2025 (6) TMI 465 - AT - Income Tax

Additions u/s 68 - unexplained cash deposits during the demonetization period - CIT(A) allowed claim - HELD THAT - The books of the assessee were audited under 44AB the deposits into bank account were made on various dates in November 2016 there is no allegation from the AO that stock was not available for sale or the purchases are bogus or the sale invoices are back dated. It is also the finding of the Ld. CIT(Appeals) that with regard to cash sales the unidentifiable parties it is important to understand that in case of over the counter sales within the limit permissible by law in any trade or business the customer cannot be forced to submit the proof of identification. AO could not identify any defect in sales register stock register purchase register and cash book particularly as on the date of demonetization. CIT(Appeals) observed that once the books of accounts are accepted by the AO and the cash sales recorded therein were considered in arriving at assessed income of the assessee then treating the cash deposited in banks against such cash sales as undisclosed income of the assessee is not justifiable. None of these findings of the Ld. CIT(Appeals) were rebutted by the Revenue. In the circumstances we uphold the order of the Ld. CIT(Appeals) and reject the grounds raised by the Revenue.

Summary

The core legal questions considered in this judgment revolve around the validity of additions made under section 68 of the Income Tax Act concerning unexplained cash deposits during the demonetization period. Specifically, the issues include: (i) whether the cash deposits made by the assessee during the demonetization period can be treated as unexplained cash credits under section 68; (ii) whether the assessee adequately explained the source of funds for these deposits; (iii) the relevance of the assessee's sales turnover, stock, and audit reports in establishing the genuineness of the cash deposits; and (iv) the applicability of judicial precedents on similar facts involving cash deposits during demonetization.

Regarding the first issue, the Assessing Officer (AO) had made an addition of Rs. 4.58 crores under section 68, alleging that the cash deposits during demonetization were unexplained since the old currency notes ceased to be legal tender post 8.11.2016 and no new currency was available in the market. The AO compared cash deposits during the demonetization period with those in the preceding period and found a substantial increase, which was not satisfactorily explained by the assessee.

The Court examined the legal framework under section 68, which stipulates that if any sum is credited in the books of an assessee and the assessee fails to explain the nature and source of such sum to the satisfaction of the AO, it may be charged as income. However, the Court emphasized that mere suspicion or routine observations are insufficient to treat credited sums as unexplained income if the assessee provides a satisfactory explanation supported by evidence.

On the facts, the Court noted that the assessee had demonstrated that the cash deposits were out of regular sale proceeds of marble blocks, supported by turnover figures, VAT returns, and audited accounts under section 44AB. The turnover for the year under consideration was Rs. 46.48 crores, with the preceding year's turnover at Rs. 60.32 crores. Importantly, cash sales had actually decreased in the demonetization year compared to the previous year, consistent with the reduced cash availability post demonetization. The Court held that comparing cash deposits during demonetization with pre-demonetization periods was inappropriate since the demonetization scheme compelled deposit of old currency notes, which ceased to be legal tender.

Regarding the AO's contention that no cash expenses were claimed during the relevant period, the Court found this to be incorrect. The assessee submitted detailed month-wise cash expenses charts for pre-demonetization periods showing substantial cash outflows, disproving the AO's assertion of no cash expenses.

The Court also analyzed the stock, sales, and purchase registers, finding no defects or discrepancies. The AO had not alleged bogus purchases, backdated sales invoices, or non-availability of stock. The Court reasoned that since purchases, sales, and stock are interlinked, and no irregularities were found in these records, the sales recorded and the corresponding cash deposits could not be doubted without tangible evidence. The Court cited the principle that suspicion alone, however strong, cannot override genuine books of account maintained according to mercantile principles.

In addressing the issue of sales to unidentifiable parties, the Court acknowledged that over-the-counter cash sales within permissible limits do not legally require proof of identification from customers. This further weakened the AO's skepticism about the cash sales.

The Court extensively relied on judicial precedents to reinforce its conclusions. It referred to the decision of the Delhi High Court in a case involving jewellery sales, where the High Court held that once sales are recorded in books and accepted by the AO, the same cannot be treated as undisclosed income again under section 68. Similarly, the ITAT Visakhapatnam's decision was cited, which recognized that demonetization caused a rush in jewellery purchases as an alternative investment, and cash sales recorded as revenue receipts cannot be taxed again as unexplained credits.

Additionally, the Court referenced the Patna High Court's ruling in Lakshmi Rice Mills, which emphasized that if the balance at hand covers the value of demonetized notes and the books of account are genuine, the source of income is well disclosed and cannot be treated as secreted profits. The Court also noted that the assessee's gross profit rates and sales trends were consistent with normal business operations and festive season variations, negating any inference of inflated sales or undisclosed income.

The Court further observed that the AO and other authorities, including the Directorate of Income Tax (Inv.), had conducted surveys and investigations but found no defects in the books or stock. The assessee's accounts were audited and accepted, and VAT returns were filed timely. The Court held that these facts collectively established the genuineness of the cash deposits as proceeds of sales legitimately recorded and offered for taxation.

In treating the competing arguments, the Court gave due consideration to the AO's suspicion and the Revenue's contentions but found them unsubstantiated by concrete evidence. The Court underscored that the onus to disprove the sales or demonstrate bogus transactions lay on the Revenue, which was not discharged. The Court rejected the Revenue's attempt to treat the same cash sales amount as undisclosed income again under section 68 and section 115BBE.

Consequently, the Court upheld the order of the Commissioner of Income Tax (Appeals) deleting the addition. The Court held that the cash receipts represented genuine sales offered for taxation, and the addition under section 68 was unsustainable.

The significant holdings include the following verbatim legal reasoning:

"Once the books of account for F.Y. 2016-17 are accepted by the Id. AO and the cash sales recorded therein were considered in arriving at the assessed income of the Assessee for the financial year under consideration, then treating the cash deposited in banks against such cash sales as undisclosed income of the Assessee is not sustainable."

"Suspicion however strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence."

"If the entries in the books of accounts are genuine and the balance in cash is matching with the books, it can be said that the assessee has explained the nature and source of such deposit."

"It is a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee."

"In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case, we have no hesitation to hold that the cash receipts represent the sales which the assessee has rightly offered for taxation."

The core principles established are that during the demonetization period, cash deposits arising from legitimate sale proceeds recorded in books of account and supported by proper audit and tax compliance cannot be treated as unexplained cash credits under section 68. The Court emphasized the necessity of tangible evidence to disprove genuine sales and rejected mere suspicion or routine observations as insufficient grounds for addition. It also clarified that once sales are accepted and accounted for, taxing the same amount again as unexplained income is impermissible.

In final determinations, the Court dismissed the Revenue's appeal and upheld the deletion of the addition of Rs. 4.58 crores under section 68 read with section 115BBE, affirming that the cash deposits were adequately explained as sale proceeds and not liable to be taxed as unexplained income.