AO Cannot Sit in the Armchair of a Businessman and Question Prudence of Business Decisions: ITAT

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, deleted the Rs 32.90 lakh addition made towards the cash deposits, observing that the cash deposits made during the demonetization period were properly explained and could not be treated as unexplained income under Section 69A of the Income Tax Act.

The assessee, Samir Navinchandra Shah, filed its income tax return (ITR) declaring Rs 48,33,320 income. The case was selected for scrutiny based on the cash deposits made by the assessee during the demonetization period, amounting to Rs 32.90 lakh. The AO treated the unexplained deposits under section 69A of the Income Tax Act. saying that the assessee had failed to prove the source. The assessee’s explanation for the cash deposits was rejected just because he had made large withdrawals, and he failed to give an explanation of the business purpose for making such large withdrawals.

The assessee appealed before the CIT(A), but did not succeed. Therefore, the assessee appealed before the ITAT Ahmedabad.

Before the tribunal, the assessee explained that the cash deposits were made out of the cash sales and the cash withdrawn from his bank account. To support his argument, he submitted the entire cash book, bank book, ledger account of buyers, and audited financial statement.

The ITAT did not find any irregularity in the documentary evidence submitted by the assessee, and it observed that the books of accounts of the assessee have not been rejected. The tribunal held that a tax officer cannot question the prudence of business decisions.

“The AO cannot sit in the armchair of a businessman and question the prudence of decisions made to reject explanations offered,” the tribunal said.

The Tribunal found that the assessee had made the required submissions to prove the genuineness of the cash deposits. The tribunal held that the assessee had discharged its onus of proving the source of cash deposits in the bank accounts during the demonetization period, and the revenue did not give any valid reason for treating the cash deposits as unexplained sources.

Accordingly, the ITAT directed the AO to delete the addition made under section 69A of the Income Tax Act.