2023 (7) TMI 736 - AT - Income Tax

Revision u/s 263 - insufficient inquiry conducted by the AO on the issue of cash found deposited during the demonetization period - as per CIT AO in making disallowance @ 20% of cash deposits made in the bank accounts is erroneous in so far as it is prejudicial to the interests of revenue - HELD THAT - The assessee had clearly demonstrated that the entire cash deposited during demonetization could not be treated as unexplained; that its scale of business operations was huge and nature of business was such that 90% of its sales was done in cash, and even prior to demonetization, the assessee had made huge cash sales commensurate to the sale made during the demonetization period. All these explanation given by the assessee was rightly taken note of by the AO and finding anomaly to the extent of substantial increase in sales during the demonetization period, he considered it fit to treat 20% of the sales as unexplained credits. Pr.CIT s view that entire cash deposits during this period is to be treated as unexplained, is contrary to the facts on record, wherein the assessee has demonstrated the factum of huge turnover prior to and post demonetization in the preceding year, and even in the succeeding year, and also factum of majority of the sales being in cash. There was no occasion at all for the AO to treat the entire cash deposited during the demonetization period, as unexplained credits. The facts on record could not have led to the inference that entire sales made by the assessee during the demonetization period were bogus. In fact, the inference drawn by the AO, that only a portion of it could be treated as bogus/unexplained, was not incorrect. Therefore, we hold that the ld.Pr.CIT s finding of error is based on incorrect appreciation of the facts before it, and his finding that the assessee had not been able to substantiate its explanation for cash sales completely is also not correct. Thus we hold, could not have been inferred from the facts on record, and there is no error as such in the order of the AO in this regard. The order passed by the ld.Pr.CIT u/s 263 of the Act holding the assessment order erroneous so as to cause prejudice to the Revenue is therefore not sustainable in law - Decided in favour of assessee.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (Pr. CIT).
2. Determination of whether the assessment order passed under Section 143(3) by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the revenue.

Summary:

Issue 1: Invocation of Section 263 of the Income Tax Act by the Pr. CIT
The Pr. CIT invoked revisionary powers under Section 263 of the Income Tax Act, 1961, to revise the assessment order dated 30.03.2022 for the Assessment Year 2017-18. The Pr. CIT noted that the AO had made an addition of only 20% of the cash deposits amounting to Rs. 3,85,80,075 during the demonetization period, despite the assessee failing to substantiate the source of these deposits with evidence. The Pr. CIT argued that the AO should have added back the entire amount of cash deposited as unexplained cash credits under Section 68 of the Act.

Issue 2: Determination of whether the assessment order was erroneous and prejudicial to the interests of the revenue
The Pr. CIT found the AO's action of limiting the addition to 20% of the cash deposits as contrary to the express provisions of Section 68, which mandates that the entire sum credited should be charged to income tax if the explanation is unsatisfactory. Consequently, the Pr. CIT set aside the assessment order and directed the AO to frame a fresh assessment, considering all issues discussed.

Tribunal's Findings:
The Tribunal reviewed the assessment order and the submissions made by both parties. It found that the AO had conducted a thorough inquiry into the cash deposits during the demonetization period. The assessee had provided comparative figures of sales, demonstrating a significant turnover with a majority of sales in cash. The AO, while not completely satisfied with the explanation, had treated 20% of the cash deposits as unexplained credits due to an abnormal increase in turnover during the demonetization period.

The Tribunal held that the Pr. CIT's conclusion that the entire cash deposits should be treated as unexplained was incorrect. The AO had appropriately considered the nature of the assessee's business, which involved substantial cash sales, and had rightly limited the addition to 20% of the cash deposits. The Tribunal found no error in the AO's order that could justify the Pr. CIT's invocation of Section 263.

Conclusion:
The Tribunal set aside the order passed by the Pr. CIT under Section 263, holding that it was not sustainable in law. The appeal of the assessee was allowed, and the assessment order passed by the AO was upheld. The Tribunal pronounced the order on 09th June 2023 at Ahmedabad.