2025 (5) TMI 734 - AT - Income Tax

Addition u/s 68 - unexplained cash credits - addition by re-characterizing the sales - CIT(A) had observed that there is no dispute with regard to the fact that assessee s sale is predominantly in cash. There was no dispute or whisper qua the genuineness of sale in the order of assessment. There was no conflict qua the stock maintained by the assessee. There was no verification / inquiry from the customers details of whom are duly submitted by the assessee during the assessment proceedings. The assessee has furnished all the primary information requisite to prove that the sales were genuine and that the customers identity are not suspected. AO had observed that primary evidence in respect of claimed cash receipts from customers have not been produced for verification whereas in the response furnished by the assessee before the AO it was the categorical request by the assessee that the receipts handed over to the customers can be verified from them or the system generated copy of same can be produced as and when demanded such request of the assessee was overlooked by the Ld. AO. CIT(A) also observed that the assessment order was silent about the stock sales of the assessee he accepted the entire sales by accepting the returned income of the assessee there was no reduction of the corresponding sale purchase or any adjustment to the stock of the assessee such action of Ld. AO is found to be arbitrary unjustified and suffering with infirmity. Cash deposits in bank in SBN / demonetized currency cannot be the reason alone for any adverse inference dehors any substantial material to dislodge the contentions of the assessee to prove that there was a failure on the part of assessee to explain the nature and source of amounts so deposited whereas in the present case the assessee have furnished or requested to further substantiate with all the necessary evidence to support the identity of the customers and genuineness of the transactions much less when the returned income of the assessee emerging from the sale transactions recorded in the books of assessee has been accepted by the AO addition by re-characterizing the same sales is incomprehensible. No error in the decision of CIT(A) in deleting the addition u/s 68 - Decided in favour of assessee.

The primary legal issues considered in this appeal relate to the applicability and interpretation of section 68 of the Income Tax Act, 1961, concerning unexplained cash credits during the demonetization period. Specifically, the Tribunal examined whether the additions made by the Assessing Officer (AO) on account of alleged unexplained cash credits were justified, and whether the books of account and evidentiary submissions of the assessee were properly evaluated in light of the statutory provisions and judicial precedents.

Two core legal questions were addressed:

1. Whether the cash deposits made by the assessee during the demonetization period, claimed to be from closing cash-in-hand balances as on 08.11.2016 and advances received from customers prior to demonetization, could be treated as unexplained cash credit under section 68 of the Income Tax Act.

2. Whether the cash receipts credited to the assessee's books through transactions involving a third party, namely Shri Shiv Jaiswal (proprietor of Shiv Kripa Honda), could be treated as unexplained cash credit under section 68, given the nature of business dealings and documentary evidence presented.

Both issues required detailed scrutiny of the factual matrix, documentary evidence, and legal principles governing unexplained cash credits and the rejection of books of account.

Regarding the first issue, the relevant legal framework is section 68 of the Income Tax Act, which empowers the AO to add unexplained cash credits to the income of the assessee if the source of such credits is not satisfactorily explained. The AO's addition was premised on the finding that substantial cash deposits in old currency notes during the demonetization period were not supported by primary evidence such as sales bills and insurance invoices corresponding to the claimed advances from customers. The AO doubted the genuineness of the cash-in-hand balance and the timing of receipts, particularly noting that insurance invoices were generated during the demonetization period, while advances were claimed to be received before it. The AO also relied on the assessee's disclosure of Rs. 25 lakhs under the Pradhan Mantri Garib Kalyan Yojna (PMGKY) as indicative of unaccounted money.

The assessee countered by submitting cash books showing closing cash-in-hand as on 08.11.2016 exceeding Rs. 2.15 crores, detailed lists of customers who paid advances, and explanations regarding the timing of vehicle deliveries and shipments. The assessee argued that the cash deposits during demonetization were from legitimate business transactions, consistent with past business trends, and supported by documentary evidence. Further, the assessee requested verification of receipts from customers, which the AO did not pursue.

The Commissioner of Income Tax (Appeals) [CIT(A)] examined the facts and judicial precedents, including the Supreme Court ruling in Dhakeshwari Cotton Mills Ltd. v. CIT, which mandates that additions cannot be made without material or evidence. The CIT(A) held that the AO's addition was based on presumption and estimation without concrete evidence. The CIT(A) noted the AO's acceptance of the books of account results and the absence of any infirmity found therein. Reliance was placed on recent Tribunal decisions holding that cash deposits during demonetization, supported by evidence of cash-in-hand prior to demonetization and consistent business practices, should not be treated as unexplained cash credits. The CIT(A) also observed that the AO's failure to adjust sales, purchases, or stock in light of the addition indicated an inconsistent approach.

Applying the law to the facts, the CIT(A) concluded that the cash deposits were bona fide and the addition under section 68 was unjustified. The Tribunal concurred with this view, emphasizing that the assessee had furnished sufficient documentary evidence and that the AO's rejection of books of account was arbitrary and unsupported by concrete findings. The Tribunal underscored that mere cash deposits during demonetization cannot be the sole basis for adverse inference without substantive material dislodging the assessee's explanation.

Concerning the second issue, the AO made an addition of Rs. 32 lakhs on the basis that cash deposits in the bank accounts of Shri Shiv Jaiswal, who was not an authorized dealer, were immediately transferred to the assessee, suggesting the introduction of unaccounted money. The AO rejected the assessee's claim that sales were made through Shri Jaiswal, noting absence of bills or documentary evidence from him and doubting the risk customers would take in making cash payments without receipts.

The assessee submitted an affidavit from Shri Shiv Jaiswal confirming sales on behalf of the assessee in lieu of discounts on spares and accessories, along with ledger copies evidencing continuous business relations. The CIT(A) held that the AO erred in disregarding the affidavit, which is a legally enforceable document, and in ignoring the ongoing business relationship and ledger evidence. The CIT(A) found no material to doubt the genuineness of the sales or the receipts and held that the AO's addition was based on mere hypothesis without evidence. The Tribunal upheld this reasoning, noting that genuine business receipts cannot be treated as unexplained cash credits merely on the basis of cash deposits in demonetized currency.

The Tribunal's significant holdings include the following:

"The AO cannot make an addition without reference to any material or evidence."

"Addition based on presumption and on estimation during scrutiny proceedings cannot be allowed."

"Cash deposits in bank in SBN / demonetized currency cannot be the reason alone for any adverse inference, dehors any substantial material to dislodge the contentions of the assessee."

"Books of account cannot be rejected on arbitrary basis with presumptions and surmise which is not according to law as well as proved on the basis of any concrete facts."

"Genuine business receipts cannot be treated as unexplained cash credits merely on the basis of cash deposits in demonetized currency."

The Tribunal reaffirmed the principle that additions under section 68 require a positive finding that the source of cash credits is unexplained, supported by evidence. It reiterated that rejection of books of account must be based on specific defects and not on assumptions. The Tribunal also emphasized that where sales are accepted and reflected in the books, the corresponding cash credits cannot be re-characterized as unexplained without cogent reasons. The Tribunal relied on judicial precedents that stress the need for a reasonable nexus between the material on record and the additions made.

In conclusion, the Tribunal dismissed the appeal filed by the revenue, upholding the deletion of additions of Rs. 56,95,458 and Rs. 32,00,000 made under section 68 of the Income Tax Act. The Tribunal found no infirmity in the order of the CIT(A), which had judiciously considered the facts, evidence, and legal principles, and had rightly held that the cash deposits were explained and the books of account were not liable to be rejected.

← Previous Next →