2025 (5) TMI 887 - AT - Income Tax

Addition made on account of cash deposits during the demonetization period - assessee s argued that deposits represented genuine cash sales as recorded in the books of accounts and income tax returns. HED THAT - On perusal of the cash book we find that the said cash sales are duly reflected as receipts thereon and there is absolutely no negative cash balance with the assessee meaning thereby the cash deposits made during the whole year including the demonetization period is squarely covered and explained out of cash balance available with the assessee. To the extent of sales made by the assessee the stocks of home d cor items had been duly reduced. The assessee had furnished the sale invoices purchase invoices stock registers VAT returns (both original and revised) cash book entire books of accounts before the learned AO. None of these documents and records were even rejected by the learned AO. The assessee had filed revised VAT returns for the third quarter only to change the input tax credit figure thereon. The sales figure in original VAT returns and revised VAT returns remain unchanged. The sales made by the assessee had not been doubted by the revenue. Hence the revenue having accepted the sales made by the assessee ought not to have made separate addition on account of cash deposits by treating it as unexplained. Otherwise the same would amount to double addition made by the learned AO. On this count itself the addition made on account of cash deposits deserves to be deleted. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the Learned Commissioner of Income Tax (Appeals) (CITA) was justified in confirming the addition made by the Assessing Officer (AO) on account of cash deposits made during the demonetization period, in the facts and circumstances of the case. Specifically, the Tribunal examined the validity of treating the cash deposits of Rs. 53,82,150/- as unexplained income under section 68 read with section 115BBE of the Income-tax Act, 1961, despite the assessee's contention that these deposits represented genuine cash sales duly recorded in the books of accounts and income tax returns.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Justification of addition on account of cash deposits during demonetization period under sections 68 and 115BBE of the Income-tax Act.

Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act deals with unexplained cash credits, empowering the AO to treat unexplained cash deposits as income if the assessee fails to satisfactorily explain the source of such credits. Section 115BBE imposes an enhanced rate of tax at 60% on income declared or offered in certain cases, including unexplained cash credits. The applicability of section 115BBE for assessment years prior to 2018-19 was also a crucial point, with reliance placed on the Madras High Court ruling in SMILE Microfinance Limited vs ACIT, which held that the enhanced tax rate under section 115BBE applies only from AY 2018-19 onwards.

Court's Interpretation and Reasoning: The Tribunal noted that the AO had disbelieved the assessee's explanation that the cash deposits represented genuine cash sales, primarily because similar cash deposits were not made in the earlier year. However, the assessee countered this by stating that the business commenced only in October 2016, making comparison with earlier years irrelevant. The Tribunal observed that the assessee's retail showroom had started operations in October 2016, coinciding with the festive period including Diwali, which naturally led to increased cash sales.

The Tribunal emphasized that the assessee had furnished comprehensive documentary evidence including sale bills, cash books, purchase invoices, stock registers, and VAT returns (both original and revised). These documents were neither rejected nor doubted by the AO. The Tribunal found that the cash sales were duly recorded in the books of accounts and reflected in the income tax return, which declared a loss for the year. The cash book reflected no negative cash balance, indicating that the cash deposits were covered by the cash sales and cash balance available.

The Tribunal further reasoned that since the revenue had accepted the sales figures, making a separate addition on account of cash deposits would amount to double addition, which is impermissible. Additionally, the Tribunal relied on the Madras High Court's decision in SMILE Microfinance Limited, holding that the enhanced tax rate under section 115BBE was not applicable for AY 2017-18, thus negating the AO's invocation of this provision.

Key Evidence and Findings: The assessee's detailed records of sales, purchases, stock reduction correlating with sales, VAT returns, and cash book entries provided a coherent and credible explanation for the cash deposits. The timing of the business commencement and the festive season sales were also significant factual findings supporting the genuineness of the cash deposits.

Application of Law to Facts: Applying section 68, the Tribunal found that the cash deposits were satisfactorily explained as genuine business receipts. The AO's failure to reject the books of accounts or the documentary evidence indicated acceptance of the sales figures. Therefore, the addition under section 68 was unwarranted. Regarding section 115BBE, the Tribunal applied the precedent that the enhanced tax rate applies only from AY 2018-19 onwards, making its application to AY 2017-18 erroneous.

Treatment of Competing Arguments: The revenue's argument centered on the absence of similar cash deposits in the preceding year and the invocation of section 115BBE. The Tribunal rejected the comparison with the preceding year due to the business's inception date and found the invocation of section 115BBE misplaced based on judicial precedent. The assessee's detailed documentary evidence and explanation were accepted over the revenue's suspicion.

Conclusions: The Tribunal concluded that the cash deposits made during the demonetization period were fully explained by genuine cash sales duly recorded in the books and returns. The addition made by the AO and confirmed by the CITA was therefore unjustified and was set aside. The enhanced tax provisions under section 115BBE were held inapplicable for the relevant assessment year.

3. SIGNIFICANT HOLDINGS

"The cash deposits made during the whole year including the demonetization period is squarely covered and explained out of cash balance available with the assessee."

"The sales made by the assessee had not been doubted by the revenue. Hence the revenue having accepted the sales made by the assessee, ought not to have made separate addition on account of cash deposits by treating it as unexplained. Otherwise, the same would amount to double addition made by the learned AO."

"Enhanced rate of tax at 60% as provided in section 115BBE of the Act could be made applicable only from Assessment Year 2018-19 onwards and cannot be applied for earlier years."

Core principles established include the necessity of rejecting books of accounts or documentary evidence before making additions under section 68, the impermissibility of double addition for the same income, and the temporal applicability of enhanced tax provisions under section 115BBE.

Final determination: The addition of Rs. 53,82,150/- on account of cash deposits during the demonetization period was not justified and was deleted. The appeal of the assessee was allowed accordingly.