S.L. Poddar (Adv) for the Assessee. Chanchal Meena (Addl.CIT) for the Revenue.

This appeal by the assessee is directed against the order dated 23/07/2019 of ld. CIT(A)-I, Jaipur for the A.Y. 2007-08. The assessee has raised following grounds of appeal:

“1. In the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the action of the ld. AO has in passing the assessment order U/s 148/144 of the Income Tax Act, 1961 which is void an-initio and deserves to be quashed.

2. In the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the addition of Rs. 16,05,000/- made ld. AO on account of alleged unexplained cash deposits in the bank account.

3. The assessee craves your indulgence to add, amend or alter all or any grounds of appeal before or at the time of hearing.”

2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic. Ground No. 1 of the appeal is regarding validity of the assessment order passed U/s 148 r.w.s 144 of the Income Tax Act, 1961, (in short, the Act). At the time of hearing, the ld counsel for the assessee has stated at bar that the assessee does not wish to press ground No. 1 of the appeal, therefore, the same may be dismissed as not pressed. On the other hand, the ld DR has not raised any objection if the assessee does not want to press ground No. 1 of the appeal. Therefore, the ground No. 1 taken by the assessee in the appeal is dismissed being not pressed.

3. Ground No. 2 of the appeal is regarding addition of Rs. 16,05,000/- made by the A.O. on account of unexplained cash deposit in the bank account, which was confirmed by the ld. CIT(A). At the outset, it was pointed out that though the assessee applied for “Vivad Se Vishwas Scheme”, however, due to non-payment of due tax, the assessee did not pursue the said application and therefore, the ld. Counsel for the assessee has stated that the appeal of the assessee may be decided as the assessee is not pursuing the application filed for settlement under “Vivad Se Vishwas Scheme”.

The assessee is an individual and a retired person. The assessee did not file any return of income U/s 139(1) of the Act. Thereafter, the A.O. received AIR information regarding deposits of cash of Rs. 16,05,100/- in the savings bank account. The A.O. issued notice U/s 148 of the Act to assess the said income of Rs. 16,05,100/-. There was no response to the notice issued U/s 148 as well as notices issued U/s 142(1) of the Act. Accordingly, the A.O. proceeded to pass an ex parte assessment order U/s 144 r.w.s. 147 of the Act whereby the income of the assessee was assessed at Rs. 16,05,100/-.

4. The assessee challenged the action of the A.O. before the ld. CIT(A) and also filed additional evidence in the shape of affidavits of 110 persons including the assessee to explain the source of deposits in the bank account of the assessee. The assessee explained that these amounts were collected from these persons who have mutually agreed to participate in the self-financing help scheme under which the amounts so collected from all the members will be given to one of the needy but the same will be decided on lottery basis. Thus, the assessee explained that this is nothing but the amount collected from all the members under this lottery scheme, but since there was some disagreement between the members and the scheme could not go further, immediately the assessee withdrawn all these amounts from the bank and returned to the members. To buttress this explanation, the assessee produced affidavits of all 110 members alongwith their identity proofs. The said evidence filed by the assessee alongwith the reply and explanation of the assessee was sent to the A.O. for his comments and remand report. The A.O. in the remand report did not accept the additional evidence and was of the view that this is only an afterthought to cover the unexplained cash deposits by the assessee, as despite the various opportunities, the assessee did not furnish any evidence during the assessment proceedings. The ld. CIT(A) accepted the stand of the A.O. and confirmed the addition made on this account.

5. Before us, the ld AR of the assessee has submitted that the A.O. has issued notice U/s 148 of the Act at the address given in the PAN of the assessee. However, the assessee was not available on the said address as the assessee had already shifted at a new address. The A.O., has therefore, passed an ex parte order without serving the notices on the assessee. After the assessment order was passed, the assessee got opportunity and occasion to furnish his explanation and evidence before the ld. CIT(A) which was admitted by the ld. CIT(A) and sent to the A.O. for remand report. The ld. AR has thus contended that the A.O. without examining the evidence furnished by the assessee, has rejected the same at limini, therefore, the remand report of the A.O. is not passed on any enquiry conducted by the A.O. but the A.O. has reiterated its stand of addition made on account of unexplained deposits made in the bank account. The ld AR has thus contended that ignoring the evidence filed by the assessee without conducting enquiry is not justified and therefore, the additions sustained by the ld. CIT(A) is liable to be deleted. The ld AR has further contended that the A.O. as well as the ld. CIT(A) has misunderstood the facts by treating the activities as a lottery whereas this is only a social banking or self help financing among the members of the social group. Therefore, the addition sustained by the ld. CIT(A) by giving a reasoning, the assessee has not produced any license or authorization to run the lottery as it is not permitted in the State of Rajasthan, is misconceived as this is not an activity of a lottery but this is only a social banking among the member group. The ld. AR has thus submitted that when the assessee has already produced the evidence in the shape of affidavits of all these 110 members from whom the amounts were collected at the rate of Rs. 15,000/- each and the same were refunded to them then the addition is not called for. Alternatively, the ld AR has submitted that even if it is considered that the assessee being the administrator of the said scheme is earning some income out of this activity then the income can be assessed as per provisions of Section 44AD of the Act @ 8% of the total amount. He has pointed out that this alternate plea was also taken by the assessee before the ld. CIT(A), however, which was rejected by the ld CIT(A) on the ground that Section 44AD of the Act is not applicable in respect of illegal receipts. Thus, the ld AR has pleaded that at the most, the income may be assessed as per provisions of Section 44AD of the Act by applying profit rate @ 8%. In support of his contention, the ld AR has relied on the decision of the Delhi Benches of the ITAT (SMC) in the case of ITO Vs Smt. Seema Khanna in ITA No. 6281/Del/2015 order dated 31/08/2016.

6. On the other hand, the ld DR has submitted that the assessee has not filed any return of income for the year under consideration and even in response to the notices U/s 148 as well as U/s 142(1)of the Act, the assessee has not produced any evidence before the A.O. to explain the source of deposits made in the bank account. Accordingly, the A.O. has passed assessment order U/s 144 r.w.s. 147 of the Act. Evidence produced before the ld. CIT(A) is an afterthought as the assessee has not produced any evidence regarding the existence of such scheme. When the assessee has not produced any evidence for the alleged scheme run by the assessee then the explanation of the assessee cannot be accepted. All the alleged receipts from these persons are less than Rs. 10,000/- to avoid the applicability of the other provisions of the Act. Thus, this is a cooked up story of the assessee which cannot be accepted in absence of any substantive documentary evidence. She has relied upon the orders of the authorities below.

7. We have considered the rival submissions as well as relevant material on record. There is no dispute that the assessee is a senior citizen and has no known source of income. The assessee has not filed any return of income U/s 139 of the Act. The A.O. reopened the assessment by issuing notice U/s 148 of the Act on 14/03/2014 on the basis of AIR information regarding cash deposits of Rs. 16,05,100/- in the savings bank account of the assessee. It is manifest from the assessment order that the notice issued U/s 148 of the Act to the assessee was served through affixation and therefore, it is clear that the assessee was not available at the address at which the notice was issued by the A.O.. Even the notices issued U/s 142(1) of the Act were also at the same address and met the same fate. Consequently the A.O. framed the assessment U/s 144 r.w.s. 147 of the Act whereby the income of the assessee was assessed at Rs. 16,05,100/-. From the assessment order itself, it is clear that the A.O. did not find any other income of the assessee except the deposits made in the bank account. Before the ld. CIT(A), the assessee explained the source of deposits as the amount collected from the 110 persons and affidavits of all 110 persons alongwith their identity proofs were filed which were sent to the A.O. for his comments. The A.O. in his remand report has rejected the explanation of the assesssee as well as the evidence on the ground that the assessee has not produced any evidence during the assessment proceedings and therefore, the list of persons and affidavits of 110 persons is nothing but an afterthought to cover up the unexplained cash deposits. Thus, it is clear that the A.O. has even not made an attempt to examine the evidence or the persons concerned from whom the assessee claimed to have collected these amounts as the source of deposits and thereafter the entire amount was withdrawn from the bank to repay to these persons. Hence, it is clear that when the assessee was not available at the address to which the notices U/s 148 and 142(1) of the Act was issued by the A.O. then the evidence produced by the assessee before the ld. CIT(A) and sent for remand report was required to be at least verified and examined and if need, so arises, the A.O. ought to have examined the persons concerned, whose affidavits were filed by the assessee. Therefore, in these facts and circumstances when the assessee has explained the source of deposits being the collection made by the assessee from the group of persons participated in a self help financial assistance scheme which is like a chit fund scheme then the explanation of the assessee and supporting evidence was required to be verified. The amount so collected from the members of the financial self help group is generally disbursed to the members whose names are selected through lottery. Therefore, the financial help is given to the members of group, whose name is selected through lottery. The ld. CIT(A) has misunderstood the entire scheme as explained by the assessee by treating the same as activity of running the lottery. The relevant finding of the ld. CIT(A) in para 3.3.2(iv) reads as under:

“(iv) I have du ly con sidered the submission s of the appellant, assessment order and the mat erial p laced on record . The appellant has deposited cash in the b ank account and to explain such cash d eposit, the appellant claimed that the money has been received under a lottery scheme.

However, no documents have been furnished regarding running of such scheme . It has not been submitted that whether any license was obtained from state government for running of lottery business. It may be mentioned that in the state of Rajasthan, running of lottery business is completely banned. It appears that the appellant has devised a story to explain the source of cash deposit which cannot be believed. The appellant has shown to receive the cash below Rs. 20,000/- from each of the person so as to avoid the applicability of other provisions of the Income Tax Act. However, once in the state of Rajasthan, the running of lottery business is not permissible, the story framed by the appellant falls flat and does not render any help. The alternate plea of the appellant can also not be accepted as the appellant himself is claiming that it has received cash from lottery business which is not legal in the state of Rajasthan. Section 44AD of the Act applies only to the business receipts and not to the illegal receipts. In the nutshell, the appellant's claim has got no merit and cannot be accepted. The cash deposited by the appellant in the bank account remains unexplained and therefore, the addition made by the AO is upheld.”

Thus, the ld. CIT(A) has rejected the explanation as well as the alternative plea of the assessee on the ground that the activity of running a lottery business is illegal in the State of Rajasthan and therefore, the provisions of Section 44AD of the Act are not applicable on such illegal activity as this is not a business activity. The A.O. has even not commented on the point as to whether such practice is prevalent in the social group and society in the State to collect money from the members of the group and then handed over to one of the needy members selected through lottery. Accordingly, in the facts and circumstances of the case where the A.O. has not examined the correctness of the evidence filed by the assessee, we are of the considered opinion that the matter is required to be properly verified and examined at the level of the A.O. Hence, we set aside the orders of the authorities below and remand the matter to the record of the A.O. to decide the same afresh after considering the explanation and evidence filed by the assessee. Needless to say, the assessee be given an opportunity of hearing before passing the fresh order.

8. In the result, appeal of the assessee is allowed for statistical purposes only.

Order pronounced in the open court on 23rd June, 2020.

Sd/- Sd/-

(VIKRAM SINGH YADAV) (VIJAY PAL RAO)

Accountant Member Judicial Member

Jaipur

Dated:- 23/06/2020