ITAT Restricts Addition To Estimated Profit Of 30% Of Cash Deposits Made During Demonetisation Period

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has directed the AO to estimate a 30% net profit on total cash deposits made during the demonetization period and deleted the balance additions made under Section 69A of the Income Tax Act.

The two-member bench of V. Durga Rao (Judicial Member) and G. Manjunatha (Accountant Member) observed that neither the assessee proved its arguments for the cash deposits nor the AO reached the conclusion that the explanation offered by the assessee is not genuine. The only possible solution is to resolve the dispute by estimating the profit on cash deposits during the demonetization period.

The assessee/appellant, which is in the business of purchasing and selling paddy, filed its return of income for the AY on November 24, 2017, admitting a total income of Rs. 5,70,920. The case has been selected for scrutiny under CASS to verify cash deposits during the demonetization period.

During the course of assessment proceedings, the AO noticed that the assessee had made cash deposits of Rs. 24,66,500 into three bank accounts in Specified Bank Notes of Rs. 500 and Rs. 1,000 denominations. The assessee has explained the source of cash deposits and argued that cash deposits are not part of her business income.

The AO did not accept the assessee's explanation, and according to the AO, the assessee could not establish cash sales made to various persons with their addresses and PAN. The AO had also analysed sales declared by the assessee and observed that the assessee has declared higher sales to cover up cash deposits made into bank accounts. Therefore, the AO rejected the arguments of the assessee and made additions of Rs. 24,66,500 as unexplained money under Section 69A of the Income Tax Act.

The assessee preferred an appeal before the CIT (A). The CIT(A) sustained the additions made by the AO towards cash deposits on the ground that the assessee could not explain the reasons for filing a return for the assessment year when she had maintained books of accounts for the earlier assessment years. Therefore, there was no error in the reasons given by the AO to make additions to cash deposits.

The assessee contended that the assessee is predominantly dealing with cash. She made the purchase on credit, whereas her sale was in cash. She never deposited cash into her bank account, even during the earlier financial year. However, because of demonetization, she had deposited the entire capital employed in the business in specified bank notes, which cannot be a valid tender after the specified date. The AO, except for stating that the assessee has booked excess sales to cover up cash deposits, does not give any valid and cogent reasons to reject the arguments of the assessee. The additions made by the AO should be deleted.

The department contended that the assessee has filed a return of income for the AY 2017–18 under section 44AD of the Income Tax Act to cover up cash deposits made during the demonetization period.

The tribunal, while partly allowing the appeal of the assessee, stated that after considering the nature of the business of the assessee and also the average gross profit for the last two assessment years, the estimation of profit on cash deposits would meet the end of the justice.

Case Title: Ms.Asokan Meena Versus ITO

Citation: /ITA No.680/Chny/2022

Date: 02.11.2022

Counsel For Appellant: CA Yeshwanth Kumar

Counsel For Respondent: Varuvooru Sreedhar

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