SASTHA SOLUTIONS,CHENNAI V. DCIT, NCC-19(1), CHENNAI

ITA 1010/CHNY/2025

AI Insights

The case involves M/s. Sastha Solutions, a firm engaged in the agency business of marketing products, which filed an appeal against the order of the Addl/JCIT(A), Visakhapatnam. The dispute centered on the assessment year 2017-18, where the AO had reduced the declared loss and made additions by estimating profit and adding unexplained cash credits. The FAA partially allowed the appeal by reducing the estimated profit margin but upheld the addition of unexplained cash credits. The Tribunal, after considering the submissions and evidence, found that the AO's estimation of income was incorrect as the books were not rejected, and the cash deposits were part of trade receipts, thus not unexplained.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 705559 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2017-2018
• Other Referred Cases: PCIT vs. Marg Ltd., TamilNadu State Marketing Corporation Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHWIN GOWDA
• Assessee Lawyers: P.M. KATHIR
• Keywords: Unexplained cash credit; Rejection of books of accounts
• Section: 234B

Judgement Text

"आयकर अपीलीय अिधकरण, ‘सी’ (एस एम सी), ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ (SMC) BENCH, CHENNAI ᮰ी जॉजᭅ जॉजᭅ, उपा᭟यᭃ के समᭃ BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT आयकर अपील सं./ITA No.: 1010/CHNY/2025 िनधाᭅरण वषᭅ/Assessment Year: 2017-18 M/s. Sastha Solutions, Flat No.9, 3rd Floor, Sriji Apartments, 64, 12th Avenue, Ashok Nagar, Chennai – 600 083. PAN: ACPFS 0215G Vs. The Deputy Commissioner of Income Tax, Non-Corporate Circle 19(1), Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri P.M. Kathir, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Shri Ashwin Gowda, JCIT (Through Virtual Mode) सुनवाई कᳱ तारीख/Date of Hearing : 01.07.2025 घोषणा कᳱ तारीख/Date of Pronouncement : 02.07.2025 आदेश/ O R D E R This appeal filed at the instance of the assessee is directed against the Addl / JCIT(A), Visakhapatnam order, dated 17.02.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18. ITA No.1010/Chny/2025 :- 2 -: 2. Brief facts of the case are as follows: The assessee is a firm. For the assessment year 2017-18, the return of income was filed on 07.11.2017 declaring loss of Rs.19,00,613/-. The case was selected for scrutiny and assessment was completed u/s.143(3) of the Act vide order dated 25.12.2019 wherein the loss was reduced to Rs.2,75,022/-. In the assessment order, the AO made addition of Rs.16,25,591/- by estimating profit at 6.29% of the total turnover. The AO also made an addition of Rs.4,48,906/- as unexplained cash credits u/s.68 r.w.s.115BBE of the Act since according to AO, the assessee has not properly explained the source of cash deposit. 3. Aggrieved by the assessment completed u/s.143(3) of the Act, assessee preferred appeal before the First Appellate Authority (FAA). The FAA partly-allowed the appeal of the assessee. As regards estimation of income at 6.29% by the AO, the FAA reduced the estimation to 5% of the total turnover. The relevant finding of the FAA reads as follows:- “6.2.2 …………. ………………………. During the appeal proceedings, Appellant contended that during the current year FY 2016-17 the firm carrying the agency business of marketing products of Brittania Industries Limited and it involves less margin of profit as compared to business carried out in FY 2015-16 which ITA No.1010/Chny/2025 :- 3 -: is of sale of Aachi products (masala powder, chilli powder, readymade mix and other similar products) and sale of talk time for MTS (CDMA mobile telephone services of Sistema Shyam Teleservices). The contention of the appellant cannot be denied outrighly as both the business models are different and involves different margins. After considering the facts of the case and appellant submissions, it is reasonable to restrict the gross profit at 5% of the total turnover of the firm for the AY 2017-18. Accordingly, AO is directly to restrict the GP at 5% on total turnover and recompute the total income of the assessee. Hence, this ground is partly allowed. 4. As regards the addition of cash deposit is concerned, the FAA confirmed the addition made by the AO by concluding assessee was not one of the authorized persons to accept Specified Bank Notes (SBNs) after 09.11.2016 and the SBNs being not a legal tender, addition made by the AO u/s.68 r.w.s. 115BBE of the Act is to be confirmed. 5. Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal. The assessee has raised ten grounds in Memorandum of Appeal. Ground Nos.1,2 and 10 are general in nature and no specific adjudication is called for and hence, the same are dismissed. Ground No.9 is with regard to charging of interest u/s.234A & 234B of the Act. Interest u/s.234A & 234B of the Act being mandatory and consequential, Ground No.9 is dismissed. The surviving grounds namely Ground Nos.3 to 8 read as follows:- ITA No.1010/Chny/2025 :- 4 -: 3. The CIT(A) erred in estimating the gross profit at 5% as against 6.29% estimated by the AO, when the books of accounts duly maintained and audited were not rejected. 4. The AO having made the addition of Rs. 16,25,591/- by estimating the gross profit without any basis, the CIT(A) went wrong in failing to delete the addition and in restricting such baseless addition. 5. The AO having made the addition by estimating the gross profit of the Appellant mere suspicions and surmises, the CIT(A) erred in failing to delete the same. 6. The CIT(A) erred in failing delete the addition of cash deposits u/s.68 of the Act as the cash deposits were out of sales proceeds and the same was accepted by the CIT(A). 7. The addition of cash deposits of Rs.4,48,906/- as unexplained cash credits u/s.68 of the Act being illegal and contrary to the facts, the CIT(A) erroneously upheld the same. 8. Without prejudice to the ground that the very addition of cash deposits is illegal, the same can be taxed only at the rates applicable for the A.Y.201 7-18 and not the enhanced rates @ 60% as done by the AO. I will adjudicate the above grounds as under: I. Ground Nos. 3 to 5 – Estimation of gross profit of the assessee 6. The Ld.AR contended that assessee for the relevant assessment year is in the new line of business and AO had erred in adopting the gross margin which was reported by the assessee in the earlier assessment year. The Ld.AR further submitted that the FAA has erred in restricting the gross margin at 5% since assessee was wholesale dealer in Britania Industries Ltd., and the gross margin was very less though the turnover was high. It was submitted that for the subsequent years (which assessee is ITA No.1010/Chny/2025 :- 5 -: having similar business), though the assessee’s turnover was substantially higher gross margin was very less. It was submitted that in the financial year 2018-19, the assessee could come to terms with the various challenges faced in the new business and post a net profit of 0.46% with a higher turnover of Rs.17.61 crores. Further, it was submitted that the assessee’s books of accounts are audited and the AO having not rejected the books of accounts ought not to have estimated the gross profit margin. In support of his submissions, the Ld.AR relied on the judgment of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Marg Ltd., reported in [2017] 396 ITR 580 (Madras). 7. The Ld.DR strongly relied on the orders of the AO and the FAA. 8. I have heard rival submissions and perused the material on record. For the relevant assessment year, assessee’s turnover was Rs.8,58,61,321/-. The turnover has entirely come from sale of products of Brittania Industries Ltd (Biscuits and other eatables) whereas the turnover of the previous assessment year was on account of sale of Aachi products (masala powder, chilli powder, etc). The assessee’s gross margin for the previous year ITA No.1010/Chny/2025 :- 6 -: (old business) was relatively higher whereas in the case of Agency business with Brittania Industries Ltd., though the turnover for the year is high (Rs.8.58 crores compared to previous year turnover of Rs.3.29 crores), the gross margin is very low at around 4.50% and after considering various other overheads the result was a net loss of 2.33%. Thereafter in the assessment year 2020-21, the assessee’s profit was 0.46% with the turnover of 17.61 crores. Therefore, it is not appropriate just to consider profit margin for the financial year 2015-16 and adopt the same as the profit margin for the relevant assessment year namely 2017-18 where the business of the assessee was totally different from that of the earlier year. Moreover, the audited books of accounts of the assessee has not been rejected by the AO while estimating the income on the turnover. The Hon’ble Jurisdictional High Court in the case of Marg Ltd., (supra) had endorsed the view of the Tribunal that only if books of accounts has been rejected, there can be an estimation of profits. In light of the aforesaid discussion, I hold that estimation of income by the AO at 6.29% which was reduced by the FAA to 5% is not legally correct on facts of the present case and the addition made is deleted. In the result, the issue raised in Ground Nos.3 to 5 is allowed. ITA No.1010/Chny/2025 :- 7 -: II. Ground Nos. 6 to 8 – Addition of cash deposits as unexplained cash credits u/s.68 of the Act 9. During the course of assessment proceedings, it was noticed that assessee had made cash deposit of Rs.5,59,500/- subsequent to the announcement of demonetization. It was further noticed by the AO that assessee’s cash in hand was only Rs.1,10,000/- as on 09.11.2016. Accordingly, the difference of Rs.4,48,906/- was added u/s.68 r.w.s. 115BBE of the Act as unexplained cash credits. The view taken by the AO was confirmed by the FAA by holding that subsequent to demonetization, assessee was not an authorized person to receive SBNs and SBNs not being legal tender, the same needs to be added u/s.68 r.w.s.115BBE of the Act. 10. The Ld.AR submitted that cash deposits are out of trade receipts from various shops and customers to whom assessee supplies the products of Brittania Industries Ltd. I notice that the entire cash book for the relevant assessment year was submitted to the AO which contains all the details of money received from customers. The Ld.AR took me through the cash book for the relevant assessment year and submitted that on 09.11.2016, the assessee had received a sum of Rs.4,26,527/- through customers ITA No.1010/Chny/2025 :- 8 -: and as on 09.11.2016, the closing cash balance was Rs.5,37,122/-. On 10.11.2016, two cash deposits were made of Rs.4,37,500/- and Rs.1,07,500/- and further a sum ofRs.14,500/- was deposited on 12.11.2016. The Ld.AR submitted that from the cash book, it is very clear that these amounts were received from customers and it is part of the trade receipts of the assessee. As regards the FAA’s reasoning that SBNs are not legal tender, the Ld.AR relied on the decision of the Chennai Bench in the case of TamilNadu State Marketing Corporation Ltd., in ITA No.431/CHNY/2023 (order dated 07.10.2024) and submitted that the specified date being 31.12.2016, any person was authorized to receive the SBNs provided he is able to explain the source for the same. 11. The Ld.DR strongly supported the orders of the AO and the FAA. 12. I have heard rival submissions and perused the material on record. On perusal of the material placed on record, it is clear that cash deposits are out of trading receipts. The books of accounts of the assessee have been audited and the same has not been rejected by the AO. When cash deposits are out of trading ITA No.1010/Chny/2025 :- 9 -: receipts, taxing the cash deposits as unexplained credits u/s.68 r.w.s.115BBE of the Act would tantamount to double taxation. Further, as regards the FAA’s contention that SBNs are not legal tender and same needs to be added u/s.68 r.w.s.115BBE of the Act, goes against the dictum laid down by the Chennai Bench of the Tribunal in the case of TamilNadu State Marketing Corporation Ltd., (supra). In the instant case, the FAA has not disputed the source of cash deposits but has merely confirmed the order of the AO by stating that assessee not being an authorized person to receive SBNs and hence, the addition was confirmed. Therefore, AO’s and FAA order is not legally tenable and I delete the addition of Rs.4,48,906/- made u/s.68 of the Act. In the result, the issue raised in Ground Nos.6 to 8 is allowed. 13. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 2nd July, 2025 at Chennai. Sd/- (जॉज[ जॉज[ क े) (GEORGE GEORGE K) उपाÚय¢ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 2nd July, 2025 RSR ITA No.1010/Chny/2025 :- 10 -: आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy to: 1. अपीलाथȸ/Appellant 2. Ĥ×यथȸ/Respondent 3. आयकर आयुÈत /CIT, Chennai 4. ͪवभागीय ĤǓतǓनͬध/DR 5. गाड[ फाईल/GF. "