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September 27, 2022

 AO failed to inquire source of the cash deposits, the section 263 order was justified

by CA Shivam Jaiswal in Income Tax

 AO failed to inquire source of the cash deposits, the section 263 order was justified

Facts and issues of the case

This appeal by the assessee is against the order of the Principal Commissioner of Income-tax, Bengaluru-2 (PCIT) passed u/s.263 of the Income Tax Act 1961 (the Act) dated 16.3.2022 for the assessment year 2017-18.The assessee is the proprietor of M/s. M.D. Jewellers [MDJ] and filed return of income declaring an income of Rs.9,35,850. The case was selected for limited scrutiny under CASS for verification of cash deposits during the year. Assessment was completed u/s. 143(3) of the Act on 6.12.2019 accepting the income shown in the return.

The PCIT noticed that the assessee has made cash deposit of Rs.88,16,000 in her bank account the source of which was submitted before the AO by the assessee as from opening cash in hand, cash sales, amount received from Debtors, amount transferred from personal books and cash withdrawals. The PCIT also noticed from the cash book of the assessee that the assessee had deposited money in the form of cash of Rs.5,00,000 on 05.08.2016, Rs.10,00,000 on 29.9.2016 from an account termed as “safe custody account” and transferred the said amount to the business account of MDJ.

The PCIT was of the view that the case was selected for limited scrutiny specifically for examining the cash deposits during the year and therefore it was necessary for the AO to examine the source of cash deposits and carry out necessary investigation. According to the PCIT, the AO failed to conduct necessary enquiries with regard to cash deposited and that the assessee has not given satisfactory explanation regarding source of cash deposits. To this extent, the PCIT considered the order of assessment to be erroneous and prejudicial to the interests of the revenue. PCIT issued a show cause notice on 9.2.2022 giving the assessee an opportunity for filing her submissions. The assessee made similar submission before the PCIT stating the deposit of cash is out of accumulated balance.

Observation by the court

Aggrieved by the order of the PCIT, the assessee is in appeal before the Tribunal.The ld. AR submitted that the assessee had accumulated cash balance which was held under safe custody account and the assessee had transferred the said amount to cash book from where it was transferred to the proprietary account of MDJ. In this regard, the ld. AR drew our attention to page 92 of the PB, where the cash book of the assessee reflecting these entries is accounted. The ld. AR submitted that the AO called for various details from time to time by issuing notices u/s. 143(2), 142(1) and also a show cause notice dated 8.11.2019 calling for details of the financials, cash book, cash sales and copy of VAT return.

 It was also submitted that the AO had called for the break-up of the cash deposits for three years from AYs 2016-17 to 2018-19. The ld. AR submitted that the observation of the PCIT that safe custody account is not mentioned anywhere in the books of account and balance sheet of the assessee is not correct and in this regard, our attention was drawn to the financials of the assessee [pg. 77 to 80 of PB], where under the details of “interest received and loan debtors”, “safe custody account” is reflected in the balance sheet of the assessee.

The ld. DR relied on the order of the PCIT and also submitted that the, cash deposit of Rs.88.16 lakhs is much more than the income declared by the assessee in the return of income at Rs.9.35 lakhs and this fact has not been properly verified by the AO. The ld. DR also submitted that from the details of three years cash deposit it is noticed that there was no cash deposit during the earlier assessment years, whereas during the year under consideration there are huge cash deposits of Rs.88,16,000. This discrepancy in the cash deposits should have been verified by the AO, which the AO failed to do so and the order therefore is erroneous and prejudicial to the interests of the revenue.

Court had considered the rival submissions and perused the material on record. The case of the assessee was selected for limited scrutiny for the purpose of verification of cash deposits during the year. It is also noticed that the assessee has submitted the details as called for by the AO from time to time. However, in the assessment order, the AO has not brought out any details of verification of cash deposits carried out by him during the course of assessment and he has passed a non-speaking order accepting the explanation given by the assessee. The source of cash deposits from “safe custody account” was not questioned by the AO by calling for ledger accounts etc., nor has the assessee submitted any details in this regard during the assessment proceedings.

In the present case, limited scrutiny was to be done for verification of cash deposits and the source of cash deposits from the safe custody account is not examined by the AO by calling for relevant details from the assessee. The AO ought to have examined the same to go into the root of these deposits whereas in the instant case, the AO has not questioned the information supplied by the assessee with regard to the source of cash deposits into the safe custody account and has simply accepted those details without further enquiry. In such circumstances, it cannot be said that the AO has made any enquiry or taken a particular view by application of mind on the issue. In view of the above discussion and relying on the ratio laid down by the Hon’ble Delhi High Court in the case of Gee Vee Enterprises (supra), we hold that there is no infirmity in the impugned order passed by the PCIT u/s. 263 of the Act.

Conclusion

In the result, the appeal by the assessee is dismissed by the court.

Asha-Devi-Vs-PCIT-ITAT-Bangalore.

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