ITAT holds only 8.3% profit taxable on mango trader's cash and non-cash deposits u/ss 44AD, 69A

ITAT partly allowed the assessee's appeal. The assessee, a mango trader regularly declaring income u/s 44AD at around 8-8.3%, was subjected by AO to an addition of 10% on total non-cash deposits and separate addition of entire cash deposits u/s 69A. ITAT held that AO brought no evidence to justify enhancement of profit rate to 10% and directed application of 8.3% on non-cash deposits, restricting the addition to Rs. 8,78,625/-. For cash deposits, ITAT held that only the embedded profit is taxable since trading activity is accepted, and directed AO to tax profit at 8.3% on such deposits.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether cash deposits of a specified sum during the relevant previous year could be treated as unexplained money under section 69A, or were to be regarded as business receipts of an admitted trading business, so that only the profit element thereon was taxable.

1.2 Whether non-cash deposits in the bank account were correctly subjected to presumptive profit at the rate of 10% under section 44AD, or whether the profit rate was required to be aligned with the assessee's past accepted profit rate of about 8-8.3% under section 44AD.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Character and taxability of cash deposits; section 69A vs. presumptive business income

Legal framework (as discussed)

2.1 The assessment was framed under section 144 on the basis of bank deposits, treating cash deposits as unexplained money under section 69A and non-cash deposits as business receipts with presumptive profit under section 44AD.

Interpretation and reasoning

2.2 The Tribunal noted that the assessee was an established Mango Trader, a fact accepted by the Assessing Officer and corroborated by the returns filed for earlier assessment years where income had been declared under section 44AD.

2.3 The turnover and presumptive profits disclosed under section 44AD for the earlier years showed a consistent net profit of around 8%-8.35%. This past pattern was accepted by the Revenue.

2.4 The bank statement revealed substantial cash withdrawals prior to the demonetization period, amounting to more than the cash deposits in issue. The assessee explained that the cash deposits during demonetization were sourced from earlier cash withdrawals from the same bank account.

2.5 The Assessing Officer, while applying section 44AD to non-cash deposits, brought the entire cash deposits to tax under section 69A without bringing any evidence on record to show that such cash deposits were unconnected with the assessee's regular business or represented unexplained money.

2.6 The Tribunal held that, in the circumstances where the assessee's status as a trader was accepted, and section 44AD had been applied by the Assessing Officer to other bank deposits, it was "obvious" that the cash deposits in the same bank account were also from the same business.

2.7 Consequently, the entire cash deposits could not be treated as unexplained money under section 69A; only the profit element on such business receipts could be brought to tax.

Conclusions

2.8 The cash deposits were held to be business receipts of the established trading business and not unexplained money under section 69A.

2.9 Only presumptive profit at 8.3% (aligned with past accepted profit rate) on the cash deposits of the specified amount was directed to be taxed, and the balance addition was deleted.

Issue 2 - Appropriate presumptive profit rate on bank deposits treated as business turnover under section 44AD

Legal framework (as discussed)

2.10 The Tribunal considered the application of section 44AD to bank deposits, noting that the assessee had in prior years declared income under section 44AD at a profit rate of around 8%-8.35% on declared turnover, and such declarations had been accepted.

Interpretation and reasoning

2.11 The Assessing Officer treated non-cash deposits in the assessee's bank account as business receipts and applied a flat 10% profit rate thereon under section 44AD, without any supporting material to justify a higher rate than that consistently shown and accepted in earlier years.

2.12 The Tribunal examined the turnover and profit figures of earlier years and found the assessee's net profit rate to be consistently around 8% to 8.35% on turnover declared under section 44AD.

2.13 In the absence of any evidence or specific reason brought on record by the Assessing Officer to warrant an increase from approximately 8% to 10%, the Tribunal held that adoption of 10% was arbitrary and not supported by the assessee's business history.

2.14 For consistency and in view of the accepted past pattern, the Tribunal considered it appropriate to adopt 8.3% as the reasonable presumptive profit rate for both non-cash and cash deposits treated as business receipts.

Conclusions

2.15 The profit rate of 10% applied by the Assessing Officer on non-cash deposits was held to be unjustified.

2.16 The Assessing Officer was directed to recompute the income by applying a profit rate of 8.3% on the non-cash deposits treated as business turnover, thereby restricting the related addition from the amount originally computed at 10% to the lower figure computed at 8.3%.

2.17 The same 8.3% profit rate was directed to be applied to the cash deposits considered as business receipts, with only such profit element taxable.

2.18 On this basis, the additions were partly sustained to the extent of profit at 8.3% on both cash and non-cash deposits, and the appeal was partly allowed.

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