The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has held that cash deposits forming part of declared business receipts cannot be independently taxed as unexplained money under Section 69A of the Income Tax Act, 1961, when the business income has already been offered under the presumptive taxation scheme of Section 44AD.
The bench of Anikesh Banerjee (Judicial Member) and Om Prakash Kant (Accountant Member) ruled that business expenditure cannot ordinarily be subjected to a separate addition under Section 69C merely because individual bills or vouchers were not produced. Such an addition would require material demonstrating that the expenditure was incurred from an independent and unexplained source.
The appellant/assessee was engaged in the business of manpower consultancy and recruitment and also earned rental and interest income. She filed her income tax return declaring a total income of ₹11,78,580.
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Her business income was offered under the presumptive taxation scheme contained in Section 44AD. She declared a turnover of ₹52,01,836 and offered six per cent of the turnover as business profit.
The return was selected for scrutiny under the Computer-Assisted Scrutiny Selection system on account of “large cash payments made for credit card purchases.”
During the scrutiny proceedings, the Assessing Officer examined cash deposits appearing in the relevant bank accounts and cash payments made towards the assessee’s credit card bills.
The Assessing Officer noticed aggregate cash deposits of ₹10.24 lakh. According to the assessee, ₹3.11 lakh out of this amount represented receipts from her manpower consultancy business.
The remaining ₹7.13 lakh had allegedly been deposited in an overdraft account jointly held by the assessee and her husband. It was claimed that the husband was the primary account holder and that the money deposited in the account belonged to him, not to the assessee.
The Assessing Officer was not satisfied with the explanation and treated the entire cash deposit of ₹10.24 lakh as unexplained money under Section 69A.
The officer also noticed cash payments of ₹10,15,312 towards credit card bills. Finding the explanation regarding their source unsatisfactory, the officer treated the amount as unexplained expenditure under Section 69C.
Consequently, the assessment was completed by determining the assessee’s total income at ₹32,17,892.
The assessee challenged the additions before the National Faceless Appeal Centre. She maintained that the cash receipts and corresponding expenditure arose from her disclosed business activities and were covered by the income offered under Section 44AD.
The Commissioner of Income Tax (Appeals), however, confirmed both additions.
The appellate authority observed that the benefit of the judicial precedents relied upon by the assessee would be available only when a nexus between the cash deposits and the declared business receipts was established through documentary evidence.
The assessee thereafter approached the Mumbai Bench of the ITAT.
Before the Tribunal, the assessee submitted that the disputed cash deposits were composed of two distinct amounts.
The first amount of ₹3.11 lakh represented receipts from her manpower consultancy business and formed part of the turnover already disclosed under Section 44AD. It was argued that the assessee had sufficient business turnover to explain this cash deposit.
The second amount of ₹7.13 lakh had been deposited in the joint overdraft account by the assessee’s husband. The assessee produced copies of her income tax return, computation of income and relevant bank account records in support of her explanation.
Regarding the addition under Section 69C, the assessee contended that cash received from customers in the course of her business had been used for making credit card payments. The expenditure charged to the credit card was stated to have been incurred in connection with services rendered to different parties.
The assessee also pointed out that the actual cash deposited towards credit card payments was ₹7,20,500, although the Assessing Officer had considered an amount of ₹10,15,312 for making the addition.
It was submitted that the relevant credit card statements, payment details and cash deposit particulars had been furnished before both the Assessing Officer and the appellate authority.
After examining the material, the Tribunal noted that it was undisputed that the assessee had offered her eligible business income under Section 44AD.
Explaining the nature of presumptive taxation, the Bench observed that once eligible business income is computed on the basis prescribed under Section 44AD, the statutory scheme proceeds on a deemed determination of the profits and gains of the business.
Consequently, expenditure connected with the disclosed business receipts cannot ordinarily be separately disallowed merely because individual invoices, bills or vouchers have not been produced.
However, the Tribunal clarified that the protection would apply only where the transactions have a nexus with the business and there is no material establishing that they represent an independent or undisclosed source of income.
The Tribunal relied upon the Punjab and Haryana High Court’s decision in CIT-II v. Surinder Pal Anand.
In that case, the High Court had held that where presumptive income forms the basis for determining taxable business income, the taxpayer is not required to explain every individual cash deposit unless the particular deposit has no nexus with the declared gross receipts.
Applying that principle, the ITAT observed that the assessee had consistently explained that the deposit of ₹3.11 lakh represented business receipts forming part of the turnover offered under Section 44AD.
Once those receipts were included in the turnover subjected to presumptive taxation, independently taxing the same amount under Section 69A would not be justified unless the Revenue produced material showing that the money came from a source outside the disclosed business.
The Tribunal also took note of the assessee’s explanation that the balance amount of ₹7.13 lakh pertained to the joint overdraft account of her husband and did not belong to her.
Turning to the addition under Section 69C, the Tribunal found that the assessee had explained the credit card payments as expenditure connected with her business activities.
The assessment order itself recorded that the assessee had furnished copies of the credit card statements, a tabulated statement of credit card payments and details of the corresponding cash deposits.
The Tribunal held that when the business income had already been offered and accepted under Section 44AD, the underlying business expenditure could not be separately added merely because individual supporting vouchers were unavailable.
Such an addition could be sustained only if the Revenue established that the expenditure had been incurred from an independent and unexplained source. No such material had been brought on record in the present case.
Considering the nature of the presumptive taxation scheme, the documents placed on record and the precedent of the Punjab and Haryana High Court, the ITAT deleted the addition of ₹10.24 lakh made under Section 69A.
The Tribunal also deleted the addition of ₹10,15,312 made under Section 69C, holding that a separate addition of business expenditure would run contrary to the scheme of Section 44AD in the absence of evidence showing an independent unexplained source.
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