2025 (7) TMI 305 - AT - Income Tax

Addition u/s. 68 - cash deposits made out from cash sales during the demonetization period - applicability of section 115BBE - Assessee argued that where cash deposited in bank by assessee during demonetization period was out of cash sales which was duly shown in books of account and AO did not point out any specific defect in books of account maintained by assessee and no inflated purchases or suppressed sales were found - CIT(A) deleted addition HELD THAT - Addition made solely on the basis of suspicion and surmises is liable to be quashed as suspicion no matter how strong cannot take the place of proof. Merely because demonetization was in progress cannot be the basis to suspect the genuine business transactions . Hence the addition so made is without any merit and thus is liable to be quashed. Secondly it is also to be noted that the addition has been made u/s 68 without considering that source of the cash deposits ie the alleged unexplained cash credits was duly recorded in the books as Sales and has also not been controverted. There is no iota of evidence to justify the application of the deeming fiction as no material to even prima-facie dispute the cash sales has been brought on record nor has it been alleged that any sales / purchases etc. were made outside the books. Therefore. in these circumstances there remains no basis on which the illegal addition so made can be sustained. AO has applied the provision of 115BBE which came into effect only on 15.12.2016 and hence was not applicable to the additions made herein. Cash deposited post demonetization by the assessee was out of the cash sales which had been accepted by the Sales Tax/VAT Department. Further the sale were not doubted upon by the Assessing Officer. Further there is no adverse observation of the AO that the assessee was not having the stock with him to effectuate the corresponding sales. Also the fact that sales were made in the period during which there was festive season cannot be lost sight of. Accordingly we affirm the action of the ld. CIT(A) in deleting the addition in dispute and reject the ground raised by the Revenue.

Summary

The core legal question considered in this appeal is whether the addition of Rs. 1,32,31,000/- made by the Assessing Officer (AO) under section 68 of the Income Tax Act, based on cash deposits made during the demonetization period, was justified or liable to be deleted.

The issue centers on the characterization of cash deposits in bank accounts during the demonetization period as unexplained cash credits under section 68, despite the assessee's explanation that these deposits arose from genuine cash sales recorded in the books of account.

Relevant legal framework includes section 68 of the Income Tax Act, which deals with unexplained cash credits, and section 115BBE, which imposes a special tax rate on unexplained income. The AO had also invoked section 115BBE, but the applicability of this provision was contested as it came into effect only on 15.12.2016, and the addition pertained to the assessment year 2017-18.

Several precedents were relied upon by the assessee, including decisions from various ITAT benches and High Courts, which emphasize that suspicion alone cannot justify additions under section 68 without tangible evidence, especially when books of account are maintained properly and not disbelieved or rejected by the AO. Notable among these are decisions where cash deposits during demonetization were held to be genuine when supported by corroborative evidence such as sales invoices, VAT returns, tax audit reports, and consistent stock records.

The Court's reasoning focused on the following key points:

• The assessee is engaged in the business of retail trading and remarking of old jewellery, operating through a proprietorship concern.
• The assessee filed returns declaring income of Rs. 5,29,070/-, but the AO assessed income at Rs. 1,37,60,070/- by adding the disputed cash deposits as unexplained income under section 68.
• The AO's addition was primarily based on the fact that cash deposits during the demonetization period were unusually high compared to the preceding year, without any specific defect or discrepancy pointed out in the books of account.
• The assessee furnished extensive documentary evidence including sale bills, sale and purchase registers, VAT returns, tax audited accounts, and cash books to substantiate the source of cash deposits as genuine cash sales.
• The AO overlooked that two of the bank accounts where cash was deposited belonged to the assessee's family members and not the assessee himself, a fact clarified by the assessee during assessment proceedings.
• The AO failed to consider the medical condition of the assessee during the previous year, which explained the lower cash sales in that year, invalidating the AO's comparison of cash deposits year-on-year.
• The books of accounts were duly audited and accepted by the AO without any adverse observations or rejection under section 145(3) of the Act.
• The sales figures were corroborated by VAT returns and accepted by the Sales Tax/VAT Department, with no adverse findings on purchases or stock levels.
• The AO's addition was thus based on suspicion and surmises arising from the demonetization context rather than any tangible evidence of bogus sales or unexplained cash credits.
• Application of section 115BBE was incorrect as it was not applicable to the assessment year under consideration.
• The addition resulted in double taxation since the same cash sales were already offered to tax at normal rates, and the addition under section 68 subjected the same amount to tax at a higher rate without justification.

The Court also referred to several judicial precedents supporting the deletion of additions under section 68 in similar factual contexts:

• A decision of the Chandigarh Bench of ITAT held that where opening stock, purchases, sales, and closing stock were not doubted, cash deposits from sales could not be treated as undisclosed income.
• The Delhi ITAT in a recent case held that suspicion without tangible evidence cannot displace the genuineness of books of account and sales figures accepted by the AO.
• The Vishakhapatnam Bench of ITAT noted that unusual features such as a rush of customers during demonetization or lack of KYC documents could not justify disbelieving sales when stock and purchases were accepted and no abnormal profits were shown.

Applying the law to the facts, the Court found that the AO's reliance on the demonetization period as a basis for suspicion was insufficient to treat the cash deposits as unexplained credits under section 68. The assessee's books were maintained properly, audited, and corroborated by VAT returns. No defect or discrepancy was pointed out by the AO in the books or audit reports. The cash deposits were consistent with the cash sales recorded and accepted by the tax authorities. The AO's failure to consider the medical condition of the assessee and the ownership of certain bank accounts further weakened the case for addition.

The Court rejected the Revenue's contention that the addition was justified on suspicion alone, reiterating the principle that "suspicion no matter how strong cannot take the place of proof." The Court also noted that the AO's attempt to invoke section 115BBE was misplaced and that the addition under section 68 led to double taxation of the same income.

In conclusion, the Court upheld the order of the Commissioner of Income Tax (Appeals) deleting the addition of Rs. 1,32,31,000/- made under section 68. The Revenue's appeal was dismissed.

Significant holdings include the following verbatim excerpts:

"The addition appears to have been made, more on the basis of suspicion, conjectures and surmises than on the basis of any independent third-party enquiry or tangible material on record. The law is trite that suspicion howsoever strong cannot partake the character of an evidence."

"The impugned addition has resulted in double taxation of the same amount, once in the form of cash sales already offered to tax by the appellant at the rate of tax applicable to the appellant and then again by way unexplained Cash Credit on deposits arising from such sales u/s 68 at higher rates specified u/s 115BBE."

"Mere surmise cannot replace an evidence to prove the wrong doing if any by the assessee. Once, the A.O. accepts the books of accounts and the entries in the books of account are matched, there is no case for making the addition as bogus sales."

Core principles established include:

• An addition under section 68 cannot be sustained solely on suspicion or surmises without tangible evidence or independent enquiry.
• Properly maintained, audited, and accepted books of account supported by corroborative evidence such as VAT returns and stock records rebut the presumption of unexplained cash credits.
• Cash deposits arising from genuine cash sales, even during demonetization, cannot be treated as unexplained income merely due to the timing or volume of deposits.
• Application of special tax provisions like section 115BBE must be strictly in accordance with their effective dates and legislative intent.
• Double taxation of the same income by treating genuine sales as unexplained credits is impermissible.

The final determination was that the addition of Rs. 1,32,31,000/- under section 68 was not sustainable and was rightly deleted by the CIT(A), and the Revenue's appeal was dismissed accordingly.