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Section 69 in The Income- Tax Act, 1995
Section 68 in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 69A in The Income- Tax Act, 1995
Section 133A in The Income- Tax Act, 1995

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Income Tax Appellate Tribunal - Mumbai
Pawan Kumar Agarwal , Mumbai vs Assessee on 27 February, 2009
                   IN THE INCOME TAX APPELLATE TRIBUNAL
                              "C" Bench, Mumbai

                   Before Shri R.S. Padvekar, Judicial Member
                  and Shri B. Ramakotaiah, Accountant Member

                             ITA No. 1801/Mum/2009
                             (Assessment Year: 2005-06)

Shri Pawan Kumar Agarwal                        Income Tax Officer - 4(3)(3)
51, Agarwal Sadan, Dadi Seth                Vs. 6th Floor, Aayakar Bhavan
Agiary Lane, Kalbadevi Road                     M.K. Road, Mumbai 400020
Mumbai 400002
PAN - AABPA 4319 F
             Appellant                                      Respondent

                        Appellant by:    Shri Rakesh Joshi
                        Respondent by:   Shri Sumeet Kumar

                                      ORDER

Per B. Ramakotaiah, A.M.

This appeal by the assessee is against the order of the CIT(A)-XV, Mumbai dated 27.02.2009.

2. Assessee has raised the following three grounds on only one issue of treating the deposits in the bank account as unexplained monies under section 69A of the I.T. Act: -

"1) The Learned CIT(A) has erred in law as well as on facts in confirming the addition of sum of Rs.54,67,850/- by treating as unexplained monies u/s. 69A of the Income Tax Act' 1961, being the cash and cross bearer cheques deposited into the Bank Account of the Appellant on account of the Cash Sales done by his Concerns, the nexus for which had been clearly established.
2) The Learned CIT(A) has erred in law as well as on facts in confirming the addition of sum of Rs.54,67,850/- by holding that the said deposits were not satisfactorily explained which finding is contrary to the material and evidence on record.
3) The Learned CIT(A) has erred in law as well as on facts in confirming the addition of sum of Rs.54,67,850/- by holding that the burden which lay upon the appellant to prove the source of deposits as above was not discharged."

3. Briefly stated, the assessee is a Director in M/s. Kishanchand Textiles Ltd. and M/s. Unicorn Textiles Pvt. Ltd., both companies are engaged in the 2 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal business of sale of fabrics to various local and outstation parties. During the financial year 2004-05 there were cash deposits to the tune of `47,15,000/- and crossed bearer cheques to the tune of `7,52,850/- totalling to `54,67,850/- in the bank account maintained with Cosmos co-operative Bank. In ITD Computer system (AIR) the fact that cash deposit to the extent of `47,15,000/- were made in the saving bank account were made available to the A.O., consequent to which summons were issued and a copy of the bank account No. 990209 with Zaveri Bazar Branch was obtained. The assessee was asked to explain the said cash deposit. Assessee explained that at that point of time they were dealing in grey fabrics. The prevailing condition in the market was that outstation parties, in order to avoid sales tax levies and other duties in their state insisted on buying the grey fabrics in cash only. Since it is necessary for selling grey fabrics to the parties the grey fabrics were sold in cash without any supporting documents. Since the money was received in cash sale proceeds were deposited in the joint saving account in Cosmos Bank from which cheques were issued in favour of the companies to which goods sold belonged. It was also explained that the sole exercise was done under the mistaken belief that sales exceeding `20,000/- could not be incurred in cash. It was further submitted that such cash sales have occurred only in F.Y. 2004-05. Consequent to the explanation, in order to verify the claim survey under section 133A was conducted in the case of the two companies, the beneficiaries to whom cheques were made out of cash deposits. During the survey the assessee seems to have disclosed an amount of `50,00,000/- as additional income for F.Y. 2006-07. However, the A.O. did not agree with the submissions of the assessee with reference to cash deposits and subsequent issue of cheques to the said companies towards their sales and treated both cash deposited in bank account as well as crossed bearer cheques totalling to `54,67,850/- as unexplained money of the assessee under section 69A of the I.T. Act.

4. Before the CIT(A) the assessee has submitted additional details with reference to issuance of cheques vis-à-vis correlation with the sales bills and sales account maintained in the company and submitted that the entire cash deposits and bearer cheques of the same amount were accounted for 3 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal as income in the hands of the assessee companies in the same assessment year as under: -

STATEMENT OF TOTAL DEPOSITS AND CHEQUE ISSUED :

TOTAL CASH DEPOSITS                                            4715000
TOTAL CROSS BEARER CHEQUES DEPOSITS                             752850
                                                               5467850
LESS CHEQUES ISSUED TO
     P. KISHANCHAND TEXTILES PVT. LTD.            1807500
     UNICORN TEXTILE PVT. LTD.                    3660350      5467850
                                                                     0
                                                              ========

5. It filed additional evidence before the CIT(A) including the details of purchases and sales of the whole period and how the amounts were accounted in the companies as sales. The CIT(A) sent the matter on remand to the A.O. who submitted the report dated 01.12.2008. Assessee was given another opportunity and after considering the explanation the CIT(A) confirmed the addition so made vide para 3.4 of his order, which is very elaborate running from page 8 to 16 of the order. The gist of the reasons given for confirming the addition are (a) that the CIT(A) did not find any merit regarding claim of satisfactory explanation of source of deposit in the bank account of the assessee (b) the so called sales bills submitted evidences the falsity of the claim of the so called sale bills as no address of any such purchase parties has been given and these bills are prepared by the same person and the modus operandi of the bills are alike (c) that all the sales bills have no printed number, there is no reference of despatch and these are prepared in few sittings by one person and further (d) the account of assessee maintained in the bank were never disclosed as the information was unearthed by the A.O. because of availability of information in ITD computer system and this is concealment of vital information of account (e) the explanation in order to over come the difficulty of accepting payments in cash or through bearer cheques for conducting companies business assessee has opened saving bank account and sales proceeds have been deposited for issuance of cheques to companies could not be relied upon (f) that there is no satisfactory explanation from the assessee as assessee has used said bank account to channelise unaccounted cash available with him 4 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal in the guise of sales. The CIT(A) also verified the deposits on 08.04.2004. Four cheques were issued by the assessee of `1,69,000/-, 1,50,000/-, 1,40,000/- and 1,15,000/- respectively to Unicorn Textiles Ltd. and there is only one deposit of `1,87,050/- which appears to be not of sale proceeds. Therefore the CIT(A) was of the opinion that the explanation that three parties have given bearer cheques, which were deposited on that day to an extent of `3,78,300/- for issuance of cheques is not acceptable. On the basis of the observation made therein, the CIT(A) finally concluded as under: -

"All the above discussion and reasoning give rise to the conclusion that undisclosed bank account of the appellant possesses huge deposit of cash which source has not been proved by the appellant at any stage of proceeding and the story of cash sales of the appellant is found unreliable. The argument that if these sales proceeds are not accepted then how can one say that purchases & sales of the companies are correct or genuine one. Ld. AR has also referred the order of the AO of M/s. P. Kishanchand Textiles Ltd. that sales has been admitted by the AO. This argument is not tenable because of the reason that AO has not given any certificate about the genuineness of the sale proceeds or purchases of goods to M/s. P. Kishanchand Textiles Ltd. Against the argument of the ld. AR there can be counter argument that these companies might have also be doing unaccounted sales at higher price and only with a view to suppress the G.P. such arrangements of taking account payee cheque from the appellant might have been made, otherwise there was no valid reason not to who the sale proceeds by the companies for their sales. The suppression of gross profit by the companies can be visualised from the sale bills itself where no qualitative details have been mentioned and selling rates are varying substantially. Since this matter is not relevant here, details of such evidences appearing in such sales bills are not adduced. As it has been referred to with a view to meet out the theoretical arguments of the ld. AR. Therefore, the totality of the facts & circumstances proves that there is unaccounted and unexplained deposit of cash in bank which is required to be tax u/s. 68/69 of I.T. Act. As such the total addition made by the AO of Rs.54,67,850/- is confirmed."

Thus the CIT(A) confirmed the addition under section 68 & 69 of the I.T. Act.

6. The learned counsel referred to the paper book and remand report to submit that the assessee has deposited cash out of the sale proceeds and issued cheques to respective companies immediately and all the sale proceeds have been accounted for in the company as explained to the authorities and the source of funds is nothing but cash sales made to outstation parties which were in fact accounted in the books of account of the two companies in which the assessee is a Director and these amounts 5 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal have been issued by way of cheques and credited to respective party's account and fully accounted in the hands of the company. He then referred to the remand report of the A.O., which was exracted by the CIT(A) in para 3.2 in page 4 of his order, wherein the A.O. has given the following statement, "the fact that there is one to one tally between cash deposit in Shri Pawan Kumar Agarwal's Bank account with Cosmos Co-operative Bank & Sales effected by the two companies cannot be denied". The Counsel also explained transaction of sales invoices and sales with reference to the date of cash deposit and date of cheque issue and date of receipt and sales bill whose account the same was credited in the respective companies and referring to various details, submitted that the A.O. has thoroughly examined one to one relationship between cash deposits and consequent issuance of cheques to the company in which the cheques are accounted for as sales proceeds. He further referred to the Balance Sheet and purchases and sales during the year and assessment order of the company consequent to the survey to submit that there is no claim of any unaccounted transactions in those cases. With reference to the argument of the CIT(A) that sales bills are unnumbered and written in one hand writing, it was his submission that the sales bills are serially numbered in hand and the only employee of the company who prepared the sales bills in his hand writing and that cannot be the reason disallowing the claim of the assessee. It was further explained that the CIT(A) also was wrong in analysing the transactions of 08.04.2004 where cheques were issued but there is only one credit of the amount of `3,78,300/- of three parties of Poonam Trading Co., Sumit Fabrics & Damodar Fabrics. Then he referred to the respective accounts in which these cheques were issued and accounted for and submitted that all the three bearer cheques were from different parties deposited on the same date in the bank and that is why there was only one clearance amount of the amount of `3,78,300/- which the CIT(A) did not accept as from three parties. He referred to the transactions with three parties before 23.03.2004 and issuance of bearer cheques. It was explained that many of the parties who transacted in grey fabrics hold bearer cheques with endorsement from one party to other and these endorsed bearer cheques are not accepted by the scheduled banks and that is why the 6 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal assessee had to open separate account in a cooperative bank whereas the assessee's main banker was Union Bank of India. It was his submission that on the basis of the explanation and documents and one to one tally of the sales proceeds accounted for in the companies the explanation of the assessee should have been accepted and the orders of the A.O. and the CIT(A) should reversed.

7. The learned D.R., however, relied on the orders of the A.O. and findings of the CIT(A) in supporting the same.

8. We have considered the rival contentions and examined the document placed in the paper book, remand report and orders of the Revenue authorities. We are unable to accept the action of the Revenue authorities in treating the cash deposits and cheque deposits as income of the assessee. First of all, the A.O. having received the information that there were cash deposits treated the account as unaccounted and undisclosed bank account. There is no provision in the return to mention all the bank accounts at the time of filing the return. Assessee is owning bank accounts and admits that the transactions are undertaken by him on behalf of the two companies in which the entire proceeds have been accounted for. Therefore the account being undisclosed cannot be the reason for denying the genuineness of transactions in the bank account. We also enquired the learned D.R. how the bank accounts maintained by the assessee are to be disclosed in the return of income as the return of income does not mention about disclosure of bank accounts at the relevant point of time. Even at present, for claiming of refund only one bank is to be mentioned, which is also not mandatory. In view of this, the allegation that assessee has not disclosed the bank account itself is not correct and can not be taken as a reason for not accepting the explanation.

9. The A.O. after elaborately discussing the issue invoked provisions of section 69A while treating the amounts as income in the hands of the assessee. Provisions of section 69A will come into picture only when the assessee is found to be the owner of the money, bullion, jewellery or other articles and these are not accounted for and no explanation about the nature and source acquisition of the asset, in the opinion of the A.O., was 7 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal not satisfactorily explained. In this particular case no assets, whatsoever, has been found. What has come to the knowledge is a bank account maintained in which cash was deposited and cheques were issued to other companies nullifying each deposit. How provisions of section 69A are applicable to this is not explained. Considering this legal lacunae, the CIT(A) in his order has confirmed the addition as addition under section 68/69. While appreciating the action of the CIT(A) in modifying the section under which the addition was made, provisions of section 69 are not applicable as there is no unexplained investment for which section 69 is applicable. The only provision which attracts in this particular case is section 68 with reference to cash credits. The A.O. in his wisdom not only considered the cash deposit of `47,15,000/- as income of the assessee but also cross bearer cheques of `7,62,850/- which were in fact received by the said companies but endorsed in individual name and again accounted for in the companies towards sale proceeds. To the extent of `7,15,850/- certainly provisions of section 68 are not applicable. Confirmation by the CIT(A) invoking provisions of section 68/69 on deposits of cross bearer cheques cannot be sustained.

10. That leaves us with cash deposit of `47,15,000/- It is assessee's explanation that goods were sold to private/outside parties in cash under the mistaken impression that sales proceeds upto `20,000/- could be undertaken in cash. Cash received was deposited in the bank account and corresponding cheques were issued to the companies. There was one to one matching tally between cash deposits, sales bills and accounting of sales by way of cheques in the hands of the respective companies. The A.O. also gives a finding that there is one to one matching. In spite of explaining that the cash deposits are noting but sales proceeds and also explaining one to one matching with respect to cheques issued and accounted for in the company the A.O. still was not satisfied about the cash deposits in the bank account. We are of the opinion that the assessee has discharged his onus of explaining and proving the nature of source of the cash deposits in the bank account. It is also a fact that the cheques issued from the bank account were accounted for by the company as credit of sales and the A.O. has not disturbed the overall sales and purchases of the company at all. In view of 8 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal this we are of the opinion that the assessee has offered an explanation about the nature and source thereof and the explanation offered by the assessee is satisfactory. The learned counsel for the assessee also explained the sales bills, sales accounted in the companies and the accounts of respective parties and also how three bearer cheques were issued on behalf of Poonam Trading Co., Sumit Fabrics & Damodar Fabrics, which were cleared on a single day and only one credit entry was given by the Bank. On verification of these transactions, we are of the opinion that the CIT(A) was wrong in coming to the conclusion that three parties cannot issue one cross bearer cheque. Actually the three bearer cheques were deposited on a single day and credited as single amount by the bank. We are of the opinion that both the A.O. and the CIT(A) have considered the addition wrongly both on facts as well as on law. Therefore, we have no hesitation in allowing the grounds and delete the addition so made in the hands of the assessee.

11. Before parting with this, we are also of the opinion that the subsequent admission of income of `50,00,000/- by the Directors consequent to the survey for F.Y. 2006-07 and withdrawal of the same consequent to the correlation of sales in stock before the A.O. should not have any bearing on the issue in consideration. Both the A.O. and the CIT(A) seems to have carried away by the admission during the survey proceedings and subsequent withdrawal which mostly pertains to A.Y. 2007-08 and not to A.Y. 2005-06. There is no evidence whatsoever to differ from the explanation given by the assessee and since the entire sales proceeds for which the cheques were issued have been accounted by the two companies in the same assessment year, the explanation of the assessee that the cash deposits were nothing but sales proceeds of companies, which are deposited in the bank account for issuance of cheques, cannot be brushed aside. It is a judicially accepted fact that the entire grey fabric market is unorganised and none of the authorities, both state government or central government could not control the grey cloth trading from the Bhiwandi area which is mostly in cash and could not be subjected to any verification. Since the assessee is dealing in grey fabrics and tried to account for all the transactions by way of cheques, assessee's action in accounting for the 9 ITA No. 1801/Mum/2009 Shri Pawan Kumar Agarwal cheque transaction in the company in respect of sales in cash should have been appreciated in the correct perspective. In view of this, we delete the addition so made and allow the grounds of the assessee.

12. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 30th December 2010.

                     Sd/-                                  Sd/-
               (R.S. Padvekar)                       (B. Ramakotaiah)
              Judicial Member                       Accountant Member

Mumbai, Dated: 30th December 2010

Copy to:

   1.   The   Appellant
   2.   The   Respondent
   3.   The   CIT(A) - XV, Mumbai
   4.   The   CIT- IV, Mumbai City
   5.   The   DR, "C" Bench, ITAT, Mumbai

                                                        By Order

//True Copy//
                                                     Assistant Registrar
                                             ITAT, Mumbai Benches, Mumbai
n.p.