2017 (5) TMI 1205 - AT - Income Tax

Unexplained cash deposits - Peak credit addition - Held that - The assessee states of earning commission, while at the same time claims to be having trade debtors qua the transport business. The word commission as used here is a misnomer, and signifies the difference between the rate/s at which the goods carriages are taken on hire and on which they are contracted out. That would imply that the assessee, at any given point of time, has outstanding dues of the transport business, i.e., against the transport work undertaken, and which he states as received, in part explanation of the cash deposits in his bank account. The amount realized would, presumably, also go to pay the trade creditors of the said business. This follows an acceptance of the assessee being in the transport business, which is established. Both the capital investment and the interest thereon, i.e., the total receipt, would stand to be brought to tax. This of-course is subject to applying a turnover ratio, which any business would entail. The Revenue has, in rejecting the plea, acted mechanically, without applying it s mind with reference to the obtaining facts and the merits of the assessee s statement. In fact, considering the turnover (total receipt) to be a part of the transport business instead (conduct of which is proven), would imply a lower profit rate and, besides, a lower amount being added on account of capital investment in-as-much as the said business would entail a higher capital turnover ratio, besides trade credits. There could be a scenario of the adjusted peak credit being below ₹ 8.50 lacs. This would not by itself warrant a reduction in the amount of addition on account of the capital employed in the two businesses. This is as, apart from the bank balance, which the peak credit in a bank account signifies, the assessee has admittedly other working capital assets in the form of trade debtors, and which have not been taken into account. This is as the investment in the trade has been estimated on the basis of a working capital (i.e. cash to cash) cycle, and which includes toward trade debts/credits as well. The assessee s argument with reference to peak credit in the account thus stands also addressed. The addition for ₹ 23.21 lacs is thus restricted to ₹ 8.50 lacs, or such other sum as may be computed on the basis of the assessee s bank accounts, as explained hereinbefore. Qua profit, only the TDS amount (Rs. 7,438/-) would stand to be further added. The assessee gets part relief. Needless to add, the assessee shall be allowed credit in respect of TDS on the IOC receipt. Assessee s argument with reference to s. 44-AD is not maintainable as the assessee is admittedly engaged in the transport business, excluded as an eligible business u/s. 44-AD.

Summary

Issues:
Assessment of unexplained cash deposits as income under sections 69/69A of the Income Tax Act, 1961; Rejection of assessee's explanation regarding transport and finance businesses; Calculation of reasonable estimate of income based on disclosed earnings; Applicability of section 44AD to the case.

Assessment of Unexplained Cash Deposits:
The case involved an appeal against the assessment order by the Commissioner of Income Tax (Appeals) dismissing the assessee's contestation of the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2010-11. The assessee, an individual, had cash deposits in his bank account totaling ?23.21 lakhs during the relevant year. The source of these deposits was claimed to be debtors from the transport and finance businesses. However, as the source was not satisfactorily explained, the entire cash amount was considered unexplained income under sections 69/69A of the Act. The appellate tribunal analyzed the explanation provided by the assessee regarding the nature of his businesses and the origin of the cash deposits.

Rejection of Assessee's Explanation:
The assessee claimed to be engaged in a transport business supported by a contract receipt from Indian Oil Corporation (IOC) and a finance business involving lending at interest rates ranging from 17% to 24% per annum. The Revenue rejected these explanations, considering the cash deposits as unexplained income. The tribunal, however, found merit in the assessee's contentions, highlighting that the profit percentage in the transport business was not disputed and the interest rates in the finance business were reasonable for the unorganized sector. The tribunal emphasized the need for a proper assessment of the disclosed income and the capital invested in both businesses to arrive at a reasonable estimate for taxation.

Calculation of Reasonable Estimate of Income:
The tribunal proceeded to calculate a reasonable estimate of income based on the disclosed earnings of the assessee. By applying average profit rates to the finance and transport businesses, the tribunal arrived at a total turnover figure that aligned with the cash deposits in the bank account. The tribunal emphasized the importance of considering turnover ratios and profit components in determining the taxable income. The judgment detailed a methodical approach to assessing the income derived from the two businesses, taking into account the capital invested and the turnover ratios.

Applicability of Section 44AD:
The tribunal addressed the applicability of section 44AD to the case, noting that the assessee's engagement in the transport business excluded eligibility for this provision. Furthermore, as the turnover of the businesses was unspecified, section 44AD could not be applied. The tribunal concluded that the addition to the assessee's income was primarily due to unexplained capital deployed in the businesses, calculated based on disclosed profit rates and trade turnover ratios. The judgment clarified the reasoning behind rejecting the applicability of section 44AD in the given circumstances.

In conclusion, the appellate tribunal partially allowed the assessee's appeal, providing relief by restricting the addition to the income and acknowledging the validity of the explanations regarding the transport and finance businesses. The judgment emphasized the importance of a thorough assessment based on disclosed earnings and capital investments to arrive at a fair and reasonable estimate of taxable income.