2014 (11) TMI 406 - AT - Income Tax

Estimation of GP - Whether the cash deposits made into bank account constitutes the income directly or it constitutes the trade receipts of the assessee, on which percentage of the profits needs to be estimated Held that - Assessee in course of assessment proceeding neither appeared nor furnished any information with regard to the cash deposits made into the bank account for whatever may be the reason - total cash deposits made by assessee in his bank accounts - assessee has not maintained any books of account, bills and vouchers, etc. in respect of the business carried on by him - assessee himself has stated that he is engaged in wholesale fruit business - assessee s claim that he is only acting as a facilitator between purchasers and sellers of fruits in fruit markets is not acceptable in absence of any supporting evidence - assessee s claim that cash deposits made in the bank accounts represent monies given by buyers and does not belong to him and further fact that he is only earning commission is also not acceptable in absence of any corroborative evidence - the cash deposits made into bank accounts have to be considered as receipts from fruit business carried on by assessee - the deposits made into the bank accounts as receipts from the business of assessee. CIT(A) has observed that minimum profit rate in this line of business is 10%, ultimately, he adopted net profit rate of 15% - the net profit adopted at 15% is high - assessee has not maintained any books of account, therefore, profit of assessee in any way has to be estimated on a reasonable basis - As no comparable case in similar line of business has been brought on record, profit has to be estimated by adopting some principle - it would be appropriate to consider toadopt the net profit rate at 5%. There are not only cash deposits, but there are cash withdrawals also - Therefore, the entire cash deposits made during the year cannot be treated as income of assessee - the peak credit appearing in the bank accounts can be considered as unexplained income of assessee the AO is directed to verify bank accounts and also examine peak credits worked out by assessee and thereafter make the addition on the basis of peak credit worked out Decided partly in favour of assessee.

Issues Involved:

1. Legitimacy of cash deposits as unexplained income.
2. Estimation of profit rate on gross receipts.
3. Adequacy of opportunity provided by the AO during assessment.
4. Disallowance under section 80C of the IT Act.

Issue-Wise Detailed Analysis:

1. Legitimacy of Cash Deposits as Unexplained Income:

The assessee, engaged in wholesale fruit business, failed to comply with notices and questionnaires issued by the AO during the assessment proceedings. Consequently, the AO completed the assessment ex-parte under section 144, treating cash deposits of Rs. 33,72,365 as unexplained cash credits and added them to the income of the assessee, resulting in a total income of Rs. 35,52,365. The assessee contended before the CIT(A) that the cash deposits were made by third parties for purchasing fruits, and thus, should not be treated as his income. The CIT(A) held that the cash deposits were trade receipts and not the direct income of the assessee, but estimated a net profit rate of 15% on the gross receipts of Rs. 1,40,33,735, resulting in an addition of Rs. 21,05,060. The Tribunal directed the AO to estimate the profit at 5% on gross receipts instead of 15%, considering the nature of the business.

2. Estimation of Profit Rate on Gross Receipts:

The CIT(A) estimated a net profit rate of 15% on the gross receipts of Rs. 1,40,33,735, based on the nature of the business and the lack of supporting evidence from the assessee. The Tribunal, however, found this rate to be high for wholesale trade and directed the AO to adopt a net profit rate of 5%, referencing section 44AF of the IT Act, which provides for a 5% profit rate for retail trade without maintained books of account.

3. Adequacy of Opportunity Provided by the AO During Assessment:

The assessee argued that he did not receive notices due to a change of address and thus could not represent before the AO. The CIT(A) and Tribunal acknowledged this but emphasized the necessity for the assessee to provide supporting evidence for his claims. The Tribunal upheld the CIT(A)'s decision to treat cash deposits as trade receipts and estimate profit accordingly, but reduced the profit rate to 5%.

4. Disallowance Under Section 80C of the IT Act:

The assessee's appeal included a ground against the confirmation of disallowances made by the AO under section 80C. The Tribunal's decision did not specifically address this issue, focusing instead on the treatment of cash deposits and the estimation of profit rate.

Conclusion:

The Tribunal concluded by partly allowing the assessee's appeal and partly allowing the department's appeal for statistical purposes. The AO was directed to verify the peak credits in the bank accounts and make additions based on the peak credit worked out. The profit rate was reduced to 5% on gross receipts, and the entire cash deposits were not treated as income, considering cash withdrawals as well. The judgment emphasized the need for proper documentation and evidence to support claims made by the assessee in tax assessments.

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