2025 (5) TMI 1573 - AT - Income Tax

Addition u/s 69A - cash deposit during demonetization as undisclosed investment - CIT(A) deleted the addition - HELD THAT - The primary condition for invoking the provisions of section 69A is that there must be existence of books of accounts and such money bullion jewellery or valuable article was recorded in the same than the question of the explanation by the assessee arose. If the assessee provides the explanation with regard to the sources thereof before rejecting the same ld. AO has to express his opinion as to why the explanation furnished by Appellant is not acceptable. It is not the allegation of the AO that the assessee has not maintained any books of account or the cash deposited in SBN in bank was not recorded in the books of account maintained. He rather accepted the turnover declared by the assessee which is inclusive of the amount of cash sales which was made in SBN and deposited into bank. As seen that the assessee not only offered explanation regarding nature and source of deposits but also substantiated the same with documentary evidences in the shape of Audited Financial Statements Sale Register Purchase Register Stock Register and Cash book. It is not understood as to how the AO could invoke the provisions of section 69A for making addition when the source of such cash deposits being cash sales was duly recorded in the books maintained in regular course. Even no discrepancy was pointed out by the VAT department in respect of purchases and sales made by the assessee. Therefore addition so made u/s 69A of the Act is unjustified and be deleted. AO has tried to support his finding merely on the basis of incorrect comparison of daily cash sales and cash deposits in the bank accounts in the year before us as well as in preceding year and such observations have already been answered by the assessee and not controverted by Revenue. In view of these facts we find no infirmity in the order of CIT(A) deleting the addition - Decided in favour of assessee. Addition made by applying G.R. rate @ 3.2% based on the assessee s average G.P. rate of last three years - We find that the AO himself has accepted that the assessee has filed stock records for AY 2017-18 and merely for the reason that there was substantial increase in sales in the month of October and November 2016 for which the cash invoices generated were not produced before the AO the provision of section 145(3) of the Act were invoked. AO has made direct enquiries from the suppliers and their statements were also recorded. AO do not find any discrepancy with regard to the purchases declared by the assessee and simply alleged that the purchases in the month of October November 2016 were abnormally high. Such allegations could not be accepted looking to the fact that during these two months there were substantial sales made by the assessee and since the assessee is a trader in jewellery without making purchase of stocks sales could not possible. This fact was ignored by the AO. No infirmity in the order of the CIT(A) in accepting the trading results declared by the assessee and deleting the addition made by applying 3.32% profit rate as against 3.24% declared by the assessee. It is also relevant to state that the AO on the one hand doubted the cash sales during the month of October November and on the other hand has applied the G.P.rate on declared sales of INR 72.14 crores which further established that AO has no material to doubt the correctness of the books of account of the assessee. No infirmity in the order of CIT(A) in accepting the trading results declared by assessee and further deleting the additions made by AO. Appeal of the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the deletion of addition of Rs. 21,55,41,500/- made under section 69A of the Income Tax Act on account of unexplained cash deposits during demonetization was justified, particularly when the assessee failed to produce majority of cash bills raised on 08.11.2016 and did not submit stock details for the subsequent assessment year.

(b) Whether the deletion of addition of Rs. 2,39,52,982/- made by applying an average gross profit margin of 3.32% under section 145(3) of the Act was justified, given that the assessee failed to furnish supporting material to substantiate transactions recorded in the books of account.

(c) Ancillary issues relating to the maintenance and acceptance of books of account, genuineness of sales and purchases, and the applicability of provisions related to unexplained cash deposits during the demonetization period.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legitimacy of addition under section 69A on unexplained cash deposits during demonetization

Relevant legal framework and precedents: Section 69A of the Income Tax Act permits addition to income where an assessee is found to be owner of money or valuables not recorded in books of account, and fails to offer a satisfactory explanation regarding the source. The provision requires three conditions: existence of unrecorded money or valuables, failure to offer explanation, or unsatisfactory explanation. Precedents from various ITAT benches and High Courts emphasize that additions under section 69A cannot be made when cash sales are recorded in books of account and accepted by other government departments such as VAT authorities.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer (AO) accepted the turnover declared by the assessee, which included the cash sales deposited during the demonetization period. The assessee maintained audited books of account, stock registers, purchase registers, and sale registers, none of which were found defective by the AO. The AO's addition was primarily based on non-production of some cash bills and an abnormal number of invoices raised on 08.11.2016, the last day for acceptance of Specified Bank Notes (SBN). However, the Tribunal observed that the AO did not find any discrepancy in purchases or stock availability, and independent enquiries from suppliers did not reveal any adverse findings.

The Tribunal relied on the principle that when sales are recorded and accepted, cash deposits arising from such sales cannot be treated as unexplained income. The Tribunal further relied on several judgments including those of the Delhi High Court and coordinate ITAT benches, which held that taxing the same cash sales amount twice-once as sales and again as unexplained cash deposit-is impermissible and amounts to double taxation.

Key evidence and findings: The assessee produced audited financial statements, VAT returns accepted by the VAT department, stock registers showing sufficient stock to cover sales, and statements from suppliers corroborating transactions. The AO did not disallow any expenses or reject the books of account under section 145(3) except applying an average gross profit rate. The Tribunal found that the AO's addition was based on conjectures and surmises rather than concrete evidence.

Application of law to facts: Since the cash deposits were recorded in the books as cash sales and the source was satisfactorily explained and substantiated, the conditions for invoking section 69A were not met. The AO failed to demonstrate that the explanation was unsatisfactory or that the cash deposits were unrecorded. Consequently, the addition under section 69A was unjustified.

Treatment of competing arguments: The Revenue argued the abnormality in invoices and purchases and non-submission of some cash bills justified the addition. The assessee countered by highlighting acceptance of sales by VAT authorities, maintenance of proper books, and lack of any adverse findings from supplier statements. The Tribunal favored the assessee's detailed documentary evidence and rejected the Revenue's reliance on presumptions.

Conclusions: The Tribunal upheld the deletion of the addition under section 69A, holding that the cash deposits were explained as genuine cash sales recorded in audited books, and no addition was warranted.

Issue (b): Validity of addition under section 145(3) by applying average gross profit margin

Relevant legal framework and precedents: Section 145(3) allows the AO to reject books of account if they are not maintained regularly or are found to be incorrect, and to estimate income accordingly. However, rejection requires valid reasons supported by evidence. Precedents establish that mere suspicion or failure to produce some documents is insufficient to reject books if overall records are consistent and audited.

Court's interpretation and reasoning: The AO applied an average gross profit margin of 3.32% based on three years' data and made an addition of Rs. 2,39,52,982/-. The AO's basis was the non-production of some cash invoices and the large purchases from a single party in October-November 2016. The Tribunal noted that the AO accepted the sales and purchases generally, did not point out any defect in stock registers or audit reports, and did not disallow expenses claimed in profit and loss accounts.

The Tribunal observed that the AO's application of section 145(3) was without valid reason and inconsistent because the AO doubted sales but still applied gross profit margin on declared sales. The Tribunal also considered the increase in turnover and marginal reduction in gross profit percentage as normal business fluctuations and not indicative of incorrect books.

Key evidence and findings: The assessee submitted day-to-day stock registers, purchase and sale invoices (including some produced during proceedings), and supplier confirmations. No adverse findings emerged from supplier statements or stock records, and the VAT department accepted sales returns without objection.

Application of law to facts: The Tribunal held that the AO failed to demonstrate any valid defect warranting rejection of books under section 145(3). The application of an average gross profit rate without disallowing expenses or rejecting sales was improper. The books of account were maintained regularly and audited, and the sales and purchases were genuine and interlinked with stock movements.

Treatment of competing arguments: Revenue relied on missing invoices and unusual purchase patterns to justify rejection and additions. The assessee emphasized acceptance of books by other government departments, consistency in stock and sales records, and lack of any specific defects. The Tribunal sided with the assessee's comprehensive evidence and found the AO's approach arbitrary.

Conclusions: The Tribunal upheld the deletion of the addition made under section 145(3) and accepted the trading results declared by the assessee.

Ancillary issues: Maintenance and acceptance of books of account, and treatment of cash sales during demonetization

The Tribunal extensively analyzed the maintenance of books, stock registers, and purchase and sale records. It found that the books were audited and maintained regularly, with no major defects pointed out by the AO. The Tribunal also recognized the unique circumstances of demonetization, noting that the large number of invoices raised on 08.11.2016 was not abnormal given the rush to convert Specified Bank Notes before the deadline.

It was emphasized that cash sales are a legitimate mode of business, especially in the jewellery trade, and that acceptance of sales by VAT authorities precludes the AO from doubting the same without substantive evidence. The Tribunal relied on multiple judgments from coordinate benches and High Courts supporting the principle that once sales are recorded and accepted, the corresponding cash deposits cannot be treated as unexplained income or subjected to double taxation.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following core principles and legal reasoning:

"Purchases, sales and the stock are interlinked and inseparable. Every purchase increases the stock and every sale decreases the stock. To disbelieve the sales either the assessee should not have the sufficient stocks in their possession or there must be defects in the stock register/stocks. Once there is no defect in the purchases and sales and the same are matching with inflow and the outflow of the stock, there is no reason to disbelieve the sales."

"When sales have already been recorded on the credit side of the sales accounts in the audited books, then making further addition of same sales would amount to double addition and which additions, thus, both on merits and otherwise not called for."

"The provisions of section 69A can be invoked only when the money or valuables are not recorded in the books of account and no satisfactory explanation is offered. In the instant case, the cash deposits were duly recorded as cash sales in audited books and explanation was furnished and accepted, hence addition under section 69A is unjustified."

"Rejection of books of account under section 145(3) requires valid reasons supported by evidence. Mere suspicion or failure to produce some invoices without any defect in audit or stock records is insufficient to reject books and make additions."

"The AO's approach of doubting sales but applying gross profit margin on the declared sales without disallowing expenses or rejecting books is inconsistent and unsustainable."

"Cash deposits during demonetization period, when supported by stock availability and recorded sales, cannot be treated as unexplained income merely because of volume or timing."

Based on these principles, the Tribunal dismissed all grounds of appeal raised by the Revenue and upheld the order of the Commissioner of Income Tax (Appeals) deleting the additions made under sections 69A and 145(3) of the Income Tax Act for the assessment year 2017-18.