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March 11, 2021

Is memory loss a valid answer for not explaining source of cash deposit?

by CA Jessica Nagaonkar in Income Tax

Is memory loss a valid answer for not explaining source of cash deposit?

There is no restriction under Income Tax in making the genuine investments out of the explainable source of funds. But several times investments are being made out of unaccounted funds and black moneys are being settled in such investments. Section 69 of the Income Tax Act helps the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee & naturally which are not recorded in the books of accounts, if any, maintained by the assessee.

According to Section 69, where the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

Section 68 of the Income Tax Act pertains to Cash Credits. According to Section 68, where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offered no explanation about the nature and source thereof or the explanation offered by him was not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Let us refer to the case of Smt. Anasuya Basi Reddy Vs ITO (ITAT Bangalore), where the assessee had challenged the additions made under Sections 68 and 69 of the Income Tax Act.

Facts of the Case:

  • The Assessing Officer (AO) had made certain additions to the income of the assessee under Sections 68 and 69
  • These additions were confirmed by Commissioner of Income Tax (Appeals).
  • Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT), challenging the following 3 additions:
  • unexplained investment u/s 69 of the Income Tax Act amounting to Rs.17,10,000
  • unexplained investment u/s 69 of the Income Tax Act amounting to Rs.5,00,000
  • addition u/s 68 of the Income Tax Act amounting to Rs.50,000.

Observations of ITAT regarding Unexplained investment u/s 69 amounting to Rs.17,10,000

  • From the plain reading of section 69, it was clear that investments which were made in the financial year immediately preceding the assessment year could only be subjected to addition under the said section.
  • In other words, the investments made in any other assessment year could not be brought to tax in the relevant assessment year.
  • From the assessment order and on material record, it was clear that the investments / advances of Rs.17,10,000 was made by the assessee in FY 2005-2006, i.e., AY 2006-2007.
  • Therefore, investments made in AY 2006-2007 could not be brought tax u/s 69 in the relevant AY, namely, A.Y. 2008-2009.
  • For this reason alone, the AO was not justified in law in making an addition by invoking the provisions of section 69.
  • The amount of Rs.13,10,000 (i.e., Rs.17,10,000 – Rs.4,00,000) shown as “advance paid towards purchase of land”, in the balance sheet was the advance amount which was given to one Shri H T Narayana Reddy in FY 2005-2006 for the purpose of purchasing land.
  • Since the sale did not go through, out of an amount of Rs.17,10,000, a sum of Rs.4,00,000 was repaid to the assessee by Shri H T Narayana Reddy in the relevant assessment year and balance amount was given to the assessee by Shri H T Narayana Reddy in AY 2011-2012
  • The advance paid by the assessee to Shri Narayana Reddy during AY 2006-2007 was stated to be out of sale proceeds of land belonging to the assessee and her son.
  • Since it was clear that the amount was advanced for purchase of land in assessment year 2006- 2007, addition u/s 69 amounting to Rs.17,10,000 could not be made for the relevant AY, viz., 2008- 2009.
  • It was ordered accordingly.

Observations of ITAT regarding Unexplained investment u/s 69 amounting to Rs.5,00,000

  • The AO based on the AIR information, had added a sum of Rs.5 lakh as unexplained investments in mutual funds and bank deposits.
  • It was clear that the assessee had received back a sum of Rs.4 lakh being part of advance amount paid to Shri Narayana Reddy.
  • This amount of Rs 4 lakh received from Shri Narayana Reddy was invested in mutual funds.
  • With regard to the bank deposit of Rs 1 lakh, the AO had erroneously come to the conclusion that the assessee had made bank deposit of Rs 1 lakh.
  • The AO himself in the impugned assessment order had found that on verification of assessee’s bank account, there was no such bank deposit of Rs.1 lakh.
  • Therefore, only the investment made during relevant AY was with reference to mutual funds amounting to Rs 4 lakh.
  • The investment in mutual funds was explained by the amount of Rs 4 lakh received by the assessee from Shri Narayana Reddy during the relevant AY.
  • Therefore, the addition of Rs 5 lakh was unwarranted u/s 69 and ITAT deleted the same.

Observations of ITAT regarding Addition u/s 68 amounting to Rs.50,000

  • The AO in the impugned assessment order had made addition of Rs.50,000 as unexplained cash credits in the bank account of the assessee.
  • The said amount was deposited in Karnataka Bank saving bank account on 07.04.2007 (cash deposit).
  • Before the AO, the assessee had stated that the assessee was unable to recollect the source of cash deposit.
  • This was due to old age and the recent surgery she had undertaken, which had resulted into loss of memory.
  • It was stated that the cash deposit of Rs 50,000 made by the assessee could be explained as part of past savings and other receipts.
  • Since the assessee had not given any details with regard to the cash deposits of Rs.50,000 ITAT confirmed this addition.

In conclusion, Memory Loss is not valid explanation for not explaining Cash Deposit Source

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