A scrap dealer has been embroiled in a tax-related controversy when he was sent a tax notice of Rs 44 lakh despite reporting a Rs 3 lakh income in the income tax return. The tax department questioned the cash
deposit of Rs 1.28 crore made in his cooperative bank accounts during FY2015-16, as the scrap dealer failed to produce detailed transaction records.
After facing a heavy tax notice, the scrap dealer named Wajeed Khan, turned to the Income Tax Appellate Tribunal (ITAT), which heard the appeal of him in the matter.
ITAT found merit in his case after seeing the tax history and ‘consistency’ history.
Let’s understand the full case of the scrap dealer.
Why Did Income Tax Department Send Rs 44 Lakh Notice?
During FY2015-16, the scrap dealer Wajeed Khan, reported an income of Rs 3 lakh in the tax filing. However, the tax department objected to a cash transaction of over Rs 1.28 crore during the period, calling it ‘unexplainable’ in his cooperative bank account.
Having flagged the case, the department opened the assessment under Section 147. He was asked to submit the detailed records of the cash transactions, which he claimed caused such high deposits. Wajeed failed to produce the records, as he claimed that a computer virus had crashed his hard drive, leading to the loss of accounting data and transaction details.
When asked the reason behind the large deposits, Wajeed said that the deposits were from business receipts from his scrap trading activity, and it was normal in his business. He asked to tax the deposits on a presumptive basis at 8 per cent of turnover.
The Assessing Officer rejected the explanation and classified the entire Rs 1.28 crore as unexplained money under Section 69A of the Income Tax Act. Consequently, the amount was taxed under Section 115BBE, leading to a tax demand of approximately Rs 44 lakh.
What Did ITAT Then Favour In His Case?
Wajeed Khan knocked on the door of the ITAT against the income tax notice. ITAT found the merit in his case when Wajeed Khan showed the tax history of his tax return before and after the disputed year, which is FY2015-16. These showed that the tax department had accepted his scrap business and the 8% profit model in those years.
The ITAT invoked the principle of consistency.
The principle of consistency requires the tax department to maintain a uniform approach if it has accepted a particular tax treatment in preceding and subsequent years. A different stance can be taken only when there is a significant change in facts or law. The Supreme Court has upheld this doctrine in landmark rulings such as Radhasoami Satsang v. CIT and Excel Industries Ltd. v. CIT.
