Blank cheques found during a search cannot be treated as unexplained investments

The ITAT, Hyderabad in the case of Sri Laxmi Narayan Agarwal (PAN: ACDPA7791B) vs. Asst. Commissioner of Income Tax, Circle-6(1), Hyderabad, I.T.A. No. 1392/HYD/2010 by a judgment dated 17.06.2015 has held that blank cheques found during a search cannot be treated as unexplained investments in absence of additional evidence.

Pleaders engaged in the case:

For the Assessee: Shri P. Murali Mohan Rao, AR
For the Revenue: Shri D. Sudhakar Rao, CIT

Date of Hearing:

The hearing was concluded on 28.5.15.

Facts and circumstances of the case:

It was an appeal filed by the assessee challenging the order of the CIT (Appeals)-IV, Hyderabad, passed on 30.09.2010 for the AY 2008-09. The assessee was a person engaged in the business of trading in scrap. Search operations under section 132 of the Act were conducted on 07.11.2007 at his premises. Thereafter notice under section 153A was sent to him asking him to file his return of income. Accordingly the appellant filed a return on 25.09.2009 disclosing income of Rs. 4, 11,320/-. The said assessment was completed under section 143(3) read with section 153A of the Act by an order dated 30.11.2009 at a total income of Rs. 1, 17, 18,320/-. The Assessing Officer made an addition of Rs. 1, 12, 57,000/- by holding that the appellant had advanced Rs. 1, 12, 57,000/-as loan to many persons.

The addition was made on the basis of the blank cheques and promissory notes obtained from the seized articles. The Assessing Officer concluded that the appellant was engaged in money lending business and made the addition as unexplained investment.

The assessee filed an appeal before the CIT (A). He submitted before the CIT (A) that the blank cheques were obtained from the persons, who intended to take loan from him. The appellant also stated that he never advanced any money to them; as such no addition should be made.

The Ld.CIT (A) after going through the explanation disbelieved the explanation offered by the appellant and held that the appellant was using his own unaccounted money in providing loans against security of promissory notes and cheques. Therefore, the Assessing Officer upheld the addition.

Grounds of appeal:

1. The Honorable CIT Appeals – IV, Hyderabad was wrong in confirming the order of the Assessing officer in making addition of amount to the return relating to the blank cheques found in the search as no loan was advanced by the assessee. During the assessment proceedings, all the persons who issued such cheques also admitted that they did not receive any loan.
2. The CIT Appeals – IV, Hyderabad erred in confirming the order of the Assessing officer by making the addition to the returned income for the advances received by the assessee towards sale of scrap without relying upon the explanation given by the assessee which was bad in law.
3. The assessee received the amount from persons engaged in similar business. It is a common practice in business to give advances for dealings of scrap. In the like manner the assessee received advances in the form of cheques as a part of business. Hence the addition made to assessed income should be deleted.
4. The CIT (A)-IV was totally wrong in confirming the order of the Assessing Officer wherein the Assessing Officer failed to appreciate that the amount received was commission for sale transaction but not sale transaction of assessee which is not justified.
5. The assessee claimed the deduction under section 80U of Rs 50,000/- on the ground of physical disability and filed a certificate issued by Gandhi Hospital in support of his claim. The CIT (A) erred in making the disallowance without considering the explanation provided by the assessee which is bad in law.
6. The assessee prayed for an opportunity to produce the certificate of disability and to consider the same while assessing the total income of the assessee and to decide the matter accordingly.
7. The CIT (Appeals) was wrong in confirming the order passed by Assessing officer and initiating penalty proceedings under section 271 (1)( c) which is bad in law.
8. The Order of the CIT (Appeals) should be set aside and sent back to Assessing officer.
9. The CIT was wrong in holding that the Assessee had concealed any income or did not furnish accurate particulars.
10. The learned CIT (A) erred in confirming the additions made to the income of the assessee on the basis of materials having no evidential value.
11. The CIT (A) should have appreciated the fact that no addition can be made without finding any incriminating material in search.

Arguments of both the sides:

It was contended by the appellant that the documents seized were merely dumb documents and for the said reason no addition should be made. The Ld.CIT (A) placed reliance upon the lower authorities and contended that the seized documents were not dumb documents as they were duly signed and filled up. As the assessee had failed to give satisfactory explanation as to under which circumstances the blank cheques came into his possession, the addition should be allowed.

The judgment of the Tribunal:

The Tribunal heard the rival submissions of both the parties and perused the material placed on record. It was clear from the material on record that the seized material were blank cheques and promissory notes executed by many persons. Each document was discussed individually.

The assessee submitted that the cheques were received as security for supply of steel which actually never took place. The Assessing Officer examined the proprietor of M/s. Sree Ganesh Trading Co. who confirmed issue of two cheques in favour of the appellant as a security but denied issue of any promissory note to the assessee.

The Assessing Officer drew an adverse inference that such statement cannot be relied upon and concluded that the appellant was engaged in the business of money lending. He treated Rs. 11 Lakhs as unexplained investment and made addition.

In appeal before the CIT (A), the plea of the assessee was not accepted and addition was confirmed holding that the appellant was engaged in money lending business and the cheques and promissory notes were obtained as a security against the money advanced.

On perusal of the seized material, it was observed that the promissory notes did not contain the amount, date and other particulars. It was also observed that there is no positive evidence to prove that the appellant advanced the money. It was held that no decisions can be made based on presumptions. In the absence of any conclusive evidence, the addition cannot be upheld. Therefore, the addition of Rs. 11, 00,000/ was deleted.

Regarding the claim of deduction under section 80U of the Act, it was held that the CIT (A) was justified in rejecting the claim. This ground of appeal was dismissed. As a result, the appeal was partly allowed. The order was pronounced in the open Court on 17.6.2015.