2017 (4) TMI 1192 - AT - Income Tax

Unexplained cash deposits in Assessee s bank Account - Held that - Undisputedly the assessee had deposited cash into his bank account and has explained the source to be the payments received from the debtors of the firm. Since the assessee was the proprietor of the business prior to its conversion into a partnership firm and since he continues to be the Managing Partner of the firm, we are inclined to accept the assessee s contentions that the debtors of the firm issued cheques in his name or that they paid in cash to the assessee. The assessee had submitted before the AO that this amount was shown in the books of the firm as loans and advances, while it is shown as payable in the assessee s books of account. This contention of the assessee has not been verified by any of the authorities below. The AO has brushed it aside on the ground that the copies of the ledger extracts are prepared by the assessee himself/the firm as per his/their convenience and therefore not reliable. The assessee has filed the copy of the Partnership Deed and we find that the partners inducted are not in any way related to the assessee and also they are entitled to equal share of profit as the assessee. In such circumstances, it cannot be held that the books of the firm are prepared as per the convenience of the assessee. Thus we deem it fit and proper to remand this issue to the file of the AO for re-examination de novo in accordance with law. Unexplained investment - Held that - We find that the CIT (A) has reproduced the capital account of the assessee in the books of M/s. Filmors wherein the capital brought in is shown as ₹ 32.00 lakhs and the opening balance is shown as Nil and the closing balance at ₹ 19,32,370.50. As per the partnership deed, all the partners have equal sharing ratio and it is seen that the other partners who have joined the firm along with the assessee have introduced ₹ 18,50,000/- each and there are withdrawals by them too. The AO has sought explanation for the capital introduced and we see no reason to interfere with the findings of the authorities below as such findings are based on the audited books of the firm M/s Filmors. As regards the source for such capital, we are of the opinion that this needs reverification, as we have remanded the issue of the sources for the cash deposits to the AO to verify the books of M/s. Samaritan Agencies and the bank deposits to see whether the assessee was in fact in receipt of the payments from the debtors of M/s. Samaritan Agencies. The AO, therefore, shall also examine if the assessee was in receipt of the amounts from the debtors of M/s. Samaritan Agencies, the amount which was collected and whether it was sufficient source for both cash deposits as well as the capital introduction in M/s. Filmors. This ground of appeal is accordingly treated as allowed for statistical purposes only with regard to the source of the capital.

Summary

Issues:
1. Treatment of cash deposits in the assessee's bank account as unexplained sources.
2. Treatment of unexplained investment in M/s. Filmors Ltd.
3. Justification of the CIT (A) in confirming the additions made by the AO.
4. Verification of sources for cash deposits and capital introduction.

Issue 1: Treatment of Cash Deposits

The assessee appealed against the order of the CIT (A) confirming additions made by the AO regarding cash deposits of ?15,01,000 in the bank account. The assessee explained that the deposits were collections from customers of the firm, which were deposited into the bank account as contributions towards capital. The AO treated the deposits as unexplained, leading to taxation. The ITAT found that the assessee had explained the sources as payments received from the firm's debtors. The ITAT noted discrepancies in the AO's rejection of the explanation without verifying the firm's books. Consequently, the ITAT remanded the issue to the AO for re-examination to compare the firm's and assessee's books before making a conclusive decision.

Issue 2: Unexplained Investment in M/s. Filmors Ltd.

The second issue involved the unexplained investment of ?32,00,000 in M/s. Filmors Ltd., with the assessee claiming a contribution of only ?18,50,000. The AO rejected the explanation, relying on the audited books of M/s. Filmors showing ?32,00,000 as the capital introduced by the assessee. The ITAT observed discrepancies in the capital account and the partnership deed, noting equal sharing ratios among partners. The ITAT remanded the issue to the AO for re-verification, instructing to examine the sources of cash deposits and capital introduction to ensure consistency and accuracy. The ITAT allowed this ground of appeal for statistical purposes, pending further verification.

Issue 3: Justification of CIT (A)

The CIT (A) confirmed the additions made by the AO, stating insufficient explanation and evidence provided by the assessee. The ITAT, upon detailed analysis, found discrepancies in the rejection of the assessee's contentions without proper verification of books and sources. Consequently, the ITAT remanded the issues to the AO for re-examination to ensure a fair opportunity for the assessee to present their case.

Issue 4: Verification of Sources

The overall judgment highlighted the importance of verifying sources for both cash deposits and capital introduction. The ITAT emphasized the need for the AO to compare the books of the firm and the assessee to establish the credibility of explanations provided. The ITAT instructed the AO to conduct thorough re-verification to ensure accuracy and consistency in determining the sources of funds, leading to the partial allowance of the appeal for statistical purposes.

In conclusion, the ITAT remanded the issues to the AO for re-examination, emphasizing the importance of verifying sources and providing a fair opportunity for the assessee to present their case effectively. The judgment aimed to ensure accuracy and consistency in determining the tax implications of cash deposits and capital investments, highlighting the significance of thorough verification processes in tax assessments.