2016 (10) TMI 597 - AT - Income Tax

Addition on account of cash deposits in bank account - protective addition v/s substantive addition - Held that - Neither the Ld. AO nor the Ld. CIT(A) have taken care to ascertain the extent to which cash deposits in bank account, totaling ₹ 1,29,74,300/- was included in the sales turnover of the assessee, originally shown by assessee at ₹ 61,00,552/- and changed later to ₹ 2,07,56,738/-. Thus, to that extent, not only the amount is fully added on account of cash deposited in bank account ; but business profit @ 8% is also added to the income of the assessee. This has, therefore, resulted in double addition, which cannot be upheld. When an appellate authority converts a protective addition into substantive addition ; there must be good reasons for it. It cannot be done lightly without consideration of relevant facts and circumstances, without due application of mind, and without sound basis. Also protective addition cannot be converted into substantive addition in the hands of an assessee merely because substantive addition was not made in the hands of another assessee. What has to be seen is whether substantive additions in the hands of the assessee is just and reasonable in the overall facts and circumstances of the case. Further, double taxation of same amount is against basic tenets of taxation. Moreover, neither the Ld. AO nor Ld. CIT(A) have ,in their respective orders adequately dealt with or specifically rejected the facts (summarized in paragraph 3.2 of this order) claimed by the appellant in the proceedings before lower authorities. On cumulative consideration of the aforesaid facts and circumstances, we set aside the impugned order of Ld. CIT(A) and restore the case to the file of Ld. AO for denovo assessment. The Ld. AO in the proceedings for denovo assessment will be free to make any inquiries and investigations. Also, the assessee will be free to furnish any evidences and explanations.

Summary

Issues:
1. Addition of income based on estimation of gross receipts
2. Addition of cash deposits in bank account
3. Conversion of protective addition to substantive addition
4. Rejection of books of accounts under section 145(3) of the Income Tax Act

Analysis:

(A) Estimation of Income:
The appellant, a proprietor, filed a return of income declaring a total income of &8377; 1,26,207. The Assessing Officer (AO) noted gross receipts of &8377; 61,00,552 and made an addition of &8377; 12,59,446 based on an estimated profit of 8% on the gross receipts. The appellant contested the addition, arguing that the order was illegal and unjustified.

(B) Addition of Cash Deposits:
The AO observed a significant cash deposit of &8377; 1,29,74,300 in the appellant's bank account, which was explained as proceeds from the sale of furniture. The AO made a protective addition of this amount in the appellant's hands pending investigation. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this addition as a substantive addition, without considering the inquiries and investigations in the case of the alleged real beneficiary, Mr. Ramesh Sharma. The appellant contended that the addition was unjustified and resulted in double taxation.

(C) Conversion of Protective Addition:
The ITAT found that the conversion of the protective addition into a substantive addition lacked proper consideration of relevant facts and circumstances. The ITAT emphasized that double taxation of the same amount is against taxation principles and that the authorities did not adequately address the appellant's claims during the proceedings. Consequently, the ITAT set aside the CIT(A) order and remanded the case to the AO for a fresh assessment.

(D) Rejection of Books of Accounts:
The AO rejected the appellant's books of accounts under section 145(3) of the Income Tax Act, estimating the profit at 8% of the gross receipts. The CIT(A) agreed with this estimation, leading to the appeal before the ITAT. The ITAT partially allowed the appeal, emphasizing the need for a thorough reassessment by the AO.

In conclusion, the ITAT's judgment highlighted the importance of proper consideration of facts, avoidance of double taxation, and the need for a fair and comprehensive assessment process in income tax matters.