2024 (11) TMI 1190 - AT - Income Tax

Addition u/s 68 - unexplained cash deposits during the demonetization period - HELD THAT - Assessee has submitted detailed submissions before the AO that the assessee has regular cash sales and deals only cash sales and regularly deposited the same in the bank and in support of the same, assessee has submitted month-wise cash sales and cash deposits in the bank. It also disclosed the cash sales during demonetization period and cash deposits. Assessee also submitted comparative chart of cash sales and cash deposits during the year in the form of chart before the AO and demonstrated that all the cash deposits are only out of cash sales. AO rejected the same by making certain analysis in the assessment order and further observed that the SBN was banned from 09.11.2016 to use in general market except to meet out some basic necessities and proceeded to make the addition u/s 68 of the Act for total cash deposits made by the assessee during demonetization period. As AO has rejected the cash sales during demonetization period and also observed that SBN was banned from 08.11.2016 and technically rejected the sales from 09.11.2016 with the observation that the assessee should not have accepted the SBN after 08.11.2016. The abovesaid observation of the Assessing Officer is not proper considering the fact that as per the Ordinance No.10/2016 dated 30.12.2016 the prohibition of holding SBN was after 31.12.2016 as per Section 5 of the Ordinance not 08.11.2016. This is supported by RBI Circular on demonetization 2016. Therefore, we are inclined to dismiss ground no.1 raised by the Revenue. Salary expenditure claimed by the assessee paid to brother of the Director/Satya Prakash Sharma - HELD THAT - Satya Prakash Sharma is a regular employee and key employee of the assessee and whatever salary received by him is properly disclosed in its return of income not only during this year but also in the past which was accepted by the Revenue. Therefore, the disallowance made by the Assessing Officer in the name of Satya Prakash Sharma is not justified and we are inclined to accept the findings of ld. CIT (A) by considering the fact that it is a family owned business. Coming to the other salaries received by the sister-in-law of the Director and wife of the Director - No evidence was brought on record to show that they are employees of the company and no evidence was brought on record to show their rendering of the services in the company. During the hearing, we directed the ld. AR to bring on record appointment letter and qualification of these employees. Even before us, nothing was submitted till now. We are inclined to treat the salary paid to sister-in-law and wife of the Director as unsubstantiated and accordingly, salaries paid to them are sustained as disallowed. The grounds raised by the Revenue are partly allowed.

Summary

Issues Involved:

1. Addition under Section 68 of the Income-tax Act for unexplained cash deposits during the demonetization period.
2. Disallowance of salary expenses under Section 37(1) for payments made to related parties.

Issue-wise Detailed Analysis:

1. Addition under Section 68 for Unexplained Cash Deposits:

The Revenue filed an appeal against the deletion of an addition of Rs. 12,55,50,000/- made by the Assessing Officer (AO) under Section 68 of the Income-tax Act. The AO had observed significant cash deposits during the demonetization period and questioned the genuineness of the transactions. The AO noted discrepancies in cash sales and deposits, particularly during the demonetization period, and argued that the cash deposits were disproportionately high compared to cash sales. The AO also highlighted the improbability of maintaining a large cash balance on hand and the scarcity of cash flow during demonetization.

The Commissioner of Income-tax (Appeals) [CIT(A)] reversed this addition, noting that a survey conducted post-demonetization found no discrepancies in the assessee's books of accounts or stock records. The CIT(A) emphasized that the AO did not reject the books of accounts and that the business nature involved substantial cash transactions. The CIT(A) also pointed out that the cash deposits during the demonetization period were significantly lower than in the previous year, supporting the assessee's claim of regular cash sales. The CIT(A) concluded that the AO's comparison of cash sales and deposits was irrelevant without finding discrepancies in the books of accounts. The Tribunal upheld the CIT(A)'s decision, noting that the AO's observations were not aligned with the legal provisions regarding demonetization and cash handling.

2. Disallowance of Salary Expenses to Related Parties:

The AO disallowed Rs. 1,06,80,000/- claimed as salary expenses, questioning the payments made to related parties, including the Director's brother, sister-in-law, and wife. The AO argued that the assessee failed to provide evidence of services rendered by these individuals and their benefit to the business.

The CIT(A) allowed the appeal, stating that the AO was informed about the nature of services provided by the related parties. The CIT(A) noted that the Director's brother was a key employee with a history of high salary accepted by the department, and the related parties were qualified and had been long-term employees. The CIT(A) found no evidence of income diversion and ruled that the assessee had the right to determine salary payments based on business benefits.

The Tribunal partially agreed with the CIT(A), accepting the salary disallowance reversal for the Director's brother due to his key role and consistent income declarations. However, it sustained the disallowance for the sister-in-law and wife due to a lack of evidence of employment and service rendering.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the addition under Section 68, dismissing the Revenue's appeal on this ground. It partially upheld the CIT(A)'s decision on salary expenses, allowing the appeal for the Director's brother but sustaining the disallowance for the sister-in-law and wife. The Revenue's appeal was thus partly allowed.