2025 (6) TMI 1923 - AT - Income Tax

Addition u/s. 68 - unexplained cash deposited in Specified Banking Notes (SBNs) during the period of demonetizations - AO rejected the books of accounts u/s 145(3) - assessee submitted that the sales were supported by proper documentation including audited books purchase and stock registers cash and bank books bills and vouchers - CIT(A) deleted addition as the assessee had maintained proper books of accounts including stock and purchase registers and had substantiated the cash sales with sufficient documentation and audited VAT returns - HELD THAT -Commissioner (Appeals) in our considered view has rightly noted that the amount in question was already recorded as sales in the books and that such sales were supported by supporting documentation. Once the sales realization has been duly taxed making an addition of the same amount u/s 68 would result in double taxation which is impermissible under law. This view is well supported including DCIT v. Damodardas Mohanlal Chokshi 2025 (1) TMI 1572 - ITAT AHMEDABAD and Radhika Jewellers 2024 (6) TMI 1449 - ITAT AHMEDABAD Genuineness of the sales was supported by various documentary evidence submitted by the assessee including audited financial statements VAT returns month-wise stock details stock and purchase registers purchase bills sales register cash book bank statements and break-up of cash sales. No specific defect was pointed out by the AO in the stock records or purchases corresponding to the sales. The cash deposits were linked to these documented sales and there was no evidence brought on record by the AO to demonstrate otherwise. CIT(A) also observed that the AO failed to substantiate the rejection of books under section 145(3) with any material defect or inconsistency in the accounting records. It was further held by CIT(Appeals) that the purchases were not doubted the stock register was duly maintained and the VAT returns were audited and accepted by the relevant authorities. Therefore once the AO accepted the sales as genuine for the purpose of determining profit he could not invoke section 68 of the Act for taxing the same amount again as unexplained cash credit . Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the addition of Rs. 3,02,51,598/- made under section 68 of the Income Tax Act, 1961, on account of unexplained cash deposits in Specified Banking Notes (SBNs) during the demonetization period, was justified in law and on facts. Specifically, the Tribunal examined whether cash sales recorded in the books of account and offered to tax could be treated as unexplained income under section 68 merely because the Assessing Officer (AO) was dissatisfied with certain documentary and procedural aspects surrounding these sales during the demonetization window.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of Addition under Section 68 on Cash Sales Recorded in Books During Demonetization Period

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act pertains to unexplained cash credits, allowing the AO to treat unexplained cash deposits as income if the assessee fails to satisfactorily explain the source. Section 145(3) empowers the AO to reject books of account if they do not comply with prescribed accounting standards or do not represent the true income. Judicial precedents cited include the jurisdictional ITAT decision in Nitisha Silk Mills Pvt. Ltd. and the Bombay High Court ruling in R.B. Jessaram Fatehchand v. ACIT, which clarify that absence of customer details for sales below Rs. 2 lakhs does not invalidate such sales. Further, the Tribunal relied on decisions such as DCIT v. Damodardas Mohanlal Chokshi and ACIT v. Radhika Jewellers, which hold that once sales are recorded and profits offered to tax, the same amount cannot be taxed again under section 68.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had maintained proper books of account, including audited financial statements, VAT returns, stock and purchase registers, and sales documentation. The AO's rejection of books under section 145(3) was not supported by any material defect or inconsistency in the records. The Tribunal emphasized that the cash sales were duly recorded and the profit element was offered to tax, making the addition under section 68 tantamount to double taxation, which is impermissible. The Tribunal accepted the assessee's explanations regarding the absence of customer details for sales below Rs. 2 lakhs, the maintenance of stock registers in quantity rather than jewellery-wise, and the business practice of building stock before festive seasons.

Key Evidence and Findings: The assessee submitted extensive documentary evidence, including audited accounts, VAT returns, month-wise stock details, purchase bills, ledger confirmations from suppliers, and detailed explanations for the cash sales and deposits during the demonetization period. The AO's observations about discrepancies such as incomplete customer details, lack of jewellery-wise stock details, alleged absence of labour charges, and sudden surge in cash deposits were rebutted with plausible business explanations and corroborated by independent audit verifications. The Tribunal noted the absence of any specific findings by the AO disproving the genuineness of purchases or sales.

Application of Law to Facts: Applying the legal principles, the Tribunal held that the AO erred in rejecting the books of account and making an addition under section 68 when the sales were recorded and profits offered to tax. The Tribunal underscored that the AO cannot treat the same amount as unexplained income after accepting it as genuine sales for taxation. It was also noted that mere non-submission of certain customer details for sales below Rs. 2 lakhs is not a valid ground for disallowance or addition.

Treatment of Competing Arguments: The AO's contentions about manipulation of sales invoices, structuring transactions to avoid reporting thresholds, discrepancies in stock and production data, and suspicious supplier transactions were carefully examined. The Tribunal found these arguments speculative and unsupported by concrete evidence. The assessee's detailed rebuttals and documentary proofs were accepted as credible. The Tribunal also dismissed the AO's reliance on comparative cash deposit patterns with the preceding year as irrelevant given the seasonal and demand-driven nature of the jewellery business.

Conclusions: The Tribunal concluded that the addition under section 68 was not justified. The assessee had discharged the onus of proving the genuineness of cash sales and deposits. The rejection of books of account was unwarranted, and the AO's action amounted to double taxation. The Tribunal upheld the order of the CIT(Appeals) deleting the addition of Rs. 3,02,51,598/-.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal observations and determinations:

"Once the sales realization has been duly taxed, making an addition of the same amount under section 68 of the Act would result in double taxation, which is impermissible under law."

"The assessee has maintained stock register and the quantitative details of product sold. It is also seen that the sales have been advanced out of the available stock and the purchase which have been recorded in the books of accounts are duly audited."

"The action of the Assessing officer in rejecting the books of account and going on to accept the net profit, is not correct."

"No specific defect has been found out in the stock details nor has it been changed/altered by the Assessing officer. The VAT returns have been audited, filed and accepted by the concerned department."

"Mere non-maintenance and/or non-submission of customer details for sales below Rs. 2 lakhs cannot be held against the assessee."

"There is nothing on record to show that either the purchases or the sales have been proven to be bogus."

"Once there is no defect in the purchase and sales and the same are matching with inflow and outflow of stock, there is no reason to disbelieve the same."

Final determination: The addition of Rs. 3,02,51,598/- under section 68 was set aside, and the appeal of the Department was dismissed.