Shivraj Mishrilal Bafna,, Raigad vs Assessee

Shri Shivraj Mishrilal Bafna, Shop No.17, Satyam Shopping Centre, Sector 2E, Kalamboli, Dist : Raigad PAN No.ADTPB2121K .. Cross Objector

Vs.

ITO, Ward-1, Panvel .. Respondent

Appellant by : Shri Prayag Jha Department by : Shri I.P. Nago Date of Hearing : 01-06-2015 Date of Pronouncement : 17-06-2015

ORDER

PER R.K. PANDA, AM :

This appeal filed by the Revenue and CO filed by the

assessee are directed against the order dated 31-10-2012 of the

CIT(A)-I, Thane relating to Assessment Year 2009-10. For the sake

of convenience, these were heard together and are being disposed

of by this common order.

2

2. Facts of the case, in brief, are that the assessee is an

individual and is engaged in the business of trading in gold

ornaments. He filed his return of income on 31-07-2009 declaring

total income of Rs.2,33,777/-. During the course of assessment

proceedings the Assessing Officer noted that as per AIR

information the assessee has made cash deposit of Rs.24,71,500/-

in his savings account. On being questioned by the Assessing

Officer to furnish the source of such cash deposits made the

assessee grossly denied of having any such account and any such

cash deposit in his bank accounts. It was stated that the bank

account is not showing any such transactions. The assessee also

asked the Assessing Officer to provide the date wise details of the

cash deposit made in the bank so that he will be able to explain

the transactions. In view of the above the Assessing Officer called

for information u/s.133(6) from the bank, i.e. Sahebrao Deshmukh

Cooperative Bank Ltd., Kalamboli branch, Navi Mumbai. Vide

letter dated 18-11-2011 the bank replied that the assessee is

maintaining the following bank accounts :

Sr.No. Account No. A/c. opening date Status of account 1 CA/582 19-04-1999 Account closed on 30-09-2000 2 SB/3363 18-04-1999 Account closed on 09-02-2004 3 SB/8176 21-04-2006 Account closed on 18-12-2008 4 SB/11679 07-01-1999 Account closed on 05-04-2011

3. From the details furnished by the bank the Assessing Officer

noted that in the bank accounts at Sl.No.3 and 4 above an amount

of Rs.40,57,265/- has been deposited on various dates and the

same has not been reflected in the balance sheet/capital account

filed by the assessee for reasons best known to him. He therefore

asked the assessee to explain as to why the above amount should

not be added to his total income u/s.68 of the I.T. Act. He also

asked the assessee to explain the source of such deposits. Since 3

the assessee did not reply to the above query raised by the

Assessing Officer to his satisfaction the Assessing Officer made

addition of Rs.40,57,265/- to the total income of the assessee

u/s.68 of the I.T. Act.

4. The Assessing Officer further observed that the assessee has

purchased gold from various customers on different dates at

Rs.3,47,600/- in cash. On being questioned by the Assessing

Officer it was stated that all those sellers are new and are not

known to the assessee and due to exceptional circumstances the

assessee has made cash payment to the above parties. Rejecting

the explanation given by the assessee the Assessing Officer made

addition of Rs.3,47,600/- u/s.40A(3) of the I.T. Act.

5. Before CIT(A) the assessee challenged both the additions. So

far as the addition of Rs.40,57,265/- made by the Assessing Officer

u/s.68 is concerned it was stated that besides regular business of

trading in gold ornaments the assessee was having the above bank

accounts which were not disclosed to the income-tax authorities

wherein deposits and withdrawals were made out of the

unaccounted business of share trading, labour job of making of

ornaments etc. The source of deposits in the bank account are out

of such sale proceeds/payments from/to of share trading, labour

charges, income for making gold ornaments etc. The assessee has

not kept any details of such receipts and payments vouchers for

which the assessee could not produce the same before the

Assessing Officer and it is not possible to give the details of such

transactions in the said bank accounts. It was accordingly argued

that only the income earned out of said unaccounted transaction

should be taxed in his case instead of deposits/credit entries as

only deposits cannot be the income of the assessee. Alternatively, 4

the assessee pleaded for addition of the peak credit amount to the

total income of the assessee. The assessee also agreed to offer

additional income of Rs.3,92,536/- on account of such peak credit.

6. Based on the arguments advanced by the assessee the

Ld.CIT(A) accepted the theory of peak credit and directed the

Assessing Officer to make addition of Rs.3,92,536/- and interest

earned on this account at Rs.47,104/-. The relevant observation of

the CIT(A) on this issue reads as under :

"4.1. I have gone through the assessment order passed by the A.O., written submissions filed by the appellant and also had detailed discussion on the issue with the A.R. of the appellant during the appellate proceedings.

4.2. The contention of the AR of the appellant is that in respect of the deposits in the bank accounts of the appellant, the entire credits in the unaccounted bank account of the appellant cannot be treated as income. In such situation only the peak credit theory should be applied and accordingly the peak amount worked out amounting to Rs. 3,92,536/- and interest earned on this amounting to Rs.47,104/- should be taken as the income for the period under consideration.

4.3. The above arguments of the AR have been considered and I intend to agree with these arguments. Where there are several credits and debits in the same bank account/ accounts, whether several credits in the accounting year, only the peak balance in the account can be taken as the income of the appellant for that period. The theory of the peak credit is most logical and applied on such deposits so as to ascertain the maximum amount which the appellant had in his bank accounts in question at any particular date, which can be treated as unexplained. The entire credits in the accounts cannot be the income of the appellant. This peak credit theory is generally accepted by the courts as it is logical and followed while attempting to make an addition for unexplained credits.

4.4. In the case of ITO Vs Maheshkumar Jayantilal Vora, (2004) 3 SOT 96 (Rajkot), ITAT Rajkot while deciding a similar issue has held as under :-

" We have duly considered the rival contentions and the material on record. The only dispute for our resolution is whether peak credit method applied in the facts of the case is rightly applied or not. It is well established that no income can be taxed twice. It is also not in dispute that these deposits include refunds of the subscriptions made from the deposits. Thus, by aggregating all deposits, they tend to get taxed twice which is against the principles of taxation the decisions cited by the Id. Counsel lend support to the case of the assessee and hence we decline to interfere with the decision of the CIT(A)."

5 4.5. It can be observed from the trend of these cash / cheque deposits in the bank accounts in question of the appellant that the cheques and cash amounts are being regularly deposited in the bank account of the appellant on the day to day basis and also there are also debits on the day to day basis. Therefore, the peak credit theory would be most logical and relevant in the instant case.

4.6. As far as the cash deposits in the bank account no. 8176 in question are concerned, it can be observed that there are total cash deposits amounting to Rs.20,76,551/-, there is peak credit of Rs. 3,92,536/- on 15/07/2008. This peak credit amount can be taken as the unexplained cash credit in the above bank account of the appellant for the period under consideration. In addition to the above, the appellant has also earned interest on these deposits, which @ 12% comes to Rs.47,104/-. Therefore, the total addition to the income of the appellant would be Rs.4,39,640/- on account of deposits in the bank account no. SB/8176 of the appellant for the year under consideration.

4.7. Similarly, in the other bank account no. 11679, there is peak credit of Rs.2,03,436/- on 26/03/2009 and this peak credit amount can be taken as the unexplained cash credit from this bank. In addition to the above peak credit, interest earned on such peak credit for the year comes to Rs.24,500/- which will also be added back to the income of the appellant for the year under consideration. The total addition therefore on account of peak credit in the bank account no. SB/11679 would come to Rs.2,27,936/- for the year under consideration. The total addition on the basis of the peak credit theory, which can be added back to the income of the appellant, comes to Rs.6,67,576/- (4,39,640 + 2,27,936). Therefore, the AO is directed to add back an amount of Rs. 6,67,576/- to the income of the appellant on account of unexplained deposits in the above mentioned bank accounts of the appellant for the period under consideration.

4.8. In view of the facts and circumstances explained above, in my opinion, the addition made by the AO for an amount of Rs. 40,57,265/- on account of the deposits in the bank accounts cannot be justified and therefore deleted. The AO is directed to delete the above addition and assess the income of the appellant as stated above on the peak credit basis at an amount of Rs.6,67,576/- and the addition made to this extent is confirmed."

7. So far as the addition u/s.40A(3) is concerned it was

submitted that the purchase of gold from customers is a regular

practice being followed by the jewellers and most of the persons

who come to sell the gold are indeed from very far flung areas.

They always insist for cash payment for selling of the gold. If the

Assessing Officer had any doubt regarding these purchases he

should have made independent enquiries from the parties

concerned. The assessee further argued that the payments in cash 6

above Rs.20,000/- were due to business expediency and covered

by the provisions of section 40A(3) read with the Rule 6DD. The

assessee further argued that all the bills and vouchers were

produced before the Assessing Officer during the course of

assessment proceedings.

8. Based on the arguments advanced by the assessee the

Ld.CIT(A) deleted the addition. While doing so, he observed that it

has been held in various decisions that if the genuineness of the

payment is not in doubt and the same is recorded in the books of

account the assessee's explanation regarding payment in cash can

be accepted. The mandate of the proviso is to exempt the payment

in violation of provisions of section 40A(3) in such cases and under

such circumstances as may be prescribed. He observed that in the

case of the assessee he is a trader and manufacturer of gold

jewellery and it is general practice in the business to purchase the

jewellery from the customers. When the needy customers come

from far flung places it is but natural that the assessee has to

make the payment in cash. Further, such cash payments for the

purchases have been made only to 12 persons ranging from

Rs.20,000/- to Rs.45,0000/- starting from 14-04-2008 till 19-03-

2009 spreading over almost the entire year, properly billed and

vouched. Further, the assessee has purchased gold from unknown

customers. Therefore, it is more obvious that assessee has to

make payment in cash. Further, if any doubt was there in the

mind of the Assessing Officer he could have called the parties and

should have carried out independent investigation to prove his

point as all the details of the parties were available. Referring to

the decision of the Mumbai bench of the Tribunal in the case of 7

ACIT Vs. Mangalchand Premchand and Company reported in 1

SOT 269 he directed the Assessing Officer to delete the addition.

9. Aggrieved with such order of the CIT(A) the Revenue has filed

this appeal with the following grounds :

"1. On the facts and in the circumstances of the case, the CIT(A)-I, Thane was not justified in deleting the addition made u/s.68 on account of the deposits in the bank accounts, overlooking the fact that the assessee failed to explain the source of deposits.

2. On the facts and in the circumstances of the case, the CIT(A)-I erred in accepting the peak credit theory, overlooking the fact that there is nothing on record to show that withdrawals made were not utilised and were available for re-depositing in the same bank account.

3. On the facts and in the circumstances of the case, the CIT(A)-I erred in admitting fresh evidence without giving opportunity to the AO.

4. The appellant prays the order of the CIT(A)-I Thane, may be vacated and that of the Assessing Officer be restored.

5. The appellant craves leave to add, amend or alter any ground/grounds, which may be necessary."

9.1 The assessee has also filed cross objections basically

supporting the order of CIT(A).

10. The Ld. Departmental Representative heavily relied on the

order of the Assessing Officer. So far as addition u/s.68 is

concerned he submitted that it is an admitted fact that the

assessee had huge deposits in the bank account during the

impugned assessment year. As against deposit of more than Rs.

40 lakhs in cash in the bank account, the profit and loss account

of the assessee shows a turnover of hardly about Rs.10 lakhs.

Under these circumstances when the Assessing Officer has pin-

pointed the cash deposits made by the assessee in the bank

account the Ld.CIT(A) should not have deleted the addition by

applying the theory of peak deposit. He submitted that there is no 8

evidence whatsoever to support the claim made by the assessee

that the deposits in the bank account are out of cash withdrawn

on various dates and sale of shares. The Ld.CIT(A) without

properly appreciating the facts of the case has simply went by the

submissions made before him. Neither he has independently

proved the submissions made by the assessee nor he directed the

Assessing Officer to verify the details which were not before the

Assessing Officer. He submitted that there is no doubt regarding

the power of the CIT(A) which are coterminous with that of the

Assessing Officer but such powers depend upon the facts of each

case. So far as deletion of disallowance u/s.40A(3) is concerned he

submitted that without assigning any proper reason the Ld.CIT(A)

deleted the disallowance made by the Assessing Officer u/s.40A(3)

of the I.T. Act. He accordingly submitted that the order of the

CIT(A) be reversed and that of the Assessing Officer be restored.

11. The Ld. Counsel for the assessee while supporting the order

of the CIT(A) submitted that the theory of peak addition has been

accepted by various Benches of the Tribunal as well as High

Courts. For the above proposition, he referred to the decision of

Rajkot Bench of the Tribunal in the case of ITO Vs. Maheshkumar

Jayantilal Vora reported in 3 SOT 96. Referring to the decision of

the Mumbai bench of the Tribunal in the case of M.A. Shahul

Hmeed Vs. ITO reported in 40 CCH 193 (Mumbai) (Tribunal) he

submitted that the Tribunal in the said decision has held that

when there are cash deposits made in bank account and also cash

withdrawals made from the same account, addition on account of

unexplained cash deposits made in said account has to be done on

the basis of peak credit. For the above proposition he relied on the 9

decision of the Hon'ble High Court of Calcutta in the case of Sanjay

Kumar Jain Vs. CIT reported in 118 Taxman 821.

11.1 So far as the ground raised by the Revenue over the

acceptance of additional evidences are concerned the Ld. Counsel

for the assessee referring to the decision of the Hon'ble Bombay

High Court in the case of Smt. Prabhadevi S. Shah Vs. CIT

reported in 100 Taxmann 404 (Bom.) submitted that the Hon'ble

High Court in the said decision has held that the restrictions

placed on the assessee to produce evidence did not affect the

powers of the AAC under subsection 4 of section 250. It has been

held there in that the powers of the AAC are much wider than the

powers of an ordinary court of appeal. The scope of his powers is

coterminus with that of the Assessing Officer. He can do what the

ITO can do. He can also direct the ITO to do what he failed to do.

The power conferred on the AAC under said sub section 4 of

section 250 being quasi judicial power, it is incumbent on him to

exercise the same if the facts and circumstances justify. If he

failed to exercise his discretion judicially and arbitrarily refuses to

make enquiry in a case where the facts and circumstances so

demand, his action would be open for correction by a higher

authority. It has been accordingly held that the restrictions placed

on the assessee to produce evidence do not affect the powers of the

AAC under sub section 4 of section 250. He accordingly submitted

that no addition should have been made u/s.68 on account of the

deposits in the bank account. Further, by admitting additional

evidence, the CIT(A) has not violated any of the provisions.

Therefore, the ground raised by the Revenue on this issue should

be dismissed.

10

11.2 The Ld. Counsel for the assessee further submitted that

bank statements are not books of accounts and therefore entries

made in such bank deposits cannot be the basis for addition

u/s.68 of the I.T. Act. For the above proposition, the Ld. Counsel

for the assessee referred to the following decisions :

1. Smt. Shanta Devi Vs. CIT reported in 37 taxmann 104 (Punj. & Har.)

2. Anand Ram Taitani Vs. CIT reported in 223 ITR 544 (Gau.)

3. ITO Vs. Kamal Kumar Mishra reported in 33 taxmann.com 610 (Lucknow Tribunal)

4. Sind Medical Stores Vs. CIT reported in 117 DTR 78 (Raj.)

5. CIT Vs. Bhaichand N. Gandhi reported in 11 Taxmann 59 (Bom.)

11.3 So far as the deletion of disallowance u/s.40A(3) he

reiterated the same arguments as made before the Assessing

Officer and the CIT(A) and submitted that the CIT(A) is fully

justified in deleting the disallowance.

12. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A)

and the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. The assessee in

the instant case is engaged in the business of trading in gold

ornaments. It is an admitted fact that the assessee in its profit

and loss account has disclosed turnover of Rs.11,14,504/-

whereas the deposits in the two undisclosed bank accounts are

Rs.40,57,465/-. Although initially the assessee denied to have

made any such cash deposits, however, before the CIT(A) he made

a plea that the deposits in the said accounts relate to his

unaccounted business of share trading and labour job of making of 11

gold ornaments. This plea was taken before the CIT(A) for the first

time. We find neither the CIT(A) called for a remand report from

the Assessing Officer nor asked the assessee to produce evidences

to prove that he was in fact engaged in the business of share

trading. It may be pertinent to note here that cash was deposited

in the said bank accounts whereas most of the withdrawals are by

inward clearing and only few instances of cash withdrawal. The

theory of peak credit as argued by the assessee before CIT(A) will

be applicable only when there are deposits in cash and

withdrawals in cash. In the instant case when the deposits are

made in cash and most of the withdrawals are by way of clearing

and not cash withdrawn, therefore, the theory of peak credit is not

fully applicable to the facts of this case. The Ld.CIT(A) has not

gone through the bank statements which were produced before

him. Although there are certain cash withdrawals, however, the

number of inward clearing entries are almost equal to the number

of cash withdrawals. Therefore, it has first to be ascertained as to

what are the nature of entries. Further, there is one transfer of

Rs.1 lakh on 21-04-2008 from S.B. A/c.No.11817, it is not known

about the nature of this entry. In our opinion, the matter requires

thorough scrutiny before coming to a final conclusion as to the

nature of entries, total amount of cash withdrawn and inward

clearing of cheques etc. The Ld.CIT(A) without applying his mind

and without verifying the nature of transactions has simply carried

away by the arguments made before him which in our opinion is

not at all justified. So far as the argument of the Ld. Counsel for

the assessee that addition u/s.68 cannot be made on the basis of

entries in the bank pass book, we find the assessee initially denied

to have made any such cash deposit in any bank account before

the Assessing Officer. Now the assessee has pleaded before the 12

CIT(A) for addition of peak credit. Before coming to the legality of

the aspect, the facts in our opinion needs to be enquired into.

12.1 Similarly, so far as the addition u/s.40A(3) is concerned,

here also, we find the Ld.CIT(A) while deleting the addition made

u/s.40A(3) observed as under :

"6.2. Majority of the Courts have taken a view that if the genuineness of the payment is not in doubt and the same is recorded in the books of accounts, the assessee's explanation regarding payment in cash can be accepted. The mandate of the proviso is to exempt the payment in violation of provisions of section 40A(3) in such cases and under such circumstances as may be prescribed. The last sentence of the proviso, i.e., having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors, is the guideline for the authority making such disallowances, which mean the AO has to apply his mind before taking decision regarding the disallowances to be made u/s. 40A(3)."

12.2 However, from the order of the CIT(A) we do not find as to

whether the persons to whom payments have been made for

purchase of gold ornaments are having bank accounts or not and

whether the places where they are residing is covered by the

banking facilities or not. Without ascertaining this vital aspect the

CIT(A) has jumped to conclusion that it was for business

expediency that the assessee has purchased the gold ornaments in

cash from different persons. He also accepted the contention of the

assessee that if the Assessing Officer had any doubt regarding the

cash payments he should have called the parties and should have

carried out independent investigation. Although the Assessing

Officer has failed in his duty, the Ld.CIT(A) whose powers are

coterminus with that of the Assessing Officer should have atleast

remanded the matter to the file of the Assessing Officer with a

direction to investigate and enquiry regarding the cash payments

which he has failed to do so. In view of the above we are unable to

accept the observations of Ld.CIT(A). Considering the totality of 13

the facts and circumstances of the case and in the interest of

justice, we deem it proper to restore the issue to the file of the

Assessing Officer with a direction to adjudicate both the issues

afresh in the light of our above observations.

13. In the result, the appeal of the Revenue as well as the CO

filed by the assessee are allowed for statistical purposes.

Pronounced in the open court on 17-06-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 17th June, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-I, Thane 4. CIT-I, Thane 5. The D.R, "B" Pune Bench 6. Guard File

By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune