2025 (3) TMI 1503 - AT - Income Tax

Unexplained cash credit u/s 68 - taxed the same u/s. 115BBE - cash deposits in bank account during the demonetization period - case of the assessee was selected for complete scrutiny and the reason for selection of the case for scrutiny was that there was an abnormal increase in cash deposit during demonetization as compared to average rate of cash deposits during pre-demonetization - assessee submitted that once the purchases declared in the books of account were accepted there is no basis to treat the sales made out of such purchases as unexplained cash credits taxable u/s 68 HELD THAT - Once the purchases declared in the books of accounts were duly accepted then no subjective assumption and presumption could be made a basis to assume allege and conclude that sales made out of such purchases were unexplained cash credits taxable u/s 68 of the Act. It is settled law that once the books of accounts sales have been accepted the same could not be regarded as unexplained credits. It is also noted that aforesaid sales as made by the assessee were supported by the availability of stock in the books of accounts whose availability is not disputed and is otherwise too supported by genuineness of creditors and also sales bills maintained. Addition in dispute confirmed by CIT(A) deserve to be deleted. We hold and direct accordingly. Assessment u/s. 115BBE in view of SMILE Microfinance Ltd. 2024 (11) TMI 1444 - MADRAS HIGH COURT has already settled the issue against the department that the law applies to the transaction on or after 01.04.2017 only.

Summary

The primary issue considered by the Appellate Tribunal (AT) was whether the addition of Rs. 8,57,44,000 made by the Assessing Officer (AO) as unexplained cash credits under section 68 of the Income Tax Act, 1961 ("the Act") during the demonetization period was justified, and whether the consequent taxation under section 115BBE of the Act was appropriate for the assessment year 2017-18.

Relatedly, the Tribunal examined the correctness of confirming the demand under section 115BBE, particularly in light of the timing of the transactions vis-`a-vis the applicability of the amended provisions.

Issue-wise Detailed Analysis:

1. Legitimacy of Addition under Section 68 on Account of Cash Deposits during Demonetization Period

Relevant Legal Framework and Precedents: Section 68 of the Act mandates that any unexplained cash credits in the books of accounts can be added to the income of the assessee if the assessee fails to satisfactorily explain the nature and source of such credits. The burden lies on the assessee to demonstrate the genuineness of the cash deposits.

Court's Interpretation and Reasoning: The AO initiated scrutiny due to an abnormal surge in cash deposits during the demonetization period, which was disproportionate compared to prior periods. The AO observed that average cash sales prior to demonetization were substantially lower compared to the spike in October 2016. The AO also noted a consistent increase in cash-in-hand balances during the year, which was unexplained.

The AO issued a show cause notice demanding an explanation for the high cash deposits amounting to Rs. 8,57,44,000. The assessee contended that the increase was due to cash sales from two branches (Dwarka and Yusuf Sarai), with declared sales figures supporting the contention. However, the AO found the explanation unsatisfactory, particularly due to the lack of documentary proof of possession of two premises during the relevant period, and the sudden spike in cash sales was not credibly explained.

The CIT(A) upheld the AO's order, affirming that the assessee failed to satisfactorily explain the extraordinary increase in cash deposits during demonetization.

Key Evidence and Findings: The AO relied on comparative data of cash sales and cash-in-hand balances from previous years, the absence of corroborative documents regarding the second branch, and the unexplained disproportionate increase in cash deposits during demonetization. The assessee's books of accounts and VAT returns showed declared sales, but the AO questioned the genuineness of the cash component.

Application of Law to Facts: The AO applied section 68 to treat the unexplained cash deposits as income from undisclosed sources. The CIT(A) concurred, emphasizing the assessee's failure to provide credible explanations or documentary evidence.

Treatment of Competing Arguments: The assessee argued that declared purchases supported the sales, and thus the cash sales could not be treated as unexplained credits. The assessee also contended that the cash deposits were already part of declared income, and taxing the same again under section 68 amounted to double taxation.

The AO and CIT(A) rejected these arguments, focusing on the abnormal spike and lack of proof for the second branch, which undermined the credibility of the cash sales explanation.

Conclusions: Initially, both AO and CIT(A) held the addition under section 68 justified. However, on appeal, the Tribunal took a different view, as elaborated below.

2. Applicability of Section 115BBE for Taxation of the Addition

Relevant Legal Framework and Precedents: Section 115BBE provides for a special tax rate on income from undisclosed sources, introduced by the Taxation Laws (Second Amendment) Act, 2016, effective from 1st April 2017. The applicability of this section is contingent on the timing of the transactions.

Court's Interpretation and Reasoning: The Tribunal referred to a ruling by the Hon'ble Madras High Court in SMILE Microfinance Ltd. vs. ACIT, which held that section 115BBE applies only to transactions occurring on or after 1st April 2017.

Key Evidence and Findings: The cash deposits in question related to the demonetization period, which was prior to 1st April 2017, i.e., during the financial year 2016-17.

Application of Law to Facts: Since the transactions predated the effective date of section 115BBE, the Tribunal held that the special tax rate could not be applied to the addition.

Treatment of Competing Arguments: The assessee argued that even if the addition were sustained, the demand under section 115BBE was erroneous. The Revenue relied on the orders below confirming the demand.

Conclusions: The Tribunal accepted the assessee's contention and directed that section 115BBE could not be applied retrospectively to the cash deposits made during demonetization.

3. Treatment of Declared Sales and Purchases vis-`a-vis Unexplained Cash Credits

Relevant Legal Framework and Precedents: It is settled law that if sales and purchases are accepted and reflected in audited books of accounts and returns, unexplained cash credits under section 68 cannot be presumed merely based on subjective assumptions.

Court's Interpretation and Reasoning: The Tribunal noted that the sales declared by the assessee were accepted by the authorities, were supported by VAT returns, and the books of accounts were audited under section 44AB without adverse findings. The availability of stock and genuineness of creditors were not disputed.

Key Evidence and Findings: The Tribunal emphasized that the declared purchases and sales were recorded in the books and supported by documentary evidence, undermining the presumption of unexplained credits.

Application of Law to Facts: The Tribunal held that once purchases were accepted, the sales arising from such purchases could not be treated as unexplained cash credits merely because of a spike in cash deposits. The subjective assumption by the AO and CIT(A) was not a sufficient basis to sustain the addition.

Treatment of Competing Arguments: The Revenue's reliance on the abnormal increase and lack of proof for the second shop was outweighed by the acceptance of books and returns by the authorities.

Conclusions: The Tribunal concluded that the addition under section 68 was not sustainable and deserved to be deleted.

Significant Holdings:

"We find that Ld. CIT(A) has not disputed the sales made which were duly disclosed in VAT return and also in books of accounts maintained by the assessee audited and also under section 44AB of the Act, no adverse inference could be drawn in respect of the declared sales by the assessee."

"Once the purchases declared in the books of accounts were duly accepted then no subjective assumption and presumption could be made a basis to assume, allege and conclude that sales made out of such purchases were unexplained cash credits taxable under section 68 of the Act."

"In view of the aforesaid peculiar facts and circumstances of the case, we are of the considered view that addition in dispute confirmed by the Ld. CIT(A) deserve to be deleted."

"Hon'ble Madras High Court in SMILE Microfinance Ltd. vs. ACIT... has already settled the issue against the department that the law [section 115BBE] applies to the transaction on or after 01.04.2017 only."

The Tribunal's final determinations were that the addition of Rs. 8,57,44,000 as unexplained cash credits under section 68 was unjustified given the acceptance of declared sales and purchases, and that the demand under section 115BBE was not applicable to transactions prior to 1st April 2017. Consequently, the appeal was allowed, and the addition and tax demand were deleted.