ITAT Mumbai Clarifies Section 68 & 69A Additions in Search-Based Assessments

1. Background of the Dispute

In a group of appeals arising out of search assessments under Section 153A of the Income Tax Act 1961, the Mumbai Bench of the ITAT in DCIT Vs P Vijaykumar & CO examined multiple additions made under Section 68 and Section 69A in the hands of a partnership firm engaged in courier (angadia) services.

The Assessing Officer (AO) had completed ex-parte best judgment assessments under Section 144 read with Section 153A, since there was no compliance to statutory notices and no return was filed in response to notices under Section 153A.

The principal issues in dispute were:

  • Cash deposits in bank accounts and cash found during search
  • Capital introduced by partners
  • Unsecured loans, including large loan entries routed through banking channels

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted most of the additions after admitting additional evidence and calling for a detailed remand report. The Revenue carried the matter to the ITAT.

The Tribunal, after examining the material and the law, upheld almost the entire relief granted by the CIT(A), reiterating important principles on:

  • The scope of Section 68 in the case of partnership firms
  • The treatment of cash deposits when sufficient recorded cash receipts exist
  • The validity of unsecured loans in the absence of a formal written loan agreement
  • The limits of “source of source” enquiry in firm cases

2. Validity of Additional Evidence and Ex-Parte Assessment

2.1 Reason for Non-Compliance during Assessment

The assessee-firm had not participated in the original assessment proceedings. Statutory notices under Section 153A and subsequent notices were received by an employee who failed to inform the partners. An affidavit of this employee, Shri Parmar Dinaji, was produced before the CIT(A) explaining the lapse.

The CIT(A) held that this constituted “sufficient cause” within the meaning of Rule 46A(1)(c) of the Income Tax Rules 1962, and hence additional evidence could be entertained in appeal.

2.2 Admission of Additional Evidence under Rule 46A

The assessee produced the following documentary records before the CIT(A) for various years:

  • Cash book and bank book
  • Bank statements of the firm
  • Bank statements of partners (e.g., Shri Jigneshkumar S. Patel, Shri Ashokbhai M. Patel)
  • Income Tax Returns of partners
  • Ledger confirmations from partners and lenders
  • Financial statements and ITR acknowledgements of lenders (e.g., M/s Shreeji Jewelers, KGS Stock Management Pvt. Ltd. / KGSSM)

The CIT(A) forwarded all such material to the AO for verification. The AO conducted remand proceedings, verified the documents, partially accepted the factual position, but objected to the very admission of additional evidence citing Rule 46A.

After considering:

  • The ex-parte nature of the original assessments
  • The affidavit and explanation of the assessee
  • The direct relevance of the documents to the issues in dispute

the CIT(A) formally admitted the evidence, holding that principles of natural justice required that the assessee be allowed to substantiate its claims.

The ITAT approved this approach, noting that the assessee had indeed been prevented by sufficient cause and that the AO had been fully heard during remand.

3. Assessment Year 2018-19 – Detailed Analysis (ITA No. 2993/M/2025)

3.1 Search, Cash Seizure and Initiation of Section 153A

A search action under Section 132 on 18.10.2019 at the assessee’s business premises resulted in seizure of cash amounting to Rs.2,62,30,500/-. A portion of this, Rs.1,10,00,000/-, was claimed as belonging to one partner, Shri Shashin H. Salva of “Deluxe Jewel”.

This triggered proceedings under Section 153A, but the assessee did not file returns despite repeated notices. Hence, the AO completed best judgment assessment u/s 153A r.w.s. 144.

The AO noted credits of Rs.1,21,66,800/- in Union Bank account no. 3198 0101 0039 458 and, in absence of explanation, treated the entire amount as unexplained cash credit under Section 68.

3.2 Break-up of Addition of Rs.1,21,66,800/-

During remand, the AO and the assessee both accepted that the total credits comprised:

  • Rs.16,09,200/- – Cash deposits (claimed as commission income in cash later deposited)
  • Rs.98,07,600/- – Capital introduced by partners
  • Rs.7,50,000/- – Unsecured loan from M/s Shreeji Jewelers

The CIT(A) examined each head separately.

The assessee contended that:

  • It was engaged in money mobilisation / courier (angadia) services.
  • It had disclosed gross receipts of Rs.88,26,909/- as commission income for FY 2017-18.
  • Out of this, Rs.16,09,200/- was received in cash and deposited into its Union Bank account on various dates.
  • The cash book and bank book reflected sufficient cash in hand and cash equivalents (Rs.96,71,771/-) to support the bank deposits.

The AO, in remand, acknowledged that:

  • The assessee’s ITR declared commission income of Rs.88,26,909/-.
  • The books reflected substantial cash equivalents.

However, he doubted the explanation only because party-wise details of commission were not furnished.

4.1 CIT(A)’s Finding on Cash Deposits

The CIT(A) reasoned that: