2023 (1) TMI 1483 - AT - Income Tax

Addition u/s 68 - unexplained cash deposits made during the demonetization period - addition towards inflated sales - quantum of sales claimed by the Appellant - HELD THAT - Unexplained bank deposits cannot be considered u/s 68 of the Act and it falls under Section 69A of the Act. However mentioning a wrong section by the AO is not fatal. We have to see the substance and not the form. Accordingly reject this ground of appeal of the assessee. Addition towards inflated sales - whether this amounts to double addition as the said amount is considered in the Profit Loss Account and included in the already declared income of the assessee? - There is a merit in this plea of the assessee. This inflated sales if any already had gone into the computation of income and making further u/s. 69A of the Act amounts to double addition which shall be avoided. Direct the AO to exclude this amount from the income of the assessee. Thereafter he has to make separate addition of the same amount u/s 69A of the Act provided if the assessee is not able to reconcile its sales with reference to the deposit of money into assessee s bank of account. AO has to consider the average daily sales of one year before the demonetisation period and if the assessee s sales during the demonetisation period found to be more than the average sales of prior one year then only that difference amount can be considered for computation of inflated sales. The assessee shall furnish full details of one year s sales prior to the demonetisation period and the AO has to consider the average daily sales and compare it with the sales of demonetisation period. On the basis of this average sales the sales during demonetisation period to be compared and fund flow/cash statement of the relevant period to be produced so as to demonstrate that the assessee is having sufficient cash balance to deposit into bank account. If there is shortage in cash balance then only addition to be made to that extent. Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

- Whether the addition made under Section 68 of the Income Tax Act, 1961 ("the Act") on account of unexplained cash deposits in the assessee's bank account during the demonetisation period was justified;

- Whether the Assessing Officer (AO) erred in treating the cash deposits as unexplained credits under Section 68 despite the assessee furnishing evidence that the deposits represented proceeds from genuine sales;

- Whether the addition of inflated cash sales during the demonetisation period resulted in double taxation by taxing the same income twice;

- Whether the AO's approach of comparing cash balances on two different dates without considering the sales register, cash book, and purchase records was appropriate;

- Whether the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] violated principles of natural justice by passing orders without affording adequate opportunity to the assessee;

- Whether the AO's rejection of the sales declared by the assessee was based on surmises and conjectures without logical reasoning;

- The correctness of the CIT(A)'s confirmation of the AO's additions and the legal validity of invoking Section 68 in this context.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Addition under Section 68 for Unexplained Cash Deposits

The AO made an addition of Rs. 15,66,990 under Section 68 treating cash deposits as unexplained credits, including Rs. 11,66,994 towards inflated cash sales during the demonetisation period (01.10.2016 to 09.11.2016). The CIT(A) deleted Rs. 4,00,000 but upheld Rs. 11,66,994.

The assessee contended that the deposits were genuine sales proceeds supported by bills and audited accounts, and that the AO's invocation of Section 68 was incorrect. The learned Authorized Representative (A.R.) argued that unexplained bank deposits should fall under Section 69A, not Section 68, and that the AO's approach was flawed as it considered only three months' average sales prior to demonetisation instead of the entire preceding year.

The Tribunal acknowledged that while the AO wrongly invoked Section 68 instead of Section 69A, this defect was not fatal as the substance of the addition must be considered rather than the form. The Tribunal rejected the plea that the addition was invalid merely because of the wrong section invoked.

Issue 2: Double Addition and Inflated Sales

The Tribunal observed that the inflated sales amount of Rs. 11,66,994 was already reflected in the assessee's Profit & Loss account and included in the declared income. Thus, making a further addition under Section 69A on the same amount would amount to double taxation.

The Tribunal found merit in the assessee's contention on this point and directed the AO to exclude this amount from the income computation to avoid double addition. However, the AO was directed to make a fresh addition under Section 69A only if the assessee failed to reconcile the sales with the bank deposits.

Issue 3: Methodology for Determining Inflated Sales

The Tribunal directed the AO to consider the average daily sales of the entire year preceding the demonetisation period rather than the three months' average used earlier. The sales during the demonetisation period should be compared with this average, and only the excess amount should be considered as inflated sales.

The assessee was required to furnish full details of sales for the relevant one-year period, and the AO was to examine the fund flow and cash statements to verify if sufficient cash balance existed to justify the bank deposits. Only if there was a shortage in cash balance would an addition be warranted to the extent of the shortfall.

Issue 4: Reliance on Cash Balances and Ignoring Books of Account

The AO and CIT(A) had relied on cash balances as of 31.03.2016 and 09.11.2016 and concluded that the cash deposits were self-generated without giving due weight to the sales register, cash book, and purchase records. The Tribunal found this approach flawed.

The Tribunal emphasized that the AO cannot reject declared sales without doubting purchases or stock figures, especially when the books were audited and VAT returns accepted by sales tax authorities. The Tribunal relied on precedents which held that sales cannot be rejected without examining corresponding purchases and stock.

Issue 5: Principles of Natural Justice and Opportunity to be Heard

The assessee alleged that the CIT(A) passed the order in haste without providing sufficient opportunity to be heard, violating natural justice. The Tribunal did not find any merit in this ground as the record did not indicate any denial of opportunity. The appeal was thus rejected on this ground.

Issue 6: Basis of Addition Being Surmises and Conjectures

The assessee contended that the AO and CIT(A) based their findings on surmises and conjectures without logical reasoning. The Tribunal acknowledged that the AO's approach was flawed in isolating the sales of the demonetisation period and in not considering the entire sales and purchase data. However, it did not find the addition wholly baseless but required a fresh examination using the correct methodology as outlined.

3. SIGNIFICANT HOLDINGS

- "Mentioning a wrong section by the AO is not fatal. We have to see the substance and not the form." This establishes that procedural errors in invoking incorrect statutory provisions do not invalidate substantive additions if the facts justify them.

- The Tribunal held that "inflated sales, if any, already had gone into the computation of income and making further u/s. 69A of the Act amounts to double addition which shall be avoided." This principle protects taxpayers from double taxation on the same income.

- The Tribunal mandated that "the AO has to consider the average daily sales of one year before the demonetisation period and if the assessee's sales during the demonetisation period found to be more than the average sales of prior one year, then only that difference amount can be considered for computation of inflated sales." This establishes a fair and reasonable method for determining inflated sales rather than arbitrary comparisons.

- The Tribunal emphasized the importance of verifying fund flow and cash statements to demonstrate sufficient cash balance before making additions, ensuring that the AO's assessment is grounded in financial reality.

- The Tribunal stated that "without doubting the purchase or stock figures the AO cannot reject the sales declared by the assessee," reinforcing the principle that sales cannot be disbelieved in isolation when corresponding purchases and stock records are undisputed.

- The appeal was partly allowed and remanded to the AO for fresh consideration consistent with the directions, thereby ensuring adherence to principles of natural justice and correct application of law.