Facts of the Case

The assessee, engaged in wholesale trading of sugar, edible oil, and rice, filed a return declaring income of ₹12,90,992. During the demonetization period, he deposited ₹32,16,500 in old currency notes into his bank account on 11.11.2016.

The Assessing Officer, citing lack of compliance and inadequate supporting evidence, disallowed various business expenses aggregating ₹27,23,015 and treated the cash deposit of ₹32,16,500 as unexplained money under section 69A. However, a separate deposit of ₹16,25,500 made on the first day after demonetization was accepted as explained.

The CIT(A) granted partial relief on expenses but sustained major additions and upheld the treatment of the demonetization deposit as unexplained.

 Issues Involved

  1. Whether disallowance of expenses based on general observations without evidence is legally sustainable.
  2. Whether cash deposits during demonetization can be treated as unexplained when claimed to arise from business receipts.
  3. Whether assessment orders based on conjecture violate principles of natural justice.

 Petitioner’s Arguments

The assessee contended that the disallowance of expenses was arbitrary and based on vague “observations” of income tax office staff, without identifying the source of such observations or providing opportunity for rebuttal.

Regarding the cash deposits, it was argued that the amount represented sales proceeds and collections from customers, duly recorded in books. Since trading results and business income were accepted, treating the deposits as unexplained money under section 69A was unjustified.

Respondent’s Arguments

The Revenue submitted that the assessee had failed to comply with notices and did not produce documentary evidence to substantiate expenses or explain deposits. In such circumstances, the Assessing Officer was justified in making additions. Alternatively, it was suggested that the matter be remanded for reconsideration.

Court Order / Findings (ITAT Allahabad)

The Tribunal found that the Assessing Officer’s disallowance of expenses was based solely on unverified observations allegedly made by staff members, whose identities were not disclosed and whose statements were neither recorded nor confronted to the assessee. Such additions were based on suspicion rather than evidence.

With respect to the demonetization deposit, the Tribunal noted the inconsistency in accepting one deposit as explained while rejecting another without proper examination of books and supporting material.

However, considering the assessee’s non-compliance during earlier proceedings and the need for proper verification, the Tribunal restored the entire matter to the Assessing Officer for a de novo assessment, directing consideration of any evidence the assessee may produce. The appeal was allowed for statistical purposes.

Important Clarification

The Tribunal did not adjudicate on the merits of the claims but emphasized that additions cannot rest on conjecture or unverified assumptions. A fresh assessment must be conducted after granting adequate opportunity and examining documentary evidence.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771061983_RAJENDRATRIPATHIMAHARAJGANJVS.INCOMETAXOFFICERWARD14MAHARAJGANJ.pdf

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