Pranav B Prem

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed an appeal filed by the Income Tax Department against Eurospa Terrytowels Pvt. Ltd. for the Assessment Year 2017–18, holding that the enhanced tax rate of 60% under Section 115BBE of the Income Tax Act, 1961 was not applicable to transactions made prior to April 1, 2017. The Tribunal concluded that the Revenue had wrongly applied the post-amendment rate and that the resultant tax effect fell below the monetary threshold for filing an appeal as per the CBDT Circular. The Bench comprising Shri Satbeer Singh Godara (Judicial Member) and Shri Manish Agarwal (Accountant Member) passed the order on July 5, 2024.

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Background

The matter pertained to unexplained cash deposits of ₹81,00,000 made in the company’s Axis Bank account, which the Assessing Officer (AO) treated as deemed income under Sections 68, 69, or 69A of the Income Tax Act, 1961. The AO proceeded to tax the amount at 60% under Section 115BBE, alleging that the assessee had failed to satisfactorily explain the source of the cash deposits.

Before the AO, the assessee submitted that the cash belonged to Eurospa Retail Pvt. Ltd., a group concern that had mistakenly deposited the amount in the appellant’s account instead of its own. The company argued that the funds were later returned through banking channels, and the transaction was fully disclosed and verifiable. Despite these submissions, the AO concluded that the cash deposits remained unexplained and made the addition of ₹81,00,000.

NFAC's Deletion of the Addition

The National Faceless Appeal Centre (NFAC) accepted the assessee’s explanation, noting that the source of the deposit had been duly explained, corroborated with bank statements, and no incriminating material was found to contradict the assessee’s claim. It held that the AO had proceeded merely on assumptions without bringing any contrary evidence on record. Accordingly, the addition was deleted. Aggrieved by this, the Department filed an appeal before the ITAT, arguing that the deletion of the addition was erroneous and that the income should have been taxed at 60% under Section 115BBE.

ITAT’s Observations

The Tribunal noted that the only dispute raised by the Revenue was on the tax rate applicable to the deemed income. It referred to the decision of the Madras High Court in SMILE Microfinance Ltd. v. ACIT [WP(MD) No. 2078 of 2020 & 1742 of 2020], which categorically held that the amended provisions of Section 115BBE (introducing a 60% tax rate) were prospective in nature and applicable only to transactions on or after April 1, 2017. Since the relevant transactions in the present case occurred in Financial Year 2016–17, the Tribunal held that the penal tax rate of 60% under the amended provision could not be applied. Therefore, the Revenue’s computation based on the enhanced rate was factually and legally incorrect.

Appeal Hit by Low Tax Effect

Importantly, the Tribunal examined the CBDT Circular No. 09/2024 dated 17.09.2024, which mandates that appeals should not be filed in cases where the tax effect is below the prescribed threshold. Once the Tribunal disregarded the inflated tax computation based on the incorrect 60% rate, the actual tax effect fell below the monetary limit required for filing an appeal. Accordingly, the Tribunal held that the appeal was not maintainable, and it was liable to be dismissed on the ground of low tax effect alone, apart from the merits.

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The ITAT dismissed the Revenue’s appeal, upholding the NFAC’s deletion of the addition. It emphasized that Section 115BBE, as amended, is applicable prospectively, and that the pre-amendment rate of 30% is the correct rate to apply for transactions prior to April 1, 2017. The ruling reiterates that penal tax rates cannot be retrospectively imposed, and assessments must be in line with the prevailing law of the relevant period. As the revised tax effect did not meet the threshold under the CBDT Circular, the appeal was also found to be barred on that ground.

Appearance

Assessee represented by Shri Jai Prakash, AR

Department represented by Shri Rajesh Kumar Dhanesta, Sr. DR

Cause Title: Income Tax Officer V. Eurospa Terrytowels Pvt. Ltd.

Case No: ITA No. 3557/Del/2024

Coram: Shri Satbeer Singh Godara [Judicial Member], Shri Manish Agarwal [Accountant Member]