2025 (12) TMI 731 - AT - Income Tax

Income on demonetization cash deposits estimated at 6% profit, taxed as business income not u/s115BBE

ITAT Rajkot-AT partly allowed assessee's appeal in respect of additions on cash deposits during demonetization and non-demonetization periods. The ... Estimation of income - cash deposits during the demonetization period and and non-demonetization period - recharge vouchers were sold by the assessee to his customers on account of mobile recharge done by him where the margin of profit is lower than 8% AND on sale of mobile phones, margin (profit) may be more than 8% HELD THAT:- This issue needs to be addressed by taking a holistic view. Therefore find some merit in the contention of assessee. Therefore, find that while the case of the assessee merits some relief, at the same time entire relief cannot be permitted to the assessee. Ends of justice would be met, if a net profit rate of 6% is adopted on the amount of cash deposited in the bank account, during demonetization period and nondemonetisation period, since the same would take care of the inconsistencies, in the various documents and evidences submitted before the lower authorities. Therefore, in order to plug the leakage of revenue, direct the assessing officer to make addition at the rate of 6%. Special rate u/s 115BBE or at the normal rate of income tax - As assessee has deposited amount in bank account out of his business activities, therefore, the assessing officer is directed to impose the tax by applying normal rate of income tax and not under section 115BBE. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether cash deposits during the demonetization period were to be treated as unexplained money under section 69A read with section 115BBE, or as part of regular business receipts. 1.2 Whether estimation of business income at 8% of total cash deposits (both demonetization and non-demonetization period) was justified on the facts and material on record. 1.3 How the returned income disclosed under section 44AD should be adjusted while computing income on estimated basis to avoid double taxation. 1.4 Whether tax on the additions arising from bank deposits representing business receipts was to be charged at the special rate under section 115BBE or at the normal rate of income tax. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of cash deposits during demonetization period - section 69A vs business receipts Interpretation and reasoning 2.1 The Assessing Officer treated cash deposits of Rs. 8,62,000/- made during the demonetization period as unexplained money under section 69A read with section 115BBE, on the premise that no explanation or details were furnished in assessment. 2.2 From the same bank account, the Assessing Officer found cash deposits of Rs. 1,91,01,420/- during the remaining period of the year and, on the basis of regular and frequent deposits followed by NEFT transfers to distributors (Agency House, Shree Navarang Telecom etc.), concluded that the assessee was carrying on business throughout the year. 2.3 The first appellate authority held that once the Assessing Officer had accepted that there was regular business activity throughout the year and applied a profit rate on cash deposits for the non-demonetization period, there was no rational basis to adopt a different treatment for cash deposits during demonetization. 2.4 The average daily cash deposits, if computed on the whole-year total of Rs. 1,99,63,420/- (Rs. 8,62,000/- + Rs. 1,91,01,420/-) and multiplied for 50 days of demonetization, gave a figure substantially higher than the actual deposits during that period, reinforcing that the demonetization-period deposits were in line with the business pattern. 2.5 The Tribunal accepted the factual finding that both demonetization and non-demonetization period cash deposits arose from business activities of the assessee and thus formed part of business receipts. Conclusions 2.6 Cash deposits of Rs. 8,62,000/- during the demonetization period are to be treated as arising from regular business activities and not as unexplained money under section 69A. 2.7 These deposits are to be brought to tax by estimating business income on the same footing as for deposits made during the non-demonetization period. Issue 2: Rate and basis of estimation of business income on cash deposits Legal framework (as discussed) 2.8 The assessee had filed a return declaring total income of Rs. 3,48,915/- under the presumptive scheme of section 44AD, on a declared turnover of Rs. 23,89,191/-, reflecting profit at 14.60% approximately. 2.9 The cash receipts as per assessee's own working aggregated to Rs. 2,12,94,274/-, substantially more than the declared turnover, raising questions under sections 44AD and 44AB regarding turnover, audit requirement and appropriateness of presumptive declaration. Interpretation and reasoning 2.10 The Assessing Officer, noticing continuous cash deposits of Rs. 1,91,01,420/- (excluding demonetization period) followed by transfers to telecom distributors, inferred that these were business receipts and estimated net business income at 8% of such deposits. 2.11 The first appellate authority upheld the 8% estimation on Rs. 1,91,01,420/- as reasonable in view of the scale of cash transactions and the assessee's inability to reconcile total cash receipts of Rs. 2,12,94,274/- with the much lower turnover of Rs. 23,89,191/- and commission income of Rs. 9,72,024/-, or to demonstrate how the latter figures were derived. 2.12 However, it was also recorded that the assessee's business consisted of two distinct streams: mobile recharge business (commission-based with relatively lower margins) and sale of mobile phones (where margins could be higher than 8%). 2.13 The Tribunal accepted the finding that the assessee's explanations and documents did not satisfactorily reconcile or bifurcate the full volume of cash deposits into turnover and direct income, nor justify the lower figures reported under section 44AD, especially in light of total cash receipts exceeding Rs. 2 crores and the implications of section 44AB. 2.14 At the same time, the Tribunal recognised that in the mobile recharge segment profit margins are generally lower than 8%, while on sale of handsets margins could exceed 8%. Since both activities were carried on together and the record did not allow precise segregation, a balanced, 'holistic' approach was considered necessary. 2.15 On this composite factual matrix, including the nature of business, the extent of unexplained reconciliation, and the need to avoid both over-estimation and revenue loss, the Tribunal found that applying an 8% net profit rate on the entire cash deposits was on the higher side. Conclusions 2.16 Business income is to be estimated at a net profit rate of 6% on the total cash deposits in the relevant bank account comprising both periods, i.e., on Rs. 1,91,01,420/- (non-demonetization) and Rs. 8,62,000/- (demonetization). 2.17 The 6% rate is to be uniformly applied on the aggregate cash deposits instead of 8% applied earlier by the Assessing Officer and partly upheld by the first appellate authority. Issue 3: Adjustment of income already returned under section 44AD and avoidance of double taxation Interpretation and reasoning 2.18 The assessee had already disclosed Rs. 3,48,915/- as business income in the original return under section 44AD. 2.19 The first appellate authority directed that this returned income must be reduced from the assessed income based on estimated net profit on cash deposits, noting that failure to do so would result in double taxation of the same income. 2.20 The Tribunal accepted and reiterated this direction, noting that once total income from the bank deposits is being recomputed on an estimated profit basis, the income already returned and taxed cannot again be subjected to tax over and above the estimated income. Conclusions 2.21 After computing business income at 6% of total cash deposits for the year, the Assessing Officer shall reduce the amount of Rs. 3,48,915/- already offered in the original return from the assessed total income. 2.22 This adjustment is mandatory to obviate double taxation of the same business income. Issue 4: Applicability of section 115BBE to additions arising from cash deposits representing business receipts Interpretation and reasoning 2.23 The Assessing Officer had invoked section 115BBE in respect of the addition made under section 69A for demonetization-period cash deposits, following the view that such deposits were unexplained money. 2.24 Upon recharacterisation of these deposits (as well as the other cash deposits) as business receipts and the entire addition being treated as business income computed on an estimated profit basis, the foundation for application of section 115BBE ceased to exist. 2.25 The Tribunal expressly held that since the deposits are out of business activities, the income therefrom must be taxed at the normal applicable rates and not at the special rate under section 115BBE. Conclusions 2.26 Additions arising from estimation of profit on cash deposits, being business income, are not to be taxed under section 115BBE. 2.27 The Assessing Officer is directed to levy tax on the assessed income at normal rates applicable to business income under the Act.