No Addition when Source of Funds was referable to Monies Pooled from Customers in the Form of Advances Received and Sales effected in Business: ITAT [Read Order]

The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) in Dyapa Rajini vs. Income Tax Officer held that no addition under Section 69 of the Income Tax Act, 1961 could be made when source of funds was referable to monies pooled from customers in the form of advances received and sales effected in the business.

The assessee purchase and sell matching materials for women clothing. She also runs a tailoring centre. She filed her income returns as Rs. 1.33 Lacs and net agricultural income as Rs. 52,450/-. The Assessing Officer (A.O) during assessment noted that frequent deposit and withdrawal activities were happening in the assessee’s bank account and as the assessee failed to furnish evidence regarding the transactions, A.O completed the assessment to the best of his judgement under Section 144 of the Income Tax Act,1961. He observed that the assessee had furnished inaccurate particulars and had concealed bank transactions without sufficient evidence to prove the legitimacy of the deposits.

At the first appellate proceedings, the assessee submitted additional evidence under Rule 46A. She submitted that deposits are pooled up in the form of receiving advances from customers and sales effected in her business. The deposits in the bank account were made in connection with obtaining Visa for her son for seeking higher studies. However, the A.O objected the admission of additional evidence on the ground that nothing prevented assessee from furnishing proper details before him.

The Commissioner of Income Tax (Appeals) (CIT(A)) admitted the additional evidence and treated the entire deposits as her business turnover and directed the A.O to estimate profit at the rate of 8%, which was equivalent to Rs.5.12 Lacs. Aggrieved, assessee appealed before the Tribunal.

The Counsel for the assessee submitted that the taxability of income from a new source of income is beyond the jurisdictional powers of a first appellate authority. He further contended that the CIT(A) didn’t afford the assessee an opportunity before making an addition creating a new source of income. He argued that the CIT(A) was already made aware that part of the amount was received as advances by later on either adjusted or returned.

The bench comprising of Vice President D. Manmohan observed “Despite detailed objections by the Assessing Officer, the Ld. CIT(A) proceeded to consider the explanation of the assessee and accepted that the advances were received by the assessee from the customers. Consequent thereto the Ld. CIT(A) directed the A.O. to treat the entire deposits as her business turnover and directed the A.O. to estimate the profit @ 8% on the deposits. If the conclusion of the Ld. CIT(A) with regard to the acceptance of the source of funds is wrong, it is the duty of the Assessing Officer to either file an appeal or to file cross-objection or appeal by way of a petition under Rule 27 of the ITAT Rules. But in the instant case, no such action was taken at any stage of the proceedings which implies that the Revenue has accepted the conclusion of the Ld. CIT(A) i.e., the source of funds was referable to the monies pooled from the customers in the form of advances received and sales effected in the business. In such event, the addition cannot be made u/s 69 of the Act.”