2022 (8) TMI 1033 - AT - Income Tax

Addition on account of deposits in bank - assessee was not able to explain the deposits of demonetized currency notes in his bank account - CIT-A deleted addition as cash deposits in the bank account were represented by the sales made by the assessee and the AO had accepted the claim of sales made by the assessee - HELD THAT - From the findings recorded by CIT(A), we find that CIT(A) was convinced with the arguments of the assessee and therefore, he gave substantial amount of relief to the extent of Rs.40 lacs. However, he confirmed an addition by holding that there is some merit in the contention of AO as the assessee had disclosed abrupt jump in sales during the months of October and November. While confirming the part addition the CIT(A) has not given any specific explanation for confirming the part addition. Therefore, the confirmation of part addition is based only on surmises and is arbitrary in nature and therefore, is liable to be deleted. Assessee appeal allowed.

Summary

Issues:
Appeal against CIT(A) order confirming addition of Rs.3,70,500 out of total addition of Rs.43,70,500 made by AO on account of demonetized currency deposits.

Analysis:
1. Background: The assessee, engaged in Sarafa business, deposited Rs.43,70,500 in demonetized currency notes between 09/11/2016 to 30/12/2016. AO held the deposits unexplained under section 69A of the Income Tax Act.

2. Assessee's Contentions: Assessee claimed deposits were from cash sales, supported by opening balance and sales figures. CIT(A) partially allowed the appeal, deleting Rs.40 lacs but confirming Rs.3,70,500 addition, citing abrupt jump in sales during demonetization period.

3. AO's Observations: AO noted significant increase in cash sales pre-demonetization and held deposits unexplained. AO applied section 69A due to lack of proof of legitimate income source for deposits.

4. CIT(A)'s Decision: CIT(A) accepted sales as source of deposits, partially allowing the appeal. CIT(A) acknowledged abrupt sales increase but confirmed Rs.3,70,500 addition without specific reasoning, leading to arbitrary decision.

5. Judgment: ITAT Lucknow allowed grounds 1 to 4, deleting the confirmed addition of Rs.3,70,500. Legal grounds (grounds 5 to 8) were not argued due to relief granted on merits. The appeal was partly allowed, emphasizing the arbitrary nature of the confirmed addition.

In conclusion, the ITAT Lucknow judgment favored the assessee by deleting the confirmed addition of Rs.3,70,500, highlighting the importance of providing reasonable explanations for income sources and criticizing arbitrary decisions by tax authorities.