AO adds Unexplained Investment During Demonetization: ITAT Rules Addition Based on Suspicion Cannot Be Sustained [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) quashed the addition of Rs. 53.02 lakhs as unexplained investment under Section 69 of the Income Tax Act stating that the addition cannot be sustained on the basis of mere suspicion.

J.K. Jewel Craft, (assessee) a partnership firm engaged in the jewelry business. The Assessing Officer (AO), during the assessment for AY 2017-18, noted that the assessee deposited Rs. 80 lakhs during the demonetization period. 

The assessee explained that the cash deposits included Rs. 7.59 lakhs from sales and collections made between November 9, 2016, and November 11, 2016, along with Rs. 45.43 lakhs infused by partners as earlier business withdrawals.

The AO rejected these explanations, and held that the contentions cannot be accepted due to it being impractical for any businessman especially running a jewellery business for a long time to keep huge amounts of cash. Therefore the AO added Rs. 53.02 lakhs as unexplained investment.

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Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (appeals)[CIT(A)]. The explanation for Rs. 7.59 lakhs was accepted by the CIT(A), citing detailed sales and stock records submitted by the assessee, which the AO had failed to consider.

However, the CIT(A) upheld the addition of Rs. 45.43 lakhs, applying the “test of human probability” and finding it was improbable for the partners to hold such large sums in cash over a long time. Aggrieved by this order, the assessee filed an appeal before the ITAT.

The two-member bench comprising Shri Manu Kumar Giri (Judicial Member) and Shri Manoj Kumar Aggarwal (Accountant Member) observed that the cash withdrawals and subsequent deposits were documented in the assessee’s books of accounts, supported by the bank statements, and reflected in the partners' capital accounts.

The tribunal also observed that the AO had accepted all other entries related to the partners’ withdrawals and deposits except for the disputed amount.

Therefore, the tribunal observed that additions cannot be made merely on suspicion or probabilities. The tribunal held that the absence of evidence to challenge the genuineness of the withdrawals and deposits makes the addition unsustainable.

The tribunal directed the deletion of the disputed addition of Rs. 45.43 lakhs,and held that the addition was based on mere suspicion and lacked legal merit. The appeal of the assessee was allowed.

To Read the full text of the Order CLICK HERE

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