Employee loses tax appeal: Court upholds addition of unexplained cash deposits as income

Get the full picture - access the original judgement of the court order here

Case Name

C.K. Ramakrishna Vs Income Tax Officer (High Court of Karnataka)

ITA No. 17 of 2018

Date: 17th November 2021

Key Takeaways

• Burden of proof: Taxpayers must provide satisfactory evidence to explain the source of cash deposits in their bank accounts
• Wrong provision application: Courts can correct wrong legal provisions cited by tax officers (Section 68 vs Section 69)
• Cash transactions: Large property transactions should typically be done through cheques/demand drafts, not cash
• Appellate powers: First appellate authorities have co-terminous powers with assessing officers and can modify provisions
• Evidence standards: Mere affidavits without supporting documentation are insufficient to prove income sources

Issue

The central legal questions were:

1. Whether Section 68 (Cash credits) applies when an assessee doesn’t maintain books of accounts, or should Section 69 (Unexplained investment) be applied instead?
2. Whether a bank passbook constitutes “Books of Account” under the Income Tax Act?
3. Whether additions can be made simultaneously under both Sections 68 and 69?

Facts

C.K. Ramakrishna was an employee at Satyam Computer Services Limited in Bengaluru for about 6 years (2003-2009). He worked as a Test Manager and spent about 3 years working on projects in the USA with a valid work permit.

For the assessment year 2009-10, he filed his tax return declaring income of Rs.8,31,390 from salary and bank interest. However, when the tax department scrutinized his case, they noticed something suspicious in his ICICI Bank account at Jayanagar Branch - multiple cash deposits totaling Rs. 23,91,000 during the period from October 1, 2008, to March 31, 2009.

The Assessing Officer couldn’t find a satisfactory explanation for these cash deposits and added this amount to his income, raising a tax demand of Rs.11,02,000.

Arguments

Ramakrishna’s Arguments:

• He claimed he was planning to invest in property and had made inquiries with three potential sellers for houses and land
• When these property deals didn’t work out, he said he temporarily gave the withdrawn cash to his brothers and sisters, who later returned the money, which he then re-deposited
• He argued that the proximity between withdrawals and re-deposits clearly established the connection
• He cited two cases: Vanitha G v. The Income Tax Officer and Smt P.Padmavathi v. The Income Tax Officer to support his position

Tax Department’s Arguments:

• The nexus between withdrawals and re-deposits was not established
• No documentary evidence was provided to substantiate the property acquisition claims
• The explanation about giving money to siblings was raised for the first time in an affidavit before the High Court, without supporting evidence
• The continuous pattern of cash withdrawals and re-deposits was suspicious

Key Legal Precedents

The court referenced several important cases:

1. Commissioner of Income-tax v. Nirbheram Deluram (1997) 91 Taxman 181 (SC) - This Supreme Court case established that quoting a wrong provision is not fatal to the case, and appellate authorities can modify assessment orders by invoking the correct provision
2. Vanitha G v. The Income Tax Officer (ITA No.636/2013, disposed on 26.08.2014) - The assessee tried to rely on this case, but the court distinguished it because in that case, the assessee maintained proper books of accounts, unlike the present case
3. Smt P.Padmavathi v. The Income Tax Officer (ITA No.414/2009, disposed on 06.10.2010) - Also cited by the assessee but found not applicable to the current facts

The court applied Section 68 (Cash credits) and Section 69 (Unexplained investment) of the Income Tax Act, 1961, along with Section 2(12A) (definition of ‘Books of Account’) and Section 143(3) (assessment powers).

Judgement

The court ruled against Ramakrishna and upheld the tax addition. Here’s their reasoning:

Court’s Decision:

• The appeal was dismissed, and all substantial questions of law were answered in favor of the Revenue
• The court found that the assessee failed to provide satisfactory evidence for the source of cash deposits
• The explanation about property negotiations was deemed unconvincing and appeared to be “only a devise set-up to escape the tax liability”

Key Reasoning:

1. Suspicious cash pattern: The court noted it was unusual for someone to withdraw cash multiple times for property purchases, especially since large property transactions should legally be done through cheques or demand drafts
2. Lack of evidence: The story about giving money to siblings was raised only in the High Court affidavit without any supporting documentation
3. Legal provision correction: The court held that even though the Assessing Officer wrongly applied Section 68, the appellate authority correctly modified it to Section 69, which was legally permissible
4. Burden of proof: The court emphasized that it’s the taxpayer’s responsibility to explain cash deposits satisfactorily, and Ramakrishna failed to meet this burden

FAQs

Q1: What’s the difference between Section 68 and Section 69 of the Income Tax Act?

A: Section 68 deals with “cash credits” and typically applies when someone maintains books of accounts. Section 69 covers “unexplained investments” and can be applied even without formal books of accounts. In this case, since Ramakrishna didn’t maintain proper books, Section 69 was the correct provision to apply.

Q2: Can tax authorities change the legal provision they initially cited?

A: Yes, according to the Supreme Court case Commissioner of Income-tax v. Nirbheram Deluram, quoting a wrong provision is not fatal. Appellate authorities have the power to correct and apply the right provision.

Q3: What kind of evidence would have helped Ramakrishna’s case?

A: He needed documentary evidence like property negotiation papers, agreements with the vendors he claimed to negotiate with, receipts or acknowledgments from his siblings for the money he allegedly gave them, or any other concrete proof linking his withdrawals to re-deposits.

Q4: Why did the court reject his explanation about property investments?

A: The court found it impractical and suspicious that someone would withdraw large amounts of cash multiple times for property purchases, especially since property transactions of significant value should legally be conducted through cheques or demand drafts, not cash.

Q5: What does this case mean for other taxpayers?

A: This case reinforces that taxpayers must maintain proper documentation for all financial transactions, especially cash deposits. Mere explanations without supporting evidence won’t suffice when the tax department questions the source of funds.

Q6: Could Ramakrishna have won if he had better documentation?

A: Potentially yes, if he had provided concrete evidence like signed agreements with property vendors, receipts from siblings, or other documentary proof that clearly established the connection between his withdrawals and re-deposits.

This appeal is filed by the assessee under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the order dated 30.07.2015 passed by the Income Tax Appellate Tribunal, Bangalore Bench “A”, Bengaluru (‘Tribunal’ for short) in ITA No.550/Bang/2011 relating to the Assessment Year 2009-10.

2. The assessee-appellant an individual employed at Satyam Computers Services Limited, Bengaluru, filed his return of income for the assessment year under consideration declaring income of Rs.8,31,390/- from salary and bank interest. The case was taken up for scrutiny and order under Section

143(3) of the Act was passed on 20.12.2011 by the Assessing Officer making an addition of Rs.23,91,000/- under Section 68 of the Act as unexplained cash credit in the bank account maintained by the assessee with ICICI Bank, Jayanagar Branch, Bengaluru, and raised a demand of Rs.11,02,000/-. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), wherein it was held that the provisions of Section 68 of the Act were not applicable and proceeded to confirm the addition under Section 69 of the Act. On further appeal before the Tribunal, vide order dated 30.07.2015, impugned herein, the order of the Commissioner of Income Tax (Appeals) has been upheld. Hence, this appeal by the assessee.

3. The appeal has been admitted by this Court to consider the following substantial questions of law;

i) Whether the learned Income Tax Appellate Tribunal was justified in holding that the provisions of Section 68 (Cash credits) of the Income Tax Act, 1961, does not apply if the assessee does not maintain the ‘Books of

Account’ and was, therefore, justified in invoking and applying the provisions of Section 69 (Unexplained investment) of the Act, for making

additions in the hands of the assessee as ‘unexplained investments’?

ii) Whether Bank Passbook of the

assessee, who does not maintain regular books of

accounts in the ordinary course of his business

for any source of income, constitutes ‘Books of

Account’ for the purpose of Sections 68, 69, 69A,

69B and 69C of the Income Tax Act, in the light of

definition of ‘Books of Account’ as given in Section

2(12A) of the Income Tax Act, inserted by Finance

Act, 2001, with effect from 1.6.2001?

iii) Whether the additions in the

declared income in the hands of assessee can be

made simultaneously under Sections 68 and 69

of the Income Tax Act?

4. The assessee has filed an affidavit in

compliance with the order of this Court dated

24.07.2018. The contents of the affidavit would disclose

that the appellant was an employee of Satyam

Computer Services Limited, Bengaluru and served there

for 6 years 2 months and 12 days from 26.05.2003. He

worked as a Test Manager taking care of the software

testing team in Bengaluru. For about 3 years and 3

months he worked under 3 projects of Satyam Company

at USA with valid work permit and for the rest of the

period he worked in Satyam at Bengaluru. At that time,

he had plans to invest in immovable property either by

way of acquiring a house/apartment or site to build a

house or land in his native place and made enquiries

with the following persons;

i) Jaya C, w/o Devendrakumar,

Constructed Building with 3 Floors

in 20x30 site. No.363, 16th Cross, 2nd Main, 4th Phase,

JP Nagar, Bengaluru 560 078. (represented by Husband Devendrakumar)

ii) S.K.Shivaram s/o late S P Kariyappa

Shivapura, Maddur Taluk,

Property Survey: Shivapura 64 (24 guntas)

iii) C.P.Nagaraj, s/o late C K Puttaswamaiah

Chamanahalli, Maddur Taluk Property Survey : Chamanahalli 202 (1 acre 23

guntas).

However, the negotiations failed and no agreements

were executed.

5. It is stated that he was drawing money from

his ICICI bank account from time to time to provide to

his wife for investment if he were to go out of the

Country. Since the negotiations to purchase could not

be put through, he had temporarily provided funds to

his brothers and sisters and as and when they returned

the money, he re-deposited the money into his bank

account. It is also stated that from out of the savings

from US trip, he used to remit the same from time to

time into his bank account and had also made

investment in Shares.

6. Learned counsel appearing for the appellant

referring to his affidavit and placing reliance on the

ruling of the Coordinate Bench of this Court in the case

of Vanitha G v. The Income Tax Officer, in ITA

No.636/2013 (disposed off on 26.08.2014) as well as

the judgment of this Court in the case of

Smt P.Padmavathi v. The Income Tax Officer, in ITA

No.414/2009 (disposed off on 06.10.2010) argued

that the appellant has explained the reason for

withdrawal and re-deposit. The amounts deposited

were from out of the withdrawals made by the appellant

from the same bank account with a view to make an

investment in a land which ultimately did not

materialize, hence, the said amounts were re-deposited.

The proximity of withdrawal and re-deposit was clearly

established. Despite the same, the Assessing Officer,

appellate authority as well as the Tribunal failed to

appreciate the same and proceeded to negate the

contentions of the appellant in making addition of

Rs.23,91,000/- and raising the demand of

Rs.11,02,000/-. Learned counsel argued that Section

68 of the Act is not at all applicable to the facts of the

case and the Assessing Officer has wrongly applied the

said provision which though noticed by the

Commissioner of Income Tax (Appeals), instead of

setting aside the assessment order, proceeded to

confirm the same under Section 69 of the Act which is

wholly untenable in law. The Tribunal has ignored

these aspects in dismissing the appeal filed by the

assessee.

7. Learned counsel appearing for the Revenue

justifying the impugned orders submitted that the

nexus between the withdrawal and re-deposit was not

established by the assessee. On the other hand,

continuously the amounts were withdrawn from the

account of the appellant-assessee and re-deposit was

made in cash which could not establish the link. No

documentary evidence was placed before the authorities

or the Tribunal to substantiate the reason of so called

acquisition of property. The explanation offered by the

assessee regarding withdrawals made, which in no way

link to the cash re-deposits made, could not satisfy the

source of income for re-deposit. In the absence of

material evidence, the orders passed by the authorities

and the Tribunal being in conformity with law, no

interference is warranted by this Court. Hence, the

appeal deserves to be dismissed answering the

substantial questions of law in favour of the Revenue

and against the assessee.

8. We have carefully considered the rival

submissions made by the learned counsel appearing for

the parties and perused the material on record.

9. The main issue regarding the explanation

offered by the appellant for re-depositing cash into the

bank account has been held in negative against the

assessee by the Tribunal for the reason that no material

evidence was placed on record to substantiate the

arguments advanced, inasmuch as the property

transactions on which the assessee relied upon.

10. We have perused the bank statement of

ICICI bank relating to the period from 01.10.2008 to

31.3.2009, wherein cash is deposited multiple times. It

is trite that the onus lies on the assessee to explain the

source of such deposits satisfactorily. The plea of the

assessee, inasmuch as the plan for acquiring the

property and negotiating with the vendors which did not

materialise, appears to be only a devise set-up to escape

the tax liability. We are not able to appreciate why the

cash has to be withdrawn on several dates for

purchasing the property. Ordinarily sale consideration

of an immovable property has to be made by way of a

cheque or Demand Draft as per law, more particularly,

when the sale consideration runs into lakhs. No

prudent person who is acting legally would transact

with the vendors of the immovable property for

acquiring the property agreeing to pay the sale

consideration amount in cash. The stance of the

appellant that the withdrawn amount was provided to

his brothers and sisters as the transaction was not

materialized and the amount was re-deposited as and

when the same was paid by his siblings, cannot be

appreciated as the same has been raised before the

Court for the first time by way of an affidavit which is

not supported by any substantial evidence.

11. In the case of Vanitha G, supra, it is clear

that the assessee had withdrawn the amount from bank

and after such withdrawal, the amount has been taken

to the account books, thereafter, the amount was

deposited after making entry in the books of account.

The authorities without any proper appreciation of the

books of accounts as well as the passbook had come to

a conclusion that it was an undisclosed income. In that

context, it was held that the authorities without any

proper appreciation of the books of accounts as well as

the passbook had come to a conclusion that it is an

undisclosed income.

12. However, in the present case, no such books

of accounts were maintained by the assessee. The

passbook/bank statement of ICICI bank has been

extensively analyzed by the authorities as well as the

Tribunal and on critical analysis of the same, there

being no satisfactory correlation found between the

withdrawal and cash deposit vis-à-vis, the claim of the

assessee with regard to the land transaction

negotiations not being proved, have rightly arrived at a

finding that the source of income has not been

established by the assessee. Hence, the judgment relied

upon by the assessee in the case of Vanitha G, supra,

do not come to the assistance of the assessee.

13. It is settled law that quoting a wrong

provision is not fatal to the case. No doubt, the

Assessing Officer has quoted Section 68 of the Act for

making additions and the same has been rectified by

the appellate authority modifying the provision as

Section 69 of the Act. It is well settled legal principle

that the power of first appellate authority is co-

terminous with that of the Assessing Officer. That being

done, there is no reason as to why the appellate

authority cannot modify the assessment order by

invoking the correct provision of law. This view is

fortified by the judgment of the Hon’ble Apex Court in

the case of Commissioner of Income-tax v. Nirbheram

Deluram, reported in (1997) 91 Taxman 181 (SC).

No addition is made simultaneously under Sections 68

and 69 of the Act. Even if the bank

passbook/statement is not treated as books of accounts

under Section 68 of the Act, the same can be used to

make addition under Section 69 of the Act.

14. It is the onus of the assessee to explain the

cash deposits and if there is no explanation or

acceptable evidence to prove the source of cash deposits

made, the said amount can be added as the assessee’s

income on general principles. Even if a wrong provision

i.e., Section 68 of the Act is quoted and the same is not

applicable, the assessee could be asked to explain the

source of income under Section 69 of the Act and such

exercise made by the first appellate authority, cannot be

faulted with. The affidavit filed by the assessee in no

way would satisfy the source of income for the cash

deposits made by the appellant.

15. The judgments referred to by the learned

counsel appearing for the assessee are carefully

considered by us and they are not applicable to the

facts of the case on hand.

16. For the reasons aforesaid, the substantial

questions of law are answered in favour of the Revenue

and against the assessee.

The appeal stands dismissed accordingly.

Sd/-

JUDGE

Sd/-

JUDGE