a Bank of Baroda account, of which Rs. 11 lakhs was withdrawn during 07.04.2016 to 09.06.2016 and re-deposited during the demonetisation period, and Rs. 35.75 lakhs was claimed to have been withdrawn over assessment years 2013-14 to 2016-17 and similarly re-deposited during demonetisation.

(ii) For Rs. 11 lakhs, the assessee produced the relevant bank statement evidencing withdrawals during 07.04.2016 to 09.06.2016 from the same account, and asserted that the cash was kept at home and re-deposited immediately after demonetisation announcement. The Tribunal noted that neither the Assessing Officer nor the first appellate authority had recorded any specific finding that this withdrawn cash had been spent or utilised elsewhere. On the available facts, the Tribunal held that there was no reason to disbelieve the assessee's explanation for this portion.

(iii) For the balance Rs. 35.75 lakhs, the assessee relied on multiple bank statements for earlier years (up to 31.03.2016) and cash flow statements to show withdrawals in assessment years 2013-14 to 2016-17. On scrutiny, the Tribunal found that, though withdrawals existed, it was not clear whether such cash could reasonably be regarded as retained in hand over such a long period and as representing the source of the demonetisation-period deposits. The evidentiary linkage between earlier withdrawals and later deposits remained uncertain.

(iv) In light of this lack of clarity, and given that the issue involved factual verification of the nature, timing and use of past withdrawals, the Tribunal considered it appropriate to remit the matter relating to Rs. 35.75 lakhs to the Assessing Officer for fresh examination, instead of either sustaining or deleting the entire addition at the appellate stage.

(c) Conclusions

(i) The cash deposit of Rs. 11 lakhs, withdrawn from the same bank account during 07.04.2016 to 09.06.2016 and re-deposited during demonetisation, could not be treated as unexplained under section 68 in the absence of any finding that it had been otherwise spent; the corresponding addition was deleted.

(ii) The addition relating to Rs. 35.75 lakhs was set aside and the matter remitted to the Assessing Officer to verify the genuineness of the claim of source from earlier years' withdrawals and to re-decide the issue after affording adequate opportunity to the assessee.

Issue (2): Disallowance of indexed cost of improvement (land filling and boundary wall) while computing capital gains

(a) Legal framework (as discussed)

The dispute concerned the admissibility and quantum of "cost of improvement" (land filling and boundary wall expenditure) to be indexed and deducted while computing capital gains. The Tribunal considered the evidentiary standard required to substantiate such claims, including the role of a valuer's report, confirmations from purchasers, and the absence of primary documentary proof such as bills, vouchers, or TDS records.

(b) Interpretation and reasoning

(i) The assessee had claimed indexed cost of acquisition/improvement aggregating to Rs. 1,53,43,003/-, including land filling and boundary wall expenses. During assessment, no supporting details were furnished, leading to full disallowance. On appeal, the assessee produced a valuation report from a valuer and asserted that boundary walls were constructed and land filling carried out on specified lands, with expenditure incurred in cash.

(ii) The first appellate authority noted that:

- Claim of land filling and boundary wall is a matter of fact and must be substantiated by valid supporting documents.

- The assessee produced only a valuer's report, without corroborative bills, vouchers, TDS records, or even names and details of contractors.

- All alleged expenses were claimed to be in cash, with no traceable trail.

On this basis, the appellate authority treated the claim as grossly unsubstantiated and confirmed disallowance of indexed cost of land filling and boundary wall of Rs. 1,09,54,020/-, while allowing cost of acquisition of Rs. 43,88,983/- supported by purchase deeds.

(iii) Before the Tribunal, the assessee produced a computation chart of year-wise expenditure on land filling and boundary wall in relation to identified parcels of land, along with confirmations from the purchasers stating that the lands were fenced and land-filled. The assessee relied again on the valuer's report.

(iv) The Tribunal accepted the Revenue's contention that a valuation report, by itself, is not sufficient proof of actual expenditure or of the timing of incurring such expenditure, and that primary evidence such as bills or vouchers had not been produced. At the same time, the Tribunal considered it unrealistic to hold that no expenditure at all had been incurred, given the existence of the valuer's report and purchaser confirmations indicating boundary wall and land filling.

(v) Taking an overall view of the material and the admitted lack of complete documentary substantiation, the Tribunal decided that a fair estimation of allowable cost of improvement was warranted. It held that the full claim of Rs. 1,09,54,020/- as improvement cost (over and above cost of acquisition already allowed) would be excessive on the existing record, but that it would be reasonable to allow approximately 50% of such claimed improvement expenditure.

(c) Conclusions

(i) The Tribunal held that the assessee had not fully substantiated the claimed land filling and boundary wall expenses by primary documentary evidence, and that the valuer's report alone was insufficient for allowing the claim in entirety.

(ii) However, considering the available corroborative indications (valuer's report and purchaser confirmations), the Tribunal concluded that some expenditure on improvement had indeed been incurred.

(iii) On an estimation basis, the Tribunal restricted the allowable improvement expenditure to Rs. 55 lakhs (being approx. 50% of Rs. 1,09,54,020/-), directed that indexation be granted on this amount, and ordered recomputation of capital gains accordingly.

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