2025 (1) TMI 1494 - AT - Income Tax

Unexplained money u/s 69A - cash deposits during the demonetization period - HELD THAT - AO had applied the net profit rate of 8% for the rest of the year and only the cash deposited during the demonetization period was treated as unexplained which is not correct. Merely because the money was deposited during the demonetization period the same in the absence of any evidence to the contrary cannot be treated as unexplained deposit; more so when the deposits during the rest of the financial year are being treated as the business income of the assessee. Assessee had stated that the business was based on 100% cash transactions and total transactions in the bank account were due to business transactions therefore on the principle of consistency and without giving reasons why the specific amount was held to be not pertaining to the business once the deposits for the rest of the year were being treated as part of the business income the deposit during the demonetization period could not be excluded and added u/s 69A of the Act merely because they pertained to the demonetization period. Assessee filed the written submission claiming that his entire business was in cash - Instead of adding a sum u/s 69A and the addition on account of business income AO is directed to apply the net profit rate of 8% on the entire bank deposits. Appeal filed by the assessee is partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this appeal were:

1. Whether the addition of Rs. 711,000 as unexplained money under Section 69A of the Income Tax Act, 1961, was justified, given that the cash deposits during the demonetization period were not considered explained.

2. Whether the order passed by the Commissioner of Income Tax (Appeals) was legally valid, particularly in terms of adherence to the principles of natural justice and the clarity of the decision-making process.

3. Whether the application of an 8% net profit rate on the cash deposits for the rest of the financial year should also apply to the deposits made during the demonetization period.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 711,000 as Unexplained Money

Relevant Legal Framework and Precedents: The relevant provision is Section 69A of the Income Tax Act, which deals with unexplained money. If an assessee is found to be in possession of money that is not recorded in the books of account and for which no satisfactory explanation is provided, such money can be deemed to be the income of the assessee.

Court's Interpretation and Reasoning: The Tribunal noted that merely because the money was deposited during the demonetization period, it could not be treated as unexplained in the absence of contrary evidence. The Tribunal emphasized the principle of consistency, highlighting that if the deposits for the rest of the year were treated as business income, the same treatment should apply to the demonetization period deposits.

Key Evidence and Findings: The assessee claimed that his business was entirely cash-based, and all bank transactions were business-related. The Tribunal found no specific reasons provided by the Assessing Officer (AO) or the CIT(A) for treating the demonetization period deposits differently.

Application of Law to Facts: The Tribunal applied the principle of consistency, finding that the deposits during the demonetization period should not be excluded from the business income calculation. The AO was directed to apply the 8% net profit rate to the entire bank deposits.

Treatment of Competing Arguments: The Tribunal considered the Department's stance but found no objection from the Department's Representative to applying the 8% net profit rate uniformly.

Conclusions: The Tribunal concluded that the addition of Rs. 711,000 under Section 69A was not justified, and the amount should be treated as part of the business income.

Issue 2: Validity of the CIT(A)'s Order

Relevant Legal Framework and Precedents: The principles of natural justice require that parties be given a fair opportunity to present their case. A cryptic order lacking detailed reasoning may violate these principles.

Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A)'s order was cryptic and lacked detailed reasoning. The order did not adequately address the assessee's claims or provide sufficient justification for upholding the AO's decision.

Key Evidence and Findings: The Tribunal found that the CIT(A) did not provide a clear rationale for distinguishing the demonetization period deposits from other business transactions.

Application of Law to Facts: The Tribunal determined that the CIT(A)'s failure to provide a detailed explanation constituted a breach of the principles of natural justice.

Treatment of Competing Arguments: The Tribunal acknowledged the assessee's claim of not being heard adequately and found merit in this argument.

Conclusions: The Tribunal found the CIT(A)'s order to be lacking in clarity and adherence to natural justice principles, warranting a partial allowance of the appeal.

Issue 3: Application of 8% Net Profit Rate

Relevant Legal Framework and Precedents: Section 44AD of the Income Tax Act allows for presumptive taxation at a specified rate for small businesses.

Court's Interpretation and Reasoning: The Tribunal reasoned that the 8% net profit rate should be applied consistently across all deposits, including those during the demonetization period.

Key Evidence and Findings: The Tribunal found that the business was cash-based, and the entire bank deposit was part of the business turnover.

Application of Law to Facts: The Tribunal directed the AO to apply the 8% net profit rate to the entire bank deposits, resulting in a revised total income assessment.

Treatment of Competing Arguments: The Tribunal noted the Department's lack of objection to applying the 8% rate uniformly.

Conclusions: The Tribunal concluded that the AO should apply the 8% net profit rate to the entire deposits, reducing the addition under Section 69A and revising the total assessed income.

SIGNIFICANT HOLDINGS

The Tribunal held that the addition of Rs. 711,000 as unexplained money under Section 69A was not justified and directed the AO to apply the 8% net profit rate to the entire bank deposits. The Tribunal emphasized the importance of consistency in treating similar transactions and highlighted the need for detailed reasoning in appellate orders to adhere to the principles of natural justice.

Core Principles Established:

- The principle of consistency must be applied in assessing similar transactions.

- Orders must provide clear reasoning to comply with natural justice principles.

Final Determinations on Each Issue:

- The addition under Section 69A was unjustified and reduced.

- The 8% net profit rate was to be applied to the entire bank deposits.

- The appeal was partly allowed, providing relief to the assessee.