2024 (12) TMI 40 - AT - Income Tax

Addition u/s 68 - unexplained cash credits in bank account - HELD THAT -Assessee is engaged in the business of textile and grey and is filing return of income for many years. The cash sales in the business of assessee, is a usual practice. Thus, considering the overall facts and circumstances of the case, entire cash deposit during demonetization period cannot be treated as unexplained credit, for a businessman having turnover of more than Rs. 1.00 crore. Considering the fact that the assessee is not able to substantiate the source of entire cash deposit, similarly entire cash deposit cannot be treated as income. Therefore, a reasonable addition out of total cash deposit will be sufficient to avoid the possibility of revenue leakage. Thus, considering the facts of the present case, 20% of total cash deposit are upheld and remaining addition is deleted. So far as taxing the addition is concerned, the cash deposit is out of business receipt, therefore, it cannot be taxed u/s 115BBE. AO is directed to tax the sustained addition at normal rate of tax. In the result, ground No. 1 of the appeal is partly allowed. Addition of sundry creditors - no supporting evidence like copy of bills, Ledger account and proof of subsequent payment is filed - CIT(A) confirmed the action of AO - HELD THAT - On considering the submission and perusal of supporting evidence in the form of account confirmation and sample purchase bill, find that neither the AO nor the ld. CIT(A) verified such bills and account confirmation or made any independent investigation of such evidences. Moreover, all the purchase bills are in respect of yarn. Complete details of creditors are available on sales invoices/purchase bills. Thus, no justification of making such addition. AO is directed to delete the addition. In the result, ground No. 2 of appeal is allowed. Ad hoc disallowances of 10% of expenses - assessee submits that the assessee has offered income u/s 44AD, thus, there is no scope of further addition - HELD THAT - CIT(A) confirmed the action of AO with similar view. Before me, the ld. AR of the assessee vehemently argued that the assessee has offered income under Section 44AD. On perusal of Profit Loss Account and computation of total income, we do not find any such reference in offering income u/s 44AD, thus, no merit in the submission of assessee. Considering the nature of expenses and the ratio of ad hoc disallowance being 10% only which is on reasonable basis. Thus, no reason to interfere in the findings of lower authorities. In the ground No. 3 of appeal is dismissed.

Summary

Issues Involved:

1. Unexplained cash credits under Section 68 of the Income Tax Act.
2. Unexplained expenditure related to outstanding creditors under Section 69C.
3. Disallowance of 10% of expenses claimed by the assessee.
4. Taxation rate applied under Section 115BBE instead of the normal tax rate.

Issue-wise Detailed Analysis:

1. Unexplained Cash Credits under Section 68:

The primary issue was the addition of Rs. 26,09,000 as unexplained cash credits in the assessee's bank account during the demonetization period. The assessee, engaged in the textile business, argued that the cash deposits were from business receipts, including cash sales and withdrawals from the bank. The Assessing Officer (AO) did not accept the explanation, citing a lack of sufficient evidence to substantiate the cash balance and treated the entire deposit as unexplained. The Tribunal found that while the entire deposit could not be justified, treating it wholly as unexplained was also unreasonable. Therefore, it upheld 20% of the deposit as unexplained, allowing the rest. The Tribunal also ruled that the cash deposits should not be taxed under Section 115BBE as they were business receipts, directing taxation at the normal rate.

2. Unexplained Expenditure Related to Outstanding Creditors under Section 69C:

The AO added Rs. 9,60,845 as unexplained expenditure, citing insufficient evidence for certain creditors. The assessee contended that confirmations and purchase bills were provided. The Tribunal noted that neither the AO nor the CIT(A) verified these documents or conducted independent investigations. Given the evidence presented, the Tribunal found no justification for the addition and directed its deletion.

3. Disallowance of 10% of Expenses Claimed by the Assessee:

The AO disallowed 10% of the expenses, arguing that they were unsupported by sufficient evidence and incurred in cash. The assessee claimed that income was offered under Section 44AD, implying no further disallowance was warranted. However, the Tribunal found no reference to Section 44AD in the financial documents. Considering the nature of the expenses and the reasonableness of the 10% disallowance, the Tribunal upheld the decision of the lower authorities.

4. Taxation Rate Applied under Section 115BBE:

The assessee challenged the application of the higher tax rate under Section 115BBE, arguing that the deposits were made before the amendment introducing the enhanced rate. The Tribunal agreed, noting that the cash deposits were business receipts and should not be taxed under Section 115BBE. Consequently, the Tribunal directed the AO to apply the normal tax rate to the sustained addition.

Conclusion:

The appeal was partly allowed. The Tribunal provided relief by reducing the unexplained cash credit addition and directing its taxation at the normal rate. It also deleted the addition related to unexplained creditors but upheld the 10% disallowance of expenses. The judgment emphasized the need for substantiating claims with evidence and the appropriate application of tax rates.