2011 (5) TMI 1007 - AT - Income Tax

Unexplained Cash Credits u/s 68 - Principle of Natural Justice - AO s decision regarding income from undisclosed sources was based on third party evidence whose cross examination was not done - CIT(A) quashed the assessment on the ground of principles of natural justice HELD THAT - It is observed that undeniably the witness the complainant was not allowed to be crossexamined by the assessee though the assessee had requested specifically for such cross-examination being allowed to him. In fact such request has been noted even in the assessment order. Thus the addition having been based on third party evidence at the back of the assessee the same was correctly quashed by the CIT(A). Coming to the merits undisputedly the addition was based only on some entries in the bank account of the assessee. The provisions of sec 68 are therefore not attracted where the assessee does not maintain books of account. It is correct that since no books of account are maintained in the ordinary course of the business of the assessee in the absence of any corroborative evidence to support action u/s 68 no such addition is tenable.

Summary

Issues:
Appeal against assessment year 2000-01 - Quashing of assessment on grounds of natural justice - Deletion of addition of Rs. 913,000 - Failure to furnish evidence of unexplained cash credits - Failure to establish identity, capacity, and genuineness of creditors.

Analysis:
1. The appeal pertains to the assessment year 2000-01 where the department challenged the CIT(A)'s decision to quash the assessment based on principles of natural justice and delete the addition of Rs. 913,000. The AO reopened the assessment due to deposits amounting to Rs. 913,000 in the assessee's bank account, suspected to be undisclosed income. The assessee failed to provide satisfactory evidence despite multiple opportunities granted.

2. The CIT(A) deleted the addition, prompting the department's grievance. The department argued that the CIT(A) erred in quashing the assessment and deleting the addition as the assessee did not substantiate the unexplained cash credits. The AO determined the total income at Rs. 961,500, treating Rs. 913,000 as income from undisclosed sources due to lack of evidence on identity and capacity of creditors.

3. The CIT(A) justified the decision by emphasizing the importance of natural justice principles. The AO's reliance on third-party evidence without allowing cross-examination of the complainant vitiated the proceedings under section 148. The witness's non-examination despite the assessee's request led to the correct quashing of the addition.

4. On the merit of the case, the addition was solely based on bank account entries as the assessee did not maintain proper books of account. The CIT(A) correctly cited precedents to support the argument that without maintained books, section 68 of the Act is inapplicable. The assessee provided detailed explanations and documents regarding the deposits, establishing the identity and genuineness of the creditors.

5. The assessee's submissions and supporting documents during the enquiry further strengthened the case against the addition. The department's contentions lacked merit in light of the detailed explanations and evidence provided by the assessee. The appeal was dismissed, upholding the CIT(A)'s decision to delete the addition and quash the assessment based on natural justice principles.

6. In conclusion, the department's appeal was dismissed, and the order was pronounced on 13.05.2011. The detailed analysis highlighted the importance of natural justice, the necessity of proper evidence in tax assessments, and the significance of maintaining books of account for tax compliance.