Detailed Analysis: New Surroad Ginning And Pressing Factory Vs ITO
The scrutiny of cash deposits made during the demonetization period continues to be a significant area of litigation under the Income Tax Act, 1961. In a recent favorable ruling for the assessee, the Income Tax Appellate Tribunal (ITAT), Ahmedabad "C" Bench, provided clarity on two critical issues: the treatment of cash deposits generated from business sales during demonetization and the taxability of capital introduced by partners in a partnership firm.
The case of New Surroad Ginning And Pressing Factory Vs ITO serves as a vital precedent, establishing that genuine business practices involving cash transactions cannot be summarily dismissed by tax authorities, and reaffirming the legal position that a firm cannot be penalized for the source of funds contributed by its partners.
Background of the Case
The dispute arose from the assessment proceedings for the Assessment Year (AY) 2017-18. The assessee is a partnership firm operating in the cotton industry. Its primary business activities involve purchasing raw cotton from farmers or the local market, processing it to separate seeds, and selling the processed cotton bales. Additionally, the firm processes cotton seeds to extract oil and cotton cake, which are subsequently sold.
During the assessment, the Revenue authorities raised two major objections leading to substantial additions to the assessee's income:
- Unexplained Cash Credits: Additions made under Section 68 regarding cash deposits found in bank accounts during the demonetization period.
- Capital Accretion: Additions regarding unexplained increases in the capital accounts of the partners.
The matter eventually reached the Tribunal via cross-appeals, with the Revenue challenging the partial relief granted by the CIT(A) and the assessee contesting the sustained additions.