2022 (12) TMI 1570 - AT - Income Tax

Addition u/s 68 - unexplained cash credits - undisclosed income during the demonetization period - AO concluded that the assessee has booked concocted cash sales in the month of October and November 2016 to adjust his undisclosed income during the demonetization period - assessee submitted that the assessee is in the business of wholesale trading in dry fruits and kirana items and assessee s accounts are subject to statutory audit u/s 44AB and the assessee maintains regular books of account. HELD THAT - AO has not pointed out any deficiency or defect in the books of account or the invoices furnished before him. In fact the Assessing Officer has not rejected the books of accounts. Only because the assessee has shown increased cash sales in the month of October 2016 and first week of November 2016 AO has entertained a doubt and suspected that the assessee has manipulated its cash sales to deposit his undisclosed income by way of cash during the demonetization period. The aforesaid allegation of the AO is not based on any concrete evidence brought on record but merely on conjecture and surmises. No adverse material has been brought on record by the AO to demonstrate that the cash sales made by the assessee either are non-genuine or bogus. AO has treated 50% of the cash sales as concocted and has accordingly made the addition. AO has provided absolutely no reason why he took the figure of 50%. Thus the addition made is purely on ad hoc / presumptive basis without being backed by any material. Unfortunately Commissioner (Appeals) without properly appreciating the facts has confirmed the addition. When no deficiency or defect has been found either in the books of accounts or invoices raised and further books of account have not been rejected the addition made on purely guess work and presumptive basis cannot be sustained - Assessee appeal allowed.

Summary

The core legal question considered in this appeal revolves around the validity of the addition of Rs. 35,65,000/- made under section 68 of the Income Tax Act, 1961, on account of unexplained cash credits purportedly representing undisclosed income during the demonetization period. Specifically, the issues are:

1. Whether the Assessing Officer was justified in treating a portion of the cash deposits as unexplained cash credit under section 68 based on an alleged manipulation of cash sales during October-November 2016.

2. Whether the addition made on an ad hoc basis without rejection of books of accounts or pointing out any defect in the accounts or invoices is sustainable.

3. The evidentiary standard required for making additions under section 68 in cases involving alleged undisclosed income.

Issue-wise Detailed Analysis

Issue 1: Justification for addition under section 68 based on alleged manipulation of cash sales

The relevant legal framework is section 68 of the Income Tax Act, which deals with unexplained cash credits. The provision requires the assessee to explain the nature and source of such credits; failing which, the amount can be added to income. Precedents emphasize that additions under section 68 must be based on tangible evidence and not mere suspicion or conjecture.

The Court observed that the assessee is engaged in wholesale trading of dry fruits and kirana items, maintaining regular books of account subject to statutory audit under section 44AB. During assessment proceedings, the Assessing Officer noted an abnormal increase in cash sales in October and November 2016, coinciding with the demonetization period, and suspected manipulation to adjust undisclosed income. However, the Assessing Officer did not reject the books of account nor pointed out any specific defect in the accounts or invoices.

The Court found that the Assessing Officer's suspicion was based solely on an increase in cash sales during the festive season (Dussehra and Diwali), which is a plausible business explanation for the spike in cash sales. The assessee furnished detailed evidence including purchase and sale invoices, bank statements, and party confirmations. No adverse material was brought on record to demonstrate that the cash sales were bogus or non-genuine.

The Court held that the Assessing Officer's conclusion was founded on conjecture and surmises rather than concrete evidence. The mere fact of increased cash sales during a particular period, without any corroborative material indicating manipulation, does not justify treating the cash deposits as unexplained credits under section 68.

Issue 2: Sustainability of addition made on ad hoc basis without rejection of books of accounts

It is well established in tax jurisprudence that additions under section 68 cannot be made arbitrarily or on a presumptive basis. The Assessing Officer must identify specific discrepancies or defects in the assessee's accounts or documents to justify such addition. The rejection of books of account is a significant step that empowers the Assessing Officer to make additions based on unexplained credits.

In the instant case, the Assessing Officer did not reject the books of accounts nor pointed out any deficiency in the invoices or accounting records. The addition was made by arbitrarily treating 50% of the cash deposits as unexplained cash credit, without any rationale or basis for selecting the 50% figure. The Court noted that such an ad hoc approach is impermissible and contrary to settled principles.

The Commissioner (Appeals) failed to appreciate these facts and confirmed the addition without proper scrutiny. The Court emphasized that additions based on guesswork or presumptive figures cannot be sustained in law.

Issue 3: Evidentiary standard for additions under section 68

The Court reiterated that the burden lies on the revenue to establish that the cash credits are unexplained and represent undisclosed income. Mere suspicion or abnormal increase in cash transactions, especially during festive periods, is insufficient. The assessee's explanation supported by proper books of account, invoices, and confirmations must be accepted unless disproved by tangible evidence.

In this case, the assessee's explanation of increased sales due to festivals was reasonable and supported by documentary evidence. The absence of any adverse material or rejection of accounts led the Court to conclude that the evidentiary standard for making the addition under section 68 was not met.

Significant Holdings

The Court held that:

"The aforesaid allegation of the Assessing Officer is not based on any concrete evidence brought on record, but merely on conjecture and surmises. No adverse material has been brought on record by the Assessing Officer to demonstrate that the cash sales made by the assessee either are non-genuine or bogus."

"The addition made is purely on ad hoc / presumptive basis without being backed by any material. Unfortunately, learned Commissioner (Appeals), without properly appreciating the facts, has confirmed the addition."

"When no deficiency or defect has been found either in the books of accounts or invoices raised and further, books of account have not been rejected, the addition made on purely guess work and presumptive basis cannot be sustained."

The core principles established are:

• Additions under section 68 require concrete evidence and cannot be based on suspicion or surmises.
• Rejection of books of account or pointing out specific defects is essential before making additions on unexplained credits.
• Ad hoc or arbitrary quantification of unexplained cash credits without basis is impermissible.
• Business explanations supported by proper documentation must be accepted unless disproved by the revenue.

Accordingly, the Court set aside the addition of Rs. 35,65,000/- made under section 68 and allowed the appeal.