2025 (12) TMI 209 - AT - Income Tax

Time-barred Section 148 notice void; cash deposits taxed at 3% profit, penalties under 271(1)(c) and 271A deleted

The ITAT (Rajkot) held that for AY 2015-16, the notice issued u/s 148 after 31.03.2021 was time-barred and thus invalid, rendering the reassessment order ... Reopening of assessment u/s 147 - Period of limitation - HELD THAT:- we find merit in the submission of the Ld. Counsel for the assessee to the effect that for assessment year (A.Y.) 2015-16, the notice u/s. 148 of the Act was issued after 1st April, 2021, which is time barred and, therefore, assessment should be quashed on this score only, by relying on the judgment of Gordhanbhai Devjibhai Kapadia [2025 (8) TMI 1735 - GUJARAT HIGH COURT] Therefore, we hold that impugned notice issued by the assessing officer, u/s 148 of the Act for A.Y. 2015-16, after 31st March, 2021, is invalid. Since the notice u/s 148 of the Act was issued on 21st April 2021, which is time barred and invalid and hence, the assessment order passed by the assessing officer under section 147 r.w.s. 144B of the Act dated 27.05.2023, should be quashed and accordingly, we quash the same, being void, ab-initio. Addition u/s 69A - We find that there is no method to derive the profit percentage in this type of business, in which the assessee is engaged, and it varies from 0.5% to 5% as per brass part products and we note that assessee has not maintained records in relation to purchase of raw materials. We note that assessee is engaged in just providing materials as per requirement of customer and there is no such roll in production and it can considered that assessee had acted as an agent of their customers and as an agent in brass parts, it is hard to earn commission @ 2% on sale, as the prices of products are open in the market. The assessee submitted before the lower authorities a chart for average rate of net profit for the industries engaged in the similar nature of business to the extent available with the assessee, and after considering average rate of net profit declared by the similar industries in same line of business. We note that assessee has raised factual objections before the lower authorities, that credit entries in the bank account, represents, sale proceeds in respect of his business, which were received from purchasers, and deposited at various stations/cities and all such amounts were withdrawn at Jamnagar for making payment of purchases. The assessee also submitted the relevant documents and evidences to demonstrate that these facts were correct. The assessee also argued before the CIT(A) that in similar cases, CIT(A) himself estimated profit at the rate of 5% and Hon'ble ITAT has estimated income at the rate of 2% to 5% of all such bank credits. The learned CIT(A) accepted the above submissions of the assessee and therefore sustained the estimated addition at the rate of 5% in some years and at the rate of 10% of cash deposit/ credit in the bank account, in some other years. AO had not specifically identified any specific defects in the purported evidences and also taking note of the fact that the assessing officer, has not held that these evidence filed by the assessee are bogus. Therefore, we find some merit in the contention of the Id. Counsel for the assessee. Therefore, we find that while the case of the assessee merits some relief, at the same time entire relief cannot be permitted to the assessee. In our view the ends of justice would be met, if a net profit rate of 3% is adopted on the amount of cash deposited in the bank accounts, since the same would take care of the inconsistencies, in the various documents and evidences submitted before the lower authorities. Therefore, we direct the AO to adopt net profit rate of 3% of cash deposited/credits in bank accounts and should be taxable under the normal rate of Income-tax. It is also made clear that instant adjudication shall not be treated as a precedent in any preceding or succeeding assessment year. Penalty on estimated addition u/s 271 (1) (c) of the Act should not be levied. Penalty u/s. 271A on account of non-maintenance of books of accounts - Assessee falls in the category of a small pax-payer, who is not maintaining books of accounts, as he filed the return of income, under presumptive income scheme, under section 44AD of the Act, therefore, penalty should not be imposed on the assessee. We note that an eligible assessee opting for presumptive taxation under Section 44AD is not required to maintain books of accounts as prescribed under Section 44AA of the Act. When an assessee chooses to declare income under Section 44AD, income is computed at 8% (or 6% for digital receipts) of turnover, regardless of actual profits. Because the income is presumed, the law exempts the assessee from the obligation to maintain books of accounts under Section 44AA(2) of the Act. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the notice issued under section 148 for assessment year 2015-16 on 21.04.2021 was barred by limitation and invalid in view of the amended reassessment regime, section 149, and the operation of TOLA, as interpreted by the Jurisdictional High Court and the Supreme Court. (2) Whether, upon the notice under section 148 for assessment year 2015-16 being held invalid, the consequential reassessment order under section 147 read with section 144B and the quantum additions made therein could survive. (3) Whether penalties imposed for assessment year 2015-16 under sections 271(1)(c), 271A and 271F could be sustained when the underlying reassessment order itself was quashed as void ab initio. (4) For assessment years 2013-14, 2014-15 and 2016-17, whether the cash deposits/credits in the assessee's bank accounts could be taxed substantially as unexplained money under section 69A, or only the profit element was taxable by estimating net profit on such deposits treated as business turnover. (5) For assessment years 2013-14, 2014-15 and 2016-17, what rate of net profit should be reasonably applied on the bank deposits (treated as business turnover) of a brass trading commission agent in the absence of regular books, and whether such income is taxable at normal rates or under section 115BBE. (6) For assessment years 2013-14 and 2014-15, whether penalty under section 271(1)(c) was leviable where the additions were made only on estimated net profit rates on turnover/deposits. (7) For assessment year 2013-14, whether penalty under section 271A for failure to maintain books of account was exigible when the assessee was a small taxpayer eligible to file under the presumptive scheme of section 44AD and thus not statutorily obliged to maintain books under section 44AA. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Validity and limitation of notice under section 148 for A.Y. 2015-16 issued on 21.04.2021 Legal framework discussed (a) The Tribunal considered the limitation for issuance of notice under section 148 for assessment year 2015-16 in light of the amended reassessment scheme operative from 01.04.2021, section 149, and the relaxation provisions under TOLA. (b) The Tribunal relied on the decision of the Jurisdictional High Court in Gordhanbhai Devjibhai Kapadia v. ITO, which in turn referred to and applied the ratio and concessions recorded by the Supreme Court in Union of India v. Rajeev Bansal, Deepak Steel and Power Ltd. v. CBDT, and other allied decisions. Interpretation and reasoning (c) The Tribunal noted that the impugned notice under section 148 was issued on 21.04.2021 for assessment year 2015-16. (d) It recorded that, as per the Jurisdictional High Court in Gordhanbhai Devjibhai Kapadia, for assessment year 2015-16 the time limit for issuing reassessment notice under the amended section 149 stood exhausted, and notices issued during the extended period under TOLA (01.04.2021 to 30.06.2021) were invalid. (e) The Tribunal reproduced and relied upon the reasoning of the High Court that, in view of the Supreme Court's decision in Rajeev Bansal and the concession of the Revenue recorded therein, all notices for assessment year 2015-16 issued on or after 01.04.2021 were required to be dropped as they could not be completed within the prescribed period under TOLA. (f) The Tribunal rejected the Revenue's contention that the assessee's participation in assessment proceedings should preclude the assessee from raising this legal objection, holding that the question of limitation and validity of jurisdictional notice is a pure legal issue and controlling precedent of the Jurisdictional High Court has to be followed. Conclusions (g) The Tribunal held that the notice under section 148 dated 21.04.2021 for assessment year 2015-16 was issued beyond the permissible period and was therefore time barred and invalid. (h) It held the notice under section 148 for assessment year 2015-16 to be void and without jurisdiction in view of the binding jurisdictional precedent. Issue (2): Consequence of invalid notice on reassessment order and quantum additions for A.Y. 2015-16 Interpretation and reasoning (a) Having found the section 148 notice for assessment year 2015-16 invalid, the Tribunal considered the effect on the reassessment order passed under section 147 read with section 144B on 27.05.2023 and on the additions made under section 69A and the taxability under section 115BBE. (b) The Tribunal applied the principle that where the foundational jurisdictional notice is void, all consequential proceedings and orders based upon it are vitiated. Conclusions (c) The Tribunal quashed the reassessment order dated 27.05.2023 passed under section 147 read with section 144B for assessment year 2015-16 as void ab initio. (d) In consequence, all issues on the merits of additions for assessment year 2015-16, including characterization of deposits as unexplained money under section 69A and applicability of section 115BBE, were held to be academic and infructuous and were not adjudicated. Issue (3): Sustainability of penalties under sections 271(1)(c), 271A and 271F for A.Y. 2015-16 when reassessment is quashed Interpretation and reasoning (a) The Tribunal observed that all the penalties for assessment year 2015-16 had been imposed with reference to the reassessment order which stood quashed as void ab initio. (b) It invoked the legal maxim 'sublato fundamento cadit opus' to hold that once the very foundation (reassessment order) is removed, the entire superstructure of consequential penalty proceedings falls. (c) It held that where the assessment itself is non est in law, penalties founded upon such assessment cannot survive. Conclusions (d) The Tribunal quashed and deleted the penalties imposed for assessment year 2015-16 under: (i) section 271(1)(c); (ii) section 271A; and (iii) section 271F, holding them to be void as consequential to an invalid reassessment. Issue (4): Characterization of cash deposits/credits in bank accounts for A.Ys. 2013-14, 2014-15, 2016-17 - unexplained money u/s 69A vs. business turnover with only profit taxable Legal framework (as discussed) (a) The Tribunal considered section 69A (unexplained money) and the principle that mere bank deposits, when explained as business receipts with supporting evidences, cannot automatically be treated as unexplained income on a standalone basis if corresponding withdrawals and trading pattern support a business explanation. Interpretation and reasoning (b) For assessment years 2013-14, 2014-15 and 2016-17, the assessee had substantial cash deposits/credits in three ICICI Bank accounts across various locations in India, with withdrawals at Jamnagar claimed to be for purchase of brass items. (c) The assessee stated that he was engaged in trading in brass items on commission basis, that customers deposited sale proceeds directly into the bank accounts from different cities, and that the assessee immediately withdrew cash to purchase brass items. (d) During the assessment and appellate proceedings, the assessee furnished bank statements, sample sale invoices, details of customers and deposit entries, and other materials to authenticate the existence of business and to show that deposits represented sale proceeds or business turnover. (e) The Tribunal noted that neither the Assessing Officer nor the Commissioner (Appeals) disputed the existence of the brass trading business or the assessee's role as a commission agent, nor did they hold the evidences produced to be bogus. (f) The Tribunal observed that there were regular and substantial withdrawals corresponding to deposits, leaving negligible balances, consistent with a trading pattern and not with unexplained cash accumulation. (g) The Tribunal referred to a prior decision of the same Bench (as cited before it and confirmed by the High Court and Supreme Court) where, in comparable circumstances of deposits and withdrawals in bank accounts linked to trading activities, it was held that deposits cannot be treated as income on a standalone basis without considering withdrawals, and that only the profit element should be taxed. (h) The Tribunal held that gross credits in business bank accounts cannot be treated in toto as income when the business explanation and supporting evidences are broadly accepted and not disproved. (i) It therefore rejected the approach of treating a large portion of deposits as unexplained money under section 69A and held that deposits should be considered as representing turnover/business receipts, on which a reasonable net profit has to be estimated. Conclusions (j) The Tribunal concluded that, for assessment years 2013-14, 2014-15 and 2016-17, the cash deposits/credits in the assessee's bank accounts are to be treated as business turnover of a brass trading commission agent, and not as unexplained money under section 69A to the extent determined by the lower authorities. (k) Only the profit element on such turnover is to be brought to tax on an estimated net profit basis; the deposits themselves are not the assessee's income in full. Issue (5): Reasonable net profit rate on bank deposits/turnover and head/rate of tax for A.Ys. 2013-14, 2014-15, 2016-17 Interpretation and reasoning (a) The assessee voluntarily declared income at 2% of the total credits/deposits for each relevant year, claiming that in similar brass commission/trading cases, 2%-5% had been accepted by appellate authorities as a reasonable net profit rate. (b) The Assessing Officer, citing absence of regular books and full documentary support, rejected the assessee's 2% rate and, for A.Y. 2016-17, treated 25% of deposits as unexplained money under section 69A; the Commissioner (Appeals), while accepting that most deposits were business receipts, estimated 10% of deposits as unexplained money and thus upheld additions of 10% of deposits (and 5% in some earlier years) to safeguard the interests of Revenue. (c) The Tribunal accepted that there is no fixed or standard profit margin in this line of brass trading/commission business; profits can vary between 0.5% and 5% depending on products and business model. (d) It took note that the assessee was effectively acting as an agent/commission agent, that prices were competitive and open in the market, and that it would be difficult for such an agent to earn a very high margin, especially when comparable data indicated lower margins. (e) The Tribunal observed that the assessee had produced a chart of average net profit rates of comparable entities in similar business; these indicated that margins in the range of 2%-5% were typical, and that in other similar cases the Tribunal had accepted net profit rates between 2% and 5% on bank credits treated as turnover. (f) At the same time, the Tribunal also considered that the assessee had not maintained regular books and there were certain inconsistencies and incomplete documentation, warranting some upward adjustment over the 2% claimed. (g) Balancing these factors, and to account for possible deficiencies in record keeping while not unduly inflating income, the Tribunal held that adoption of a 3% net profit rate on total cash deposits/credits in the bank accounts would meet the ends of justice. (h) It directed that such net profit so computed should be treated as business income taxable at the normal rates applicable under the Act, instead of invoking section 69A read with section 115BBE on the gross credits or on a higher deemed portion. (i) It further clarified that this estimation at 3% is made on the peculiar facts of this case and is not to be treated as a binding precedent for other years. Conclusions (j) For assessment years 2013-14, 2014-15 and 2016-17, the Tribunal directed the Assessing Officer to compute income by applying a net profit rate of 3% on the total cash deposits/credits in the assessee's bank accounts, treating the same as turnover. (k) The additions sustained by the Commissioner (Appeals) at 5% or 10% of deposits, or by the Assessing Officer at 25% of deposits under section 69A, were reduced and replaced by this 3% net profit estimation. (l) The resultant income is to be assessed as business income chargeable at normal rates of tax, and not under section 69A/section 115BBE. Issue (6): Levy of penalty under section 271(1)(c) on estimated additions for A.Ys. 2013-14 and 2014-15 Legal framework (as discussed) (a) The Tribunal considered section 271(1)(c) relating to penalty for concealment of income or furnishing inaccurate particulars of income, and examined whether such penalty can be sustained where the underlying additions are purely based on estimation of profit rate. (b) It relied on the decision of a Co-ordinate Bench in Gipilon Texturising Pvt. Ltd., wherein it was held, following jurisdictional High Court decisions (including Manish Dhirajlal Mehta and Vijay Proteins Ltd.), that no penalty under section 271(1)(c) is leviable on purely estimated additions. Interpretation and reasoning (c) The Tribunal observed that, in the present case, the Assessing Officer had made additions by estimating income based on turnover/bank deposits and that, on appeal, the Commissioner (Appeals) further altered the rate of estimation (5% or 10%), which itself showed the inherently estimative nature of the additions. (d) It noted that there was no categorical finding by the Revenue authorities of any specific concealment of particular items of income or of deliberate furnishing of inaccurate particulars; the dispute essentially related to what net profit percentage should be reasonably applied. (e) Applying the binding principle that penalty is not justified where additions rest solely on estimation and where there is no concrete evidence of concealment beyond such estimation, the Tribunal held that the preconditions for invoking section 271(1)(c) were not satisfied. Conclusions (f) The Tribunal held that penalties under section 271(1)(c) for assessment years 2013-14 and 2014-15, levied on the basis of estimated additions, were not sustainable. (g) It deleted the penalties under section 271(1)(c) for these years in full. Issue (7): Penalty under section 271A for non-maintenance of books where assessee is under presumptive scheme of section 44AD (A.Y. 2013-14) Legal framework (as discussed) (a) The Tribunal considered section 271A (penalty for failure to keep, maintain or retain books of account as required under section 44AA) and section 44AD (presumptive taxation scheme for eligible small taxpayers). (b) It noted that, under section 44AD read with section 44AA(2), an eligible assessee opting for presumptive taxation is not required to maintain books of account as otherwise prescribed under section 44AA. Interpretation and reasoning (c) The Tribunal recorded that the assessee fell in the category of small taxpayers who returned income on a presumptive basis, and that the assessee's stand was that he was filing under section 44AD and therefore not obliged to maintain books. (d) The Revenue's case was that, because the bank credits were treated as turnover, the assessee ought to have maintained books and thus was liable for penalty under section 271A. (e) The Tribunal held that, where an assessee is eligible for and opts to declare income under the presumptive provisions of section 44AD, the statute itself exempts such assessee from the requirement of maintaining books of account under section 44AA. (f) It emphasized that income under section 44AD is computed on a presumptive basis (at prescribed percentages of turnover), irrespective of actual profits, and in such a regime the legislative intent is to relieve small taxpayers from the compliance burden of maintaining formal books; therefore, failure to maintain books cannot be penalised under section 271A in such circumstances. Conclusions (g) The Tribunal held that, the assessee being an eligible small taxpayer under the presumptive scheme of section 44AD and not statutorily required to maintain books of account under section 44AA, no penalty under section 271A could be imposed for non-maintenance of books. (h) It deleted the penalty under section 271A for assessment year 2013-14.