Cash Deposit Addition Restricted to 5% Net Profit, Not 8%, for Commission Business u/s 44AD

ITAT upheld the order of CIT(A) restricting the addition on cash deposits to net profit computed at 5% instead of 8% under section 44AD. The Tribunal accepted that the assessee was engaged in commission-based transactions, with normal commission ranging between 2% and 5%, and held that CIT(A) correctly considered the nature of business and bank transactions while applying a 5% net profit rate. Finding no perversity or legal infirmity in the CIT(A)'s approach, ITAT dismissed the Revenue's appeal and sustained the reduced addition.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether cash deposits in the assessee's bank account, initially taxed as unexplained money under section 69A, were rightly treated by the appellate authority as business turnover and income estimated thereon.

1.2 Whether, on the facts of a commission-based scrap trading activity and absence of books of account, the net profit/commission rate should be estimated at 5% or at 8% by applying section 44AD of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterisation of cash deposits - unexplained money under section 69A versus business turnover

Interpretation and reasoning

2.1 The Assessing Officer treated the total cash deposits of Rs. 99,73,439/- in the assessee's bank account as unexplained money under section 69A, in the absence of a return of income and compliance to notices.

2.2 The appellate authority examined the bank account and found regular cash deposits and withdrawals, cash payments and cheque transfers throughout the year, and noted that such deposits were not concentrated in the demonetisation period.

2.3 The assessee's explanation that he was engaged in purchase and sale of scrap, collecting cash from different buyers and depositing the same into the bank account, and earning commission on such transactions, was found to have some truth based on the nature and pattern of banking transactions.

2.4 While the assessee did not fully substantiate his claim with complete details, partial details and the consistency of account operations led the appellate authority to accept the deposits as representing business transactions.

Conclusions

2.5 The cash deposits in the relevant bank account are to be treated as turnover from the assessee's business activity rather than as unexplained money under section 69A, and income is to be estimated on such turnover.

Issue 2: Appropriate rate of income estimation on turnover - applicability of section 44AD and adoption of 5% commission/net profit

Legal framework (as discussed)

2.6 The Revenue contended that in the absence of books of account, the net profit should be estimated in line with section 44AD at 8% of the turnover, arguing that such presumptive rate should be taken as the benchmark.

2.7 The appellate authority, instead, estimated income at 5% of the cash deposits treated as turnover, considering the assessee's stated commission-based scrap business.

Interpretation and reasoning

2.8 The Tribunal noted that the only dispute raised by the Revenue was against the rate applied by the appellate authority, namely 5% instead of 8% as urged with reference to section 44AD.

2.9 It was not disputed before the Tribunal that the assessee was engaged in business activity. The assessee had contended that he carried out scrap transactions on a commission basis, generally earning commission between 2% to 5%, and claimed to have earned 2% in the relevant year.

2.10 The appellate authority, after considering the nature of the assessee's activity as commission-based dealings in scrap and examining the bank account, rejected the specific 2% claim but adopted a higher estimate of 5% of the deposits as income, treating the deposits as turnover.

2.11 The Tribunal found no inconsistency or infirmity in the appellate authority's approach, holding that the nature of the assessee's business as a commission agent justified estimating income at 5%, rather than mechanically applying 8% as per the Revenue's reliance on section 44AD.

Conclusions

2.12 In the facts of a commission-based scrap trading business, estimation of income at 5% of cash deposits treated as turnover is reasonable and proper.

2.13 Section 44AD and its presumptive rate of 8% do not mandate substitution of the 5% rate adopted by the appellate authority in this case.

2.14 No interference is warranted with the appellate authority's estimation; the Revenue's grounds seeking application of 8% under section 44AD are rejected, and the appeal is dismissed.

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