2025 (4) TMI 1024 - AT - Income Tax

Unexplained cash deposits u/s 69 - stand of the assessee that he is an agriculturist and he did not have any taxable income except exempt agriculture income and therefore he was not required to file his income tax return - Regarding cash deposit it is submitted that assessee had cash withdrawal and the payment was deposited against cash withdrawal. It is also submitted that assessee s wife and his father had received huge amount compensation on acquisition of their agricultural land which was exempt from income-tax out of which assessee s wife had kept few cash with him and assessee s father had given cash which was deposited by the assessee in his bank account from time to time and support the assessee has filed copies of bank account of self wife and his father HELD THAT - No material to the contrary has been brought on record by the authorities below. Therefore considering the totality of facts of the present case assessee has successfully proved the source of cash deposit in his bank account. Accordingly assessment order passed u/s 144/147 of the Act is quashed. Grounds of appeal are allowed.

Summary

The core legal issues considered in this appeal pertain to the validity and correctness of the assessment order passed under the Income Tax Act, 1961, specifically regarding the addition of unexplained cash deposits in the assessee's bank account. The principal issues are:

1. Whether the assessment order passed under section 144/147 of the Income Tax Act without proper service of notice under section 148 is valid and sustainable.

2. Whether the addition of Rs. 30,66,000/- as unexplained cash deposits in the assessee's bank account under section 69 is justified on facts and law.

3. Whether the assessee has satisfactorily explained the source of the cash deposits, including cash withdrawals from his own account, his wife's account, and cash received from his father, all linked to exempt agricultural income and compensation for compulsory acquisition of agricultural land.

4. Whether the principles of natural justice were violated in the assessment process, including the non-consideration of the assessee's submissions and evidence.

5. The correctness of the appellate authority's directions regarding the consideration of cash withdrawals as source of deposits and the avoidance of double benefit.

Issue 1: Validity of Assessment Order Passed Without Proper Notice Under Section 148

The Income Tax Act mandates that for reopening an assessment under section 147, a valid notice under section 148 must be issued and served on the assessee. The assessee contended that the notice under section 148 was not delivered during the assessment period and that the assessment was completed ex parte under section 144, which is a mandatory requirement and not merely procedural. Therefore, the assessee argued that the assessment order is liable to be quashed.

The legal framework requires strict adherence to procedural mandates to ensure fairness and natural justice. Non-service or non-delivery of the notice under section 148 vitiates the reopening and subsequent assessment. The Court noted the absence of any material to demonstrate proper service of notice and found merit in the contention that the assessment was passed without affording the assessee an opportunity to be heard, thereby violating principles of natural justice.

Consequently, the Court held that the assessment order passed under section 144/147 without valid notice under section 148 is illegal and liable to be quashed.

Issue 2: Justification for Addition of Rs. 30,66,000/- as Unexplained Cash Deposit Under Section 69

Section 69 of the Income Tax Act provides that where any sum is found credited in the books of an assessee and the assessee fails to explain the nature and source thereof, such sum may be deemed to be income of the assessee. The Assessing Officer (AO) relied on information from the Annual Information Return (AIR) and noted cash deposits of Rs. 30,66,000/- in the assessee's bank account during the financial year 2011-12. The assessee did not initially respond to notices, leading to the ex parte addition.

The assessee explained that the cash deposits were made against earlier cash withdrawals from his own account and his wife's account. Further, the wife had received compulsory land compensation amounting to Rs. 54.92 lakhs, exempt under section 10(37), and the father had similarly received exempt compensation of Rs. 2.02 crores. The assessee submitted detailed bank statements and cash flow charts showing withdrawals and deposits, asserting that the cash deposited was from legitimate sources and exempt income.

Relevant precedents emphasize that additions under section 69 cannot be made on mere suspicion or conjecture. The Supreme Court in various rulings has laid down the "Human Probability Test" to assess the genuineness of transactions. The Court observed that the AO failed to apply mind and proceeded mechanically without considering the detailed explanations and documentary evidence provided by the assessee.

The Court noted that the assessee's submissions were supported by bank statements of himself, his wife, and his father, showing the flow of cash. No contradictory material was brought on record by the revenue authorities. The Court held that the assessee successfully explained the source of cash deposits, and the addition under section 69 was unwarranted.

Issue 3: Explanation of Source of Cash Deposits and Treatment of Agricultural Income and Compensation

The assessee's case was that he was a farmer with no taxable income other than exempt agricultural income. The compensation received by his wife and father for compulsory acquisition of agricultural land was exempt under section 10(37). The cash withdrawn by the wife and father was kept at home and subsequently deposited by the assessee in his bank account.

The Court considered the detailed cash flow charts and bank statements submitted, which showed the timing and amounts of withdrawals and deposits. The Court found the explanation plausible and consistent with the practice of cash transactions in agricultural contexts. The Court emphasized that the AO's failure to consider these facts amounted to non-application of mind.

The Court also referred to the principle that exempt income and compensation for compulsory acquisition cannot be taxed unless there is evidence of concealment or evasion. The assessee's explanation satisfied the legal requirement under section 68 for explaining cash credits.

Issue 4: Violation of Principles of Natural Justice

The assessee contended that his replies and evidence submitted during the assessment proceedings were not taken on record, and the AO passed an ex parte order under section 144. The Court recognized that natural justice requires that the assessee be given a fair opportunity to present his case and that the AO must consider the submissions and evidence before making additions.

The Court found that the AO's failure to consider the assessee's replies and evidence violated the principles of natural justice, rendering the assessment order unsustainable.

Issue 5: Directions of the First Appellate Authority and Treatment of Cash Withdrawals

The learned CIT (Appeals) partially allowed the appeal and directed the AO to consider cash withdrawals as the source of deposits if the time gap between withdrawal and deposit was less than 30 days for the assessee's account and 15 days for the spouse's account, while cautioning against double benefit if deposits were made in both accounts.

The Court noted that while these directions were reasonable, the AO had not applied them properly, and the overall assessment order remained flawed. The Court found that the appellate authority's directions were an attempt to balance the evidentiary burden but ultimately the assessee had already explained the source sufficiently.

Significant Holdings and Legal Principles Established

"The assessment order passed under section 144/147 of the Income Tax Act without valid service of notice under section 148 is illegal and liable to be quashed."

"Additions under section 69 cannot be made on conjecture or suspicion; the assessee must be given an opportunity to explain the source of cash deposits, and such explanation must be considered with application of mind."

"Exempt agricultural income and compensation for compulsory acquisition under section 10(37) cannot be taxed unless there is evidence of concealment or evasion."

"Principles of natural justice require that the assessee's submissions and evidence be recorded and considered before making adverse additions."

"The Human Probability Test as laid down by the Supreme Court is a relevant standard to assess the genuineness of cash transactions in agricultural contexts."

On application of these principles to the facts, the Court concluded that the assessee had satisfactorily explained the source of cash deposits, and the impugned assessment order was quashed. The appeal was allowed accordingly.