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Demonetization (OCM): Cash Deposits/ Receipts/ Advances and Presumptive Tax u/s 44AD - Part 3

Jan 21, 2020

Continuing our series relevant for the first assessment after demonetisation (OCM) at Taxsutra Database Insight, we have compiled recent 15 cases that operate at the intersection of presumptive taxation, assessment of cash deposits after demonetization and additions u/ss. 68 to 69C. Some important principles that emerge are listed below in brief:

1) [TS-6380-ITAT-2019(DELHI)-O] - Cash deposit during demonetization period - ITAT: Insufficient evidence to consider sales as bogus or to make addition of cash in hand – ITAT notes that Assessee, a small trader, declared return of income under presumptive provisions u/s 44AD and case was selected under limited scrutiny for cash deposit during demonetization period from 09.11.2016 to 30.12.2016; The fact that during assessment, the assessee submitted a copy of his balance-sheet does not prove that the assessee maintained books of account; AO made addition u/s 68 on account of unexplained cash credits due to bogus sales; On appeal, CIT(A) restricted addition to the extent of cash in hand, which was considered as unaccounted; ITAT ruled in Assessee`s favour and delete the entire addition, notes that “If there is no creditor in the books of account and no books of account have been maintained, there is no question of considering it to be cash credit”; Assessee had filed details of sales & purchase before AO giving names, telephone number and address of parties;  held that if the AO had any doubt, he could have made direct inquiry; ITAT held that there was no justification to consider the assesee’s sales to be bogus or to make addition of cash in hand as per details submitted; AO did not bring any sufficient evidence on record to justify the addition;

2) [TS-5014-ITAT-2020(Bangalore)-O] - ITAT: AO cannot examine other issues during limited scrutiny assessment, unless approved by CIT/ Pr. CIT – ITAT rules in assessee`s favour, notes that case was selected for limited scrutiny with respect to cash deposits in bank account during demonetization period (9th Nov. to 30th Dec); ITAT holds that disallowance u/s 43B for non-payment of VAT is not within scope of limited scrutiny;

3) [TS-8507-ITAT-2019(Agra)-O] - Income declared u/s 44AD - Addition u/s 69 – ITAT : Cash deposit in bank account a trading receipt - Assessee derived income from remuneration and interest from three partnership firms and also derived income from glass bangle business; AO felt that the assessee failed to prove that cash deposit represented his business turnover. An addition of Rs. 7,99,950/- was made u/s  69 after allowing credit of the business income of Rs. 70,050/- as shown by the assessee u/s 44AD; On appeal Ld. CIT(A) rejected all contentions of the assessee; ITAT notes that the CIT(A), in AY 2011-12, had chosen to hold cash deposits as sale consideration of trading business, hence even if explanation of business is found to be untrue, following the findings for AY 2011-12, net profit rate had to be applied; ITAT following co-ordinate Bench order in assessee’s own case for the AY 2011-12, directs AO to apply net profit rate of 5% on bank deposits of Rs.8,70,000/- giving credit to the income of Rs.70,050/- already shown under section 44AD of the Act;

4) [TS-10314-ITAT-2018(Ranchi)-O] - Return of income filed u/s 44AD – Assessee failed to explain source of cash deposits before lower authorities, income came to be estimated by accepting deposits made in bank accounts as trade deposits; ITAT partly allow assessee’s appeal, modifies CIT(A) order and estimated income at 4% of cash deposits into bank accounts;

5) [TS-8499-ITAT-2019(Cochin)-O] - Section 44AD exempts the assessee from maintenance of books of accounts, and asking assessee to prove to the AO’s satisfaction expenditure to the extent of 92% of gross receipts/ deposit would defeat the purpose of presumptive taxation u/s 44AD or other such provision; ITAT rules in assessee’s favour, notes the contradiction: if the income is estimated, how could the expenditure component on the basis of said income be considered to have been ‘actually incurred’? It is only presumption that 92% of gross receipts was incurred as expenditure; ITAT holds that section 69A of the Act cannot be applied as neither AO nor CIT(A) have given any reason as to why Section 44AD is not applicable;

6) [TS-10312-ITAT-2018(Agra)-O] - Appearance of Accountant or Chartered Accountant before the AO does not establish that books were actually maintained by the assessee – ITAT rules in assessee’s favour, notes that AO failed to exercise his powers u/s 133(6) or u/s 131 to verify credits in the revised balance sheet, which were supported by confirmations. They simply made additions on the basis of first estimated balance sheet, particularly when no books were maintained; It is pertinent that the AO had the assessee’s bank statement before him, but did not point out any entries of the alleged amounts;

7) [TS-6983-ITAT-2019(Kolkata)-O] - Presumptive taxation u/s 44AD – can addition be made u/s 68 when income/ profit is estimated – neither AO nor CIT(A) have given any reason as to why s. 44AD is not applicable; ITAT holds that AO cannot examine statement of accounts in such cases, or make additions towards undisclosed purchases, undisclosed expenditure, undervaluation of closing stock, etc. The turnover declared by the assessee is accepted by the Revenue, and such additions go against the spirit of the Act;

8) [TS-8316-ITAT-2019(Hyderabad)-O] - Merely because of cash deposits in bank account during demonetization period (Nov-Dec 2015), cash in hand as on 31-03-2016 cannot be doubted – ITAT notes that assessee is engaged in money lending business and therefore cannot be expected to be without any cash in hand at the end of the relevant assessment years (AYs);  The assessee has been showing closing balance of cash in hand even for the earlier AYs and sundry debtors were shown in the Balance Sheet ended 31st March, 2015, hence cash flow statement demonstrates the sources of the funds with the assessee; ITAT further notes that the return of income filed by Assessee has been accepted by the Department and was not picked up for scrutiny; ITAT deletes the addition, holds that cash in hand of as on 31-03-2016 cannot be doubted;

9) [TS-6098-ITAT-2016(Chandigarh)-O] - Addition u/s. 69C cannot be made when assessee’s turnover is not doubted and his profits reported at 8% in tax return applying s. 44AD is accepted – ITAT rules in assessee’s favour, holds that when the income component is estimated, the expenditure cannot be considered to have been ‘actually’ incurred; States that for application of s. 69C, the assessee should have ‘incurred’ expenditure, which is irrelevant for income offered under presumptive taxation; AO made an addition on the ground that expenses shown in cash flow statement was less than 92% of turnover; ITAT explains that if 8% of gross receipts are assessee’s 'deemed' income, the remaining 92% are also his 'deemed' expenditure; Holds that asking the assessee to prove to the AO’s satisfaction expenditure totalling 92% of gross receipts would defeat the purpose of presumptive taxation; Holds that since the scheme of presumptive taxation has been formed to avoid long drawn process of assessment in cases of small traders or in businesses where incomes are almost of static quantum of all businesses, the AO could have made addition u/s 69C once he had carved the case out of s. 44AD;

10) [TS-7692-ITAT-2017(Mumbai)-O] - Sale value of gold bars of huge magnitude to undisclosed customers in cash are taxable u/s. 68 - ITAT rules that on complete appreciation of facts and also on the touchstone of human probabilities, the story of sale of gold bars appears to be a smokescreen while real objective was to introduce undisclosed income into the banking system by way of deposit of cash in bank accounts; Holds on facts that the genuineness of the business of gold bars carried on by the assessee of such huge magnitude, keeping in view assessee’s background based on material on record and assessee’s infrastructure facilities as well inexperience in this field cast serious shadow of doubt on the genuineness of said business carried on by the assessee; Observes that assessee did not have adequate infrastructure (like security vaults, security personnel) or experience to handle such huge transactions in gold bars of huge magnitude...............

11) [TS-8936-ITAT-2017(Mumbai)-O] - ITAT upholds CIT(A)’s order, sets aside addition u/s 69 for cash deposits in bank account; AO treated the deposits as unexplained investment, as return of income was filed in ITR–2 wherein there is no option for offering income u/s 44AD, and had also offered income under the head income from other sources; the CIT(A) deleted the addition by observing that merely because option to offer income u/s 44AD is not present in Form ITR-2 was no reason for rejecting the appellant’s return; the CIT(A) applied presumptive rate of tax of 8% on cash deposited; ITAT notes that AO, in the preceding AY 2010–11, has accepted the assessee’s aforesaid claim and the CIT(A)’s finding that cash deposits are from his cosmetics and merchandise business, set aside addition u/s 69; ITAT cautions assessee that he should not take advantage of his ignorance by repeatedly committing same mistake. If he intends to avail the benefit of presumptive tax u/s 44AD, he has to comply with requirement of the relevant statutory provisions”

12) [TS-221-HC-2013(ALL)-O] - HC: Upholds AO's right to tax unexplained sundry creditors, places onus on assessee - Onus to prove genuineness of sundry creditors on assessee; AO rejected book results and estimated net profit rate of 8% u/s 44AD and made certain additions u/s 68 in respect of unexplained cash credits; the CIT(A) deleted the addition, observing that since 8% net profit rate was estimated u/s 44AD, no separate addition could be made; HC held that in absence of proof that creditors represent income from a source that is already taxed, AO is empowered to tax unexplained sundry creditors as well as estimated business income; Where sundry creditors are not relatable to business whose income was taxed on estimate basis, AO is empowered to make additions;

13) [TS-5139-ITAT-2010(Ahmedabad)-O] - ITAT: AO found no correlation between entries in books of accounts with vouchers / supporting documents, hence rejected books of account and applied sec. 69. Subsequently, AO made additions based on differences in creditors’ account balances, and credits in bank accounts. HC stated since assessment is based on ‘best judgement’, differences in account balances is an application of the income, and does not warrant another addition. Deposits into bank tantamount to application of income. Hence, separate addition is not called for. Further, once AO has rejected the books of account, he cannot take recourse to them to find out income therefrom and make addition/ disallowance;

14) [TS-5457-HC-2010(Punjab & Haryana)-O] - HC: Income declared u/s 44AD - Assessee  is not under any obligation to explain individual entry of cash deposit in bank unless such entry has no nexus with gross receipts;

15) [TS-5365-ITAT-2004(AHMEDABAD)-O]  - ITAT : Provisions of ss. 28 to 43C not applicable, if assessee is assessed u/s 44AF – ITAT  rules in Assessee’s favour, directs AO to apply 5% of net profit on total turnover and delete addition made u/s 40A(3);


Taxsutra Database Insight series on Demonetisation (OCM) cases - 

1) Click here to read and download Taxsutra Database Insight: Demonetisation (OCM) Cases:  Explanation for Duration/ Link between Cash Deposits & Withdrawal - Part 2 

2) Click here to read and download Taxsutra Database Insight: Demonetisation (OCM) - “Unexplained Cash Credits and GP-Rate additions” – Part 1

3) Click here to read and download Taxsutra Database Insight: Compendium of Recent Rulings on Undisclosed Income, Unexplained Credits, Unexplained Expenditure & Unexplained Investments - Part II

4) Click here to read and download Taxsutra Database Insight: Compendium of recent rulings on undisclosed income, unexplained credits, unexplained expenditure & unexplained investments – Part 1

5) Click here to read and download Taxsutra Database Insight: Compendium of Rulings Impacting ‘Unexplained Money’ Taxation u/s. 69A


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