2014 (3) TMI 955 - AT - Income Tax

Unexplained income - Held that - Limit of gross receipts/turnover has been fixed under the provisions of section 44AD which in this case for assessment year 2006-07 was ₹ 40,00,000/-. Hence the income to be assessed on presumptive basis must be in consonance with the gross receipts of total turnover which according to the provisions of the section 44AD is taken at 8%. The conclusion is that though the assessee may claim that it has earned the income less than the 8% of the total turnover yet, if it does not maintain any books of account, still it is bound to offer the income at the rate of 8% of the total turnover/gross receipts. However, the assessee is precluded from claiming that it has in fact earned the income higher than 8% and it has been so declared by it also, but it is absolved any liability of paying the tax on the additional income but only on the income arrived at the rate of 8% of the total turnover. Though there is no necessity to maintain accounts in case of furnishing return under section 44AD yet, if the assessee has maintained any accounts and has furnished the same with the return of income, like the capital account of the partners in the case in hand, the AO can examine said accounts and if he finds that there is an introduction of unexplained cash in the capital accounts of the assessee, he would be justified to ask the assessee to explain the source of such credits and in the absence of any satisfactory explanation, the AO will be justified in adding such sum into the income of the assessee. - AO found unexplained cash introduced in the capital account of the partners. The said capital accounts were also filed with the return of income furnished under section 44AD. The ld. CIT(A) from the explanation offered in the case of Shri Ishwar Shivgan Patel was satisfied regarding the source of cash introduced into the capital account of the partners of the firm and hence he deleted the additions. However, the assessee firm since have failed to explain regarding the introduction of cash in the account of Shri Shivgan Jetha Patel, hence he rightly confirmed the addition on account of unexplained introduction of cash in that account. - Decided against assessee.

Summary

Issues:
1. Addition of unexplained cash to the income of the appellant firm under section 68 of the Income Tax Act.
2. Disallowance of interest on capital of a partner under section 69 of the Income Tax Act.

Analysis:
1. The appellant firm, engaged in construction business, filed its income return under section 44AD of the Income Tax Act, estimating income at 8% of total turnover. The Assessing Officer (AO) noted unexplained cash credits in the partners' capital accounts and treated it as unexplained income under section 68. The Commissioner of Income Tax (Appeals) deleted one cash credit but upheld the other, as the appellant failed to explain the source of the cash. The AO's decision was based on the lack of explanation and the partners' capital accounts filed with the return.

2. The appellant argued that since they filed under section 44AD, maintaining books of account was unnecessary, and any additions should be at the partners' level, not the firm's. The appellant cited relevant case law but the tribunal disagreed. It clarified that under section 44AD, income is presumed at 8% of turnover, even without maintaining accounts. However, unexplained cash can still be added to income if the source is unexplained, as in this case. The tribunal upheld the CIT(A)'s decision, emphasizing the need for satisfactory explanations for cash credits.

3. The tribunal highlighted that while section 44AD allows for presumptive income without account maintenance, unexplained cash must still be justified. The appellant's failure to explain the cash credit led to its addition to income. The tribunal rejected the argument that section 68 cannot apply under section 44AD, as unexplained cash falls under relevant sections like 69 and 69A. The tribunal upheld the CIT(A)'s decision based on unsatisfactory explanations for the cash credit.

In conclusion, the tribunal dismissed the appeal, affirming the CIT(A)'s decision to add the unexplained cash to the appellant firm's income. The judgment underscores the importance of providing satisfactory explanations for cash credits, even under presumptive income schemes like section 44AD, to avoid additions to taxable income.