2013 (11) TMI 62 - AT - Income Tax

Presumptive income u/s 44AF of the Income Tax Act Presumptive income rejected and assessment was done u/s 144 - Assessees are individual and are in retail trading business of sarees and dress materials since many years additions of undisclosed income determined on the basis of highest peak balance on particular date of the two banks maintained by the appellant. - Held that - The assessees claimed that they were in retail business of saree was not found genuine by the lower authorities as ld. A.O. issued the summons to all parties only one party responded back. The assessees were not substantiated their claims before the lower authorities with reference to cash deposited in the bank account. The ld. CIT(A) had confirmed the addition on the basis of peak cash. No nexus had been established by the assessee with the sale transaction of their business and cash deposited. Thus Section 44AF cannot be applied in this case - The appellants were not produced any books of accounts before the A.O. but submitted copy of the purchase and sale register Decided against the Assessee.

Summary

Issues:
Three appeals from CIT(A)-I, Surat for assessment year 2009-10; Rejection of returned income under presumptive basis; Additions of undisclosed income based on peak balance; Allegations of rotating undisclosed funds through unverifiable transactions; Failure to establish cash deposits as sale transactions; Confirmation of additions by CIT(A); Application of Section 44AF; Non-submission of books of accounts; Nexus between cash deposits and business transactions.

Detailed Analysis:

Issue 1: Rejection of Returned Income under Presumptive Basis
The assessees filed returns under presumptive basis under Section 44AF but the CIT(A) rejected the returned income. The CIT(A) observed erratic cash deposits not consistent with business sales, high opening cash balance, and lack of proof of sales. The CIT(A) upheld the Assessing Officer's rejection under Section 44AF due to inability to ascertain the nature of deposits and made additions based on peak cash and cheque amounts.

Issue 2: Additions of Undisclosed Income Based on Peak Balance
The Assessing Officer made additions of undisclosed income in all three cases based on peak balance and gross profit. The additions were determined from cash deposits and transactions with unverifiable sources. The CIT(A) confirmed these additions due to the lack of nexus between cash deposits and business sales, leading to the rejection of Section 44AF application.

Issue 3: Allegations of Rotating Undisclosed Funds
The Assessing Officer noted instances where cash deposits were made before issuing cheques for property purchases, indicating a rotation of undisclosed funds through unverifiable transactions. The CIT(A) found this practice suspicious and upheld the additions of undisclosed income based on peak balance, emphasizing the need for substantiating the source of funds.

Issue 4: Failure to Establish Cash Deposits as Sale Transactions
The assessees failed to establish a clear link between cash deposits and genuine sale transactions of their retail business. Despite submitting some financial records, the assessees could not provide sufficient evidence to support their claims. The CIT(A) emphasized the importance of proving the source of cash deposits to avoid rejection under Section 44AF.

Issue 5: Confirmation of Additions by CIT(A)
The CIT(A) reviewed the assessees' contentions and supporting documents but found them insufficient to validate the claimed income under presumptive basis. The CIT(A) upheld the Assessing Officer's additions of undisclosed income based on peak balance, highlighting the need for a clear nexus between cash deposits and legitimate business transactions.

Issue 6: Application of Section 44AF and Non-Submission of Books of Accounts
The assessees claimed to operate under Section 44AF but could not substantiate their income declarations with adequate proof. The failure to submit complete books of accounts hindered the assessment process, leading to the rejection of the presumptive basis and subsequent additions of undisclosed income by the Assessing Officer and confirmed by the CIT(A).

In conclusion, the appeals of all three assessees were dismissed by the tribunal on 6th September 2013, upholding the CIT(A)'s decision to confirm the additions of undisclosed income based on peak balance and rejecting the application of Section 44AF due to the lack of evidence linking cash deposits to legitimate business transactions.