Entire Cash Deposits in Bank cannot be added as Income: ITAT directs to consider peak calculation

The assessee runs a wholesale textile business named “M/s. Himanshu Fabrics,” and is Karta of a HUF. The assessee submitted a return of income on September 30, 2012, declaring a total income of Rs.9,19,240/- for the fiscal year 2012-13. After the return was processed under section 143(1) of the Income Tax Act of 1961 (“the Act” for short), was subjected to a scrutiny assessment and a notice was issued under section 143(2) on August 8, 2013. The assessee has made cash deposits of Rs.1,09,30,500/- in the saving bank account at Oriental Bank of Commerce (for short “OBC Bank”) on various dates, according to the Annual Information Report available with the Department regarding which he was requested to furnish details of such cash deposits, and explain source thereof with corroborative evidence and copy of bank account.

The assessee filed its written submissions and even wrote a letter dated 12.3.2015 submitting that he had offered peak credit of the cash transaction Rs.6,05,000/- recorded in the OBC Bank account as his income for the present Asst.Year 2012-13. Further, he said that he had no objection for assessing his income for the year under consideration at Rs.8,74,440/- based on 8% of the total turnover of Rs.1,09,30,500/- of his trading business in place of the peak amount of cash deposited of Rs.6,05,000/-for the year under consideration. The assessee as cooperation offered Rs.8,74,440/- as its income for the assessment year under consideration.

AO’s Decision:  The AO after considering submissions given by the assessee held that the assessee failed to prove the genuineness of the cash credit. Mere entries of sales and purchases in the books of accounts of the assessee were not enough to justify the cash credits. There must be some supporting documents related to particular transactions and prove and justify the genuineness of the transaction. The AO held that the assessee has not proved the onus cast upon him, so the cash deposits would be treated as cash introduced from undisclosed sources and made an addition of Rs.1,09,30,500/- to the total income of the assessee and demanded tax upon the same.

Appeal Before Id.CIT(A): Aggrieved, the assessee filed appeal before the ld.CIT(A), claiming that the AO has erred in making the addition of the withdrawal amount in the bank account as the income of the assessee. The AO failed to consider that the closing stock offered as additional income by the assessee in the subsequent assessment year, was nothing but the asset acquired out of such unaccounted income, and thus was inclusive of the amount incorporated in the bank account. Thus, the AO erred in not adopting either peak credit method or gross profit method but treated the total deposits in the bank accounts as the income of the assessee. The assessee pleaded before the CIT(A) to cancel the addition made by the AO. ITA No.2686/Ahd/2016 5

Decision: The ld.CIT(A) after considering the submissions of the assessee dismissed the appeal filed by the assessee on following grounds:

Certain deposits were found in the bank account of the assessee for which the appellant has submitted that these deposits are related to unaccounted retail business of the assessee. Other than no explanation and evidences were given by the assessee. The assessee has failed to establish the nexus between the disclosure made during survey operation and unaccounted stock with the cash deposits made in the saving bank account held with the Oriental Bank of Commerce. The contentions of the appellant that the provisions of Section-68 are not applicable to the case of the assessee as the bank account is not part of any book of accounts is not acceptable. The AO is justified in making the addition of Rs.1,09,30,500/- and the same is confirmed. Thus, the grounds of appeal are dismissed.

Appeal before ITA Tribunal: Aggrieved against appellate order, the assessee filed an appeal before the Tribunal raising the following grounds of appeal:

• The Id CIT(Appeals) has erred both in law and on facts in confirming an addition of Rs. 1,09,30,500/- in respect of gross amounts of total deposits on various dates in the bank account of Himanshu Shethia Individual with Oriental bank of commerce ignoring the submissions and the statement of the appellant during survey.
• The CIT(Appeals) erred in law and on facts in not appreciating that considering the deposits and also withdrawls from the said bank account only profit embedded in the undisclosed turn over ought to be assessed as income. The Id CIT(Appeals) also erred in law and on facts in confirming the addition of entire gross amount of deposits in the bank account when the sources of the said deposits were explained to be unaccounted sales of fabrics purchased from withdrawals from the said bank account and hence only peak amount could be added as claimed by the appellant in the statement during the course of the survey. It is so held now and addition of Rs. 1,09,30,500/- be directed to be deleted.
• Both the lower authorities failed to appreciate the submissions and explanations that the deposits in the bank account were from unaccounted trading and hence there was no justification to hold that as there were no bills for sales and purchase, the adoption of only Gross profit was not to be accepted.
• The Id CIT(A) also erred in law and on facts in not appreciating that the appellant had also adhered to the statement made during the survey with regard to disclosure obtained by the survey team with respect to excess or unaccounted stock and hence the statement made could not be rejected in part. It be so held and submissions made be directed to be accepted
• Both the lower authorities erred in making and in confirming addition in the hands of the appellant with regard to the gross deposits of the various amounts in the impugned bank account. It is so held now and the addition made be deleted.

Decision By the Tribunal:

The assessee offered a disclosure of Rs.51,21,318/- related to the unaccounted investment in stock for which there was no entry in the books of accounts of the assessee. Thus, during the course of survey, the assessee admitted the fact of unaccounted transactions of grey cloth and has offered the same for taxation either GP on such unaccounted trade or peak amount of cash deposits. It was pleaded that the AO erred in treating the cash deposits in OBC Bank account as unexplained cash credit, and relied upon Bombay High Court judgment in the case of CIT Vs., Bhaichand H. Gandhi, 141 ITR 67 wherein it has been held that where money is deposited in a bank, the relationship that is constituted between the banker and the customer is one of the debtor and creditor and not of trustee and beneficiary. The passbook supplied by the bank to its constituent is only a copy of the constituent’s account in the books maintained by the bank. It is not if the passbook is maintained by the bank as the agent of the constituent or it can be said that the passbook is maintained by the bank under the instruction of the constituent. Hence, the passbook supplied by the bank to the assessee cannot be regarded as book of the assessee i.e book maintained by the assessee or under his instruction. Thus, the AO erred in adding the amount of Rs.1.09 crores reflected in the assessee’s bank account which is not a book maintained by the assessee, and therefore, addition under section 68 of the Act cannot be made

It was held that the assessee’s cash deposits in the bank account were treated as unexplained income of the assessee and whereas the correct method is applying peak calculation method to compute the profit from the unaccounted cash sales made by the assessee. The entire cash deposits in the bank account cannot be added as income of the assessee. Cash sales made by the assessee do not have any bills or other record. However, the same is deposited in the bank accounts, and the purchases are made through bearer cheques to various parties.

In above lines, the matter is to be remanded to the AO only to the extent of considering the peak calculation and determining the income of the assessee in accordance with law. It is ordered that the assessee should cooperate with the AO for furnishing all the details for determining the peak calculation of the above OBC Bank transactions.

Thus, the appeal filed by the assessee was allowed to the extent indicated above.

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