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Sh. Surinder Kumar Mahajan, Govt. Contractor,, Pathankot v. The Income Tax Officer,, Pathankot

Income Tax Appellate Tribunal

Oct 10, 2022

Judgment

Subsequent
References

CaseIQ

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Concise Analytical Summary — ITA No. 534/Asr/2015

Factual and Procedural Background

The appeal arises from the order dated 31.07.2015 of the Commissioner of Income Tax (Appeals)-2, Amritsar, in respect of Assessment Year 2011-12, challenging confirmation of an addition of Rs.20,86,691 made by the Assessing Officer (AO) under section 68 of the Income Tax Act. The assessee, Sh. Surinder Kumar Mahajan, had filed his return under section 44AD (presumptive taxation) declaring total sales proceeds of Rs.52,13,825 and a return of income (deemed profit) of Rs.3,10,200 (with the opinion noting a deemed profit calculation of 8% = Rs.4,17,106 in parts of the record). The AO was not satisfied with the assessee's explanation for cash deposits in two bank accounts (IDBI Bank and PNB), reproduced cash/deposit entries totalling Rs.46,88,000 and treated a portion of the deposits as unexplained, making an addition under section 68. The CIT(A) confirmed the addition after treating 92% of gross receipts as deemed expenses (in line with the presumptive scheme) and allowing limited credit, resulting in confirmation of unexplained deposits of Rs.20,86,691. The assessee appealed to the Income Tax Appellate Tribunal (ITAT), Amritsar Bench.

Legal Issues Presented

Whether an addition under section 68 (unexplained cash credits) can be sustained against an assessee who has been assessed under the presumptive taxation provisions of section 44AD without the AO first carving out the case from section 44AD (for instance, by invoking section 69A) and proving that bank deposits have no nexus with declared gross receipts.
Whether, in the context of section 44AD (which deems profit at 8% of turnover), the Assessing Officer can treat the balance 92% of gross receipts as unexplained cash requiring the assessee to substantiate incurrence of expenditure to that extent.

Arguments of the Parties

Appellant's Arguments

The assessee declared turnover of Rs.52,13,825 and stated that the cash deposits in the IDBI and PNB bank accounts were out of those sales proceeds; the deposits were not limited to the lower figures relied upon by the tax authorities.
The assessee had opted for presumptive taxation under section 44AD and therefore had not maintained books of account; where income is assessed under section 44AD, the provisions of section 68 cannot be invoked to treat bank deposits as unexplained cash credits.
Neither the AO nor the CIT(A) proved that the cash deposits were other than business receipts with corroborative or circumstantial evidence; the authorities failed to displace the assessee's claim that the deposits represented business receipts.
The assessee relied on precedent authorities (including CIT v. Surinder Pal Anand and selected ITAT decisions) to support the contention that individual cash deposits need not be explained where presumptive taxation under section 44AD has been adopted.

Respondent's Arguments

The Assessing Officer was not satisfied with the assessee's explanation and reproduced cash/deposit entries in two bank accounts totalling Rs.46,88,000, treating Rs.24,24,961 as unexplained cash deposits and making an addition under section 68.
The CIT(A) confirmed the addition on the basis that deemed profit under section 44AD was 8% (Rs.4,17,106 on turnover of Rs.52,13,825) and treated the remaining 92% of gross receipts as deemed expenses; concluding that cash sales of Rs.22,70,735 were not available to the appellant for purchases/expenses, the CIT(A) allowed limited credit and confirmed unexplained deposits amounting to Rs.20,86,691. (The Additional CIT/Departmental Representative supported the impugned order.)

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Surinder Pal Anand, Punjab & Haryana High Court, (2010) 192 Taxman 264 (P&H)	Where an assessee is assessed under section 44AD (presumptive income), the assessee is not obliged to explain each individual bank deposit unless the deposit has no nexus with the gross receipts; exemption from maintaining books and presumptive computation means individual entries need not be disallowed without proof that they are unrelated to declared turnover.	The ITAT explicitly followed and applied this jurisdictional High Court decision and, relying on its principles, deleted the addition of Rs.20,86,691. The Tribunal stated it was "Following the Hon'ble Jurisdictional Punjab & Haryana High Court... we delete the addition."
Honey Rahulan v. Income Tax Officer, Ward-3, Alappuzha, ITA No. 150/Coch/2020 (ITAT, SMC Bench, Cochin) — AY 2011-12	This decision was cited by the assessee in support of the proposition that presumptive taxation under section 44AD limits the ability of the revenue to treat bank deposits as unexplained.	The judgment was cited by the assessee; the Tribunal's order records reliance by the assessee on this decision but the Tribunal's ultimate reasoning specifically records adoption of the Punjab & Haryana High Court decision (Surinder Pal Anand). The ITAT's order does not indicate it rested its decision principally on this ITAT bench decision.
Sh. Kanwaljit Singh Sandhu v. ITO, Tarn Taran, ITA No. 82/Asr/2018 (ITAT, Amritsar Bench)	Cited by the assessee as supportive precedent on treatment of bank deposits where return filed under section 44AD.	The decision was cited by the assessee. The Tribunal's order notes it among the authorities relied on by the assessee but the Tribunal expressly referred to and followed the Punjab & Haryana High Court decision for its conclusion.

Court's Reasoning and Analysis

The Tribunal first recorded the factual matrix: the assessee declared turnover of Rs.52,13,825 and had been assessed on a presumptive basis under section 44AD, whereby profits are deemed at 8% of turnover. The Tribunal quoted section 44AD and emphasized the statutory feature that the income is "deemed to be" profits and gains of business at the prescribed percentage, explaining that the deeming nature indicates that the deemed income is not the actual measured income but a statutory construct for assessment.

The Tribunal reasoned that because section 44AD deems profits at a percentage of turnover and also contemplates that deductions under sections 30 to 38 are deemed to have been given (per sub-section (2)), it is inconsistent to require an assessee who has opted for presumptive taxation to substantiate the entire balance 92% of gross receipts as actual business expenditures or to displace the declared nexus between gross receipts and bank deposits. The Tribunal concluded that requiring the assessee to prove expenditure to the extent of 92% would defeat the very purpose of presumptive taxation.

The Tribunal noted that neither the AO nor the CIT(A) had undertaken the exercise of carving out the case from the ambit of section 44AD (for example by invoking section 69A or otherwise) and establishing by evidence that the impugned deposits had no nexus with the declared gross receipts. The Tribunal held that no such exercise had been done by the lower authorities to justify treating those deposits as unexplained cash credits.

The Tribunal relied upon and followed the jurisdictional Punjab & Haryana High Court decision in CIT v. Surinder Pal Anand, which held that where presumptive taxation under section 44AD is applicable and accepted, an assessee is not obliged to explain each bank deposit unless the revenue shows that a deposit lacks nexus with declared gross receipts. Applying that authority and the statutory import of section 44AD, the Tribunal concluded the confirmed addition was contrary to the spirit and object of section 44AD and therefore deleted the addition of Rs.20,86,691.

Holding and Implications

Holding: The appeal was allowed and the addition of Rs.20,86,691 made under section 68 was deleted.

Implications:

Direct effect: The confirmed addition of Rs.20,86,691 is deleted and the assessee's appeal succeeds in respect of that addition. The Tribunal expressly followed the Punjab & Haryana High Court precedent in reaching this result.
Scope and precedent: The Tribunal applied an existing jurisdictional High Court decision (CIT v. Surinder Pal Anand) and did not purport to lay down a new legal principle. The order underscores that, where an assessee is assessed under section 44AD and the authorities have not carved out the case from section 44AD by appropriate exercise (and proved deposits lack nexus with turnover), additions under section 68 cannot be sustained merely by pointing to unexplained bank deposits.
No broader novel precedent was announced by the Tribunal beyond following the cited jurisdictional High Court ruling and applying the statutory scheme of section 44AD to the facts before it.

Order pronounced in open court on 10.10.2022. Bench: (Anikesh Banerjee) Judicial Member and (Dr. M. L. Meena) Accountant Member.

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IN THE INCOME TAX APPELLATE TRIBUNAL

AMRITSAR BENCH, AMRITSAR

BEFORE DR. M. L. MEENA, ACCOUNTANT MEMBER

AND SH. ANIKESH BANERJEE, JUDICIAL MEMBER

I.T.A. No. 534/Asr/2015

Assessment Year: 2011-12 Sh. Surinder Kumar Mahajan Vs. Income Tax Officer, (Govt. Contractor), Garden Ward-3, Pathankot-VI, Colony, Mission Road, Pathankot

Pathankot

[PAN: ADSPM 8293L]

(Appellant) (Respondent)

Appellant by : Sh. P. N. Arora, Adv. Respondent by: Sh. Ghansham Sharma, Sr. DR Date of Hearing: 14.09.2022

Date of Pronouncement: 10.10.2022

ORDER

Per Dr. M. L. Meena, AM:

This appeal has been filed by the assessee against the order dated 31.07.2015 passed by the Ld. Commissioner of Income Tax (Appeals)-2, Amritsar, in respect of the Assessment Year 2011-12, challenging therein upholding addition of Rs.20,86,691/- u/s 68 of the Act as the assessee has shown its return of income u/s 44 AD of the Act.

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO

2. The assessee has declared return of income of Rs.3,10,200/- u/s 44AD of the Act showing total sales proceeds at Rs.30,18,825/- on account of clay, rori and bajri proceeds a commission of income tax at Rs.1,20,000/- from a sale of stone during the year under consideration in compliance to the questionnaire issued by the AO. The ld. AR filed a reply dated 02.10.2013 stating therein that assessee was carrying business of supplying loose clay, rori and bajri being carried out from his residence. The AO has not been satisfied with the reply of the assessee that he has not maintained the books of account so no documentary evidences were produced to substantiate his sales claimed to extent of Rs.52,13,825/-. The AO reproduced the cash and deposits entries in the two bank accounts of the assessee, i.e., IDBI Bank, Dhangu Road, Pathankot and PNB, Dalhousie, Distt. Chamba totaling to Rs.46,88,000/-. The assessee to explain the source of the cash deposits, the AO being not satisfied with the reply of the assessee as treated Rs.24,24,961/- out of 52,13,825/- sales claimed by the assessee as unexplained cash deposit on account on excess cash deposits u/s 68 of the Act and added to the return of income of the assessee.

3. In appeal, the ld. CIT(A) has confirmed the addition by observing that the assessee has declared income of Rs.4,30,200/- in its return of income

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO for the year under consideration which included the deemed profit u/s 44AD of the Act of Rs.4,17,106/- being 8% of Rs.52,13,825/-, and therefore, the balance 92% of the gross receipts or turnover of the assessee were treated as his deemed expenses. The ld. CIT(A) has further observed that the AO has accepted the sale proceeds of clay, rori and bajri totaling of Rs.22,38,000/- between 01.04.2010 to 23.08.2010 in the two bank accounts, therefore, he has held that cash sales of Rs.22,70,735/- were not available with the appellant for making purchases of clay, rori and bajri and for incurring business expenses. Accordingly, the ld. CIT(A) has held deemed expenditure of the assessee for the year under consideration upto 23.08.2010 @ 92% of Rs.22,70,735/-. Thus, the ld. CIT(A) has allowed credit of Rs.3,30,574/- against the cash deposit of Rs.14,19,650/- in the two bank accounts of the appellant and balance and thus the balance of Rs.20,86,691/- (Rs.24,17,265 - 3,30,574) were held to be unexplained cash deposit and confirmed u/s 68 of the Act.

4. Aggrieved, with the impugned order and the assessee filed an appeal before us, objected to the confirmation of the addition of Rs.20,86,691/- u/s 68 of the Act without appreciating the facts of the case and ignoring the turnover of Rs.52,13,825/-, the sales effected during the second part of the financial year in particular. The ld. counsel for the assessee has submitted

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO that the assessee has provided the details of the cash deposits in the IDBI and PNB Bank being deposited out of the sales made amounting to Rs.52,13,825/- ad not Rs.19,90,735/- and Rs.2,81,000/- as mentioned by the authorities which is factually incorrect. He has argued that the assessee has not maintained books of account and where the assessee did not maintain the books of account and declared an income u/s 44AD. The provisions of section 68 of the Act cannot be invoked under the statute, in support he placed reliance on the following judgments:

1. Punjab & Haryana High Court in the case of Commissioner of Income Tax-II v. Surinder Pal Anand in ITA No. 156 of 2010, dated 29.06.2010, AY. 2005-06.

2. Income Tax Appellate Tribunal, "SMC" Bench, Cochin in the case of Honey Rahulan v. Income Tax officer, Ward-3, Alappuzha in ITA No. 150/Coch/2020, date - 09.06.2020, AY 2011-12.

3. Income Tax Appellate Tribunal, Amritsar Bench in the case of Sh. Kanwaljit Singh Sandhu v. ITO, Tarn Taran in ITA No. No. 82/Asr/2018, dated 24.12.2021, AY 2009-10.

The assesse has filed computation of income with declared Turnover as follows:

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO

5. The ld. counsel further argued that the AO has not considered the benefit of the cash balance and only the profit declared was considered as inflow in the cash for the source of the cash deposits in the bank account. He has also argued that neither the AO or the ld. CIT(A) has proved that the cash deposits in the bank accounts were not out of the business cash receipts of the assesse, with the support of required corroborative documentary evidences or by any circumstantial evidences in order to hold that the particular bank deposits were other than the cash sale receipts. The Ld. CIT(A) was required to prove the contrary to what is claimed by the assessee during that particular period. The Ld AR contended that the parallel corresponding sales have been accounted by credit receipts and thereby the same cash amount of the sales receipt were deposited in the bank accounts of the assessee.

6. The Ld addl. CIT(DR) supported the impugned order.

7. Heard the rival contentions, perused the material on record and written submissions filed before us. Admittedly, the assesse declared deemed profit u/s 44AD of the Act of Rs.4,17,106/- being 8% of Rs.52,13,825/- business turn over.

8. Section 44 AD of the Act reads as under:

"44AD (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profit and gains of business or profession".

"(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of subsection (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed."

9. The provisions of the above section are quite unambiguous to the effect that in case of an eligible business based on the gross receipts/total turnover, the income under the head 'profits & gains' of business shall be deemed to be @ 8% or any higher amount. The first important term here is 'deemed to be' which proves that in such cases there is no income to the extent of such percentage, however, to extent, income is deemed. It is undisputed that 'deemed' means presuming the existence of something which actually is not. Therefore, it is quite clear that though for the purpose of levy of income tax 8% or more may be considered as income, but actually this is not the actual income of the assessee. This is also the purport of all provisions relating to presumptive taxation.

10. From an analysis of section 44AD of the Act contained hereinabove, we are of the view that the assessee had not incurred the expenses to the extent of 92% of the gross receipts. Therefore, in the present case, the provisions of section 69A of the Act cannot be applied. Asking the

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO assessee to prove to the satisfaction of the Assessing Officer, the expenditure to the extent of 92% of gross receipts, would also defeat the very purpose of presumptive taxation as provided under section 44AD of the Act or other such provision. Since the scheme of presumptive taxation has been formed in order to avoid the long drawn process of assessment in cases of small traders or in cases of those businesses where the incomes are almost of static quantum of all the businesses, the Assessing Officer could have made the addition under section 69A of the Act, once he had carved out the case out of the glitches of the provisions of section 44AD of the Act. No such exercise has been done either by the Assessing Officer or by the Ld. CIT(A) in this case.

11. From the record, it is undisputed fact that the assessee had not maintained books of account that is why he opted for 8% income as per section 44AD of the Act. The section also does not put obligation on the assessee to maintain books of account, more so, in view of the fact that his income has been assessed as per section 44AD of the Act, he cannot be punished for not maintaining the same.

12. In our considered opinion such additions go against the spirit of the Section 44AD of the Act, which was introduced to help the small traders

ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO who have difficulties in maintaining books of account and other records. Tax is levied on presumptive basis. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Surinder Pal Anand [2010] 192 Taxman 264 (Punj. - Har.), on identical circumstances had held as follows'.—

"7. Section 44AD of the Act was inserted by the Finance Act, 1994 with effect from 1- 4-1994. Sub-section (1) of section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8 per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in sections 28 to 43C of the Act. This income is to be deemed to be the profits and gains of said business chargeable of tax under the head "profits and gains" of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs. 40 lakhs.

8. Once under the special provision, exemption from maintaining of books of account has been provided and presumptive tax at the rate of 8 per cent of the gross receipt itself is the basis for determining the taxable income, the assessee was not under obligation to explain individual entry of cash deposit in the bank unless such entry had no nexus with the gross receipts. The stand of the assessee before the Commissioner of Income-tax (Appeals) and the Tribunal that the said amount of Rs.14,95,300 was on account of business receipts had been accepted. The Ld. AR with reference to any material on record, could not show that the cash deposits amounting to Rs.14,95,300 were unexplained or undisclosed income of the assessee.

9. In view of the above position, we are unable to hold that any substantial question of law arises in this appeal.

10. The appeal is dismissed."

13. Since, the Assessing Officer nor the CIT(A) had done any exercise to carved out the case out of the glitches of the provisions of section 44AD of the Act. The authorities below have not given any reason as to why the provisions of Section 44AD of the Act are not applicable to this case and

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ITA No. 534/Asr/2015 Surinder Kumar Mahajan v. ITO hence, the addition confirmed was against the spirit of the Section 44AD of the Act.

14. Following the Hon'ble Jurisdictional Punjab & Haryana High Court in the case of CIT v. Surinder Pal Anand (Supra), we delete the addition of Rs. Rs.20,86,691/-.

15. In the result, the appeal of the assesse is allowed. Order pronounced in the open court on 10.10.2022

Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member

*GP/Sr/PS* Copy of the order forwarded to:

(1) The Appellant:

(2) The Respondent:

(3) The CIT(Appeals)

(4) The CIT concerned True Copy

(5) The Sr. DR, I.T.A.T By Order