2025 (7) TMI 433 - AT - Income Tax

Unexplained cash credit u/s 68 r/w section 115BBE - assessee has not made sales through tax invoices - as alleged sales had abnormally increased in one particular month - CIT(A) deleted addition - HELD THAT - The assessee has furnished before the AO the month wise details of purchases and sales made after that date and the movement in the stock position. As seen that on the 1st of October 2016 the assessee had stock worth Rs.13, 08, 49, 603.61/- in its possession and that when viewed against the closing stock of Rs. 9, 53, 63, 490.16/- as on 31st October 2016 had depleted a substantial amount of that stock by way of sales. The details of stock purchases and sales that have been submitted by the assessee before the ld. AO have not been questioned or doubted in any manner by the ld. AO. Therefore only because the month of October 2016 saw a spurt in cash sales below the limit of Rs.2, 00, 000/- for which the assessee was not in a position to furnish details of purchasers the sales made by the assessee cannot be doubted unless the purchases sales and stock depletion are also cast into doubt. Argument that the assessee had not submitted the sales invoices to the Assessing Officer - We observe that unless there is a finding that the stocks were not available or were diverted elsewhere sales claimed out of those stocks cannot be doubted AO has based his additions on the belief that there exists a possibility of manipulating the exact date of sale on account of the requirement of filing of VAT return for October 2016 on 20.11.2016 but we observe that first of all in this case all the cash from sales was deposited on 10.11.2016 leaving lesser scope for manipulation but even if that were so it would not take the credits on account of those sales in his books outside the purview of sales receipts unless it could be shown that the sales had not occurred or that the assessee did not have the stock to sell that which he claimed to have sold. Assessee presented the cash book before the ld. AO and the ld. AO could not find any discrepancy in the same. Therefore the credits made in the said cash book on account of cash sales remain uncontroverted. As assessee has presented evidence of available stock and depletion of the said stock on account of sales and AO has not carried out any enquiry to show that any portion of the receipts on account of the sale of that stock are unexplained by such sales no case for addition u/s 68 is made out. We are therefore in agreement with the CIT(A) and uphold his decision to delete the addition on this account. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal relate primarily to the applicability of section 68 of the Income Tax Act, 1961, concerning unexplained cash credits, and the legitimacy of additions made on account of alleged unexplained cash sales during the demonetization period. Specifically, the issues include whether the unexplained cash credit of approximately Rs. 2.98 crores can be sustained where the assessee failed to produce sales invoices for cash sales made during 1.10.2016 to 8.11.2016; whether the abnormal increase in cash sales during this period is indicative of manipulation to explain unaccounted specified bank notes (SBNs); the onus and evidentiary requirements on the assessee to prove the genuineness of such credits; and the correctness of disallowing deduction claimed under section 37 for amounts deposited under the Pradhan Mantri Garib Kalyan Yojana (PMGKY).

Regarding the unexplained cash credit under section 68, the legal framework mandates that the onus lies on the assessee to satisfactorily explain the nature and source of any cash credits appearing in the books of account. The Supreme Court decisions in Kale Khan Mohammad Hanif v. CIT and Sumati Dayal v. CIT establish that the assessee must prove the identity and genuineness of the creditors or customers, and the transactions must be supported by cogent evidence. The principle of preponderance of probabilities guides the assessing authority in determining whether the explanation is satisfactory.

The Assessing Officer (AO) relied on statistical analysis showing an abnormal spike in cash sales during the demonetization window (1.10.2016 to 8.11.2016), particularly sales below Rs. 2,00,000/-, which circumvented mandatory PAN quoting requirements, rendering customers unidentifiable. The AO observed that these sales were not supported by tax invoices but only by sales invoices, and no vouchers were submitted for these transactions. The AO posited that this pattern was consistent with attempts to convert unaccounted SBNs into accounted cash sales, citing the opportunity window before VAT returns were due on 20.11.2016. Consequently, the AO held Rs. 2,98,53,859/- as unexplained cash credit under section 68, while excluding Rs. 70,00,000/- declared under PMGKY.

The assessee contended that the increase in sales was part of an expanding business trajectory, supported by continuous growth in sales figures from FY 2015-16 through FY 2017-18. The assessee submitted detailed monthly purchase, sales, and stock records, asserting that the stock in hand was adequate to support the sales claimed. The assessee argued that the AO's reliance on the absence of PAN details for small cash sales below Rs. 2,00,000/- was misplaced, as no KYC or PAN requirement exists for such transactions, and that the books of account were audited and vouched without objection. The assessee also highlighted that the AO did not dispute the authenticity of the stock or purchases, nor did he find discrepancies in the cash book or other records.

The Appellate Tribunal, after examining the facts and submissions, observed that the business was indeed expanding, with sales increasing year on year. The Tribunal noted that the assessee had an opening stock of approximately Rs. 4.68 crores as on 1.4.2016, which increased to Rs. 13.08 crores by 1.10.2016, and the closing stock at the end of October 2016 was Rs. 9.53 crores, indicating substantial depletion consistent with sales. The Tribunal emphasized that the AO did not question the stock availability or the genuineness of purchases, nor did he find any discrepancies in the cash book or other records. It was held that the mere absence of PAN details for small cash sales or the timing of VAT return filings could not, by itself, render the sales or cash credits unexplained under section 68.

The Tribunal further reasoned that the AO's suspicion based on the demonetization context and the possibility of manipulating dates was not supported by independent enquiry or evidence. The cash deposits were made on 10.11.2016, limiting the scope for manipulation. The Tribunal underscored that unless the sales themselves or the stock supporting those sales are disproved, the credits arising from such sales cannot be treated as unexplained. The Tribunal thus concurred with the CIT(A)'s decision to delete the addition of Rs. 2,98,53,859/- under section 68.

On the issue of deduction claimed under section 37 for Rs. 70,00,000/- deposited under PMGKY, the Tribunal noted that the CIT(A) had disallowed the deduction on the ground that once an income is declared as undisclosed, it cannot be treated as an allowable expense. The assessee had admitted to suppression of income by making a declaration under PMGKY, and the deduction was disallowed accordingly. The Tribunal upheld this finding, confirming the addition.

The Tribunal also addressed the Revenue's contention that the addition under section 68 should be confirmed for the entire amount, including the PMGKY deposit, due to the admitted suppression of income. However, since the assessee withdrew its cross objection challenging the deletion of the addition, the Tribunal dismissed the cross objection and confined its decision to the issues raised in the Revenue's appeal.

In considering competing arguments, the Tribunal balanced the AO's reliance on circumstantial evidence and statistical anomalies against the assessee's production of comprehensive stock, purchase, sales, and cash book records. The Tribunal underscored the principle that suspicion or surmise alone cannot substitute for concrete evidence to justify additions under section 68. The Tribunal also noted that double taxation would arise if the same receipts were taxed twice, and since the sales were already offered to tax, additions under section 68 were unwarranted absent proof of unexplained credits.

The significant holdings of the Tribunal include the following verbatim legal reasoning: "...only because the month of October, 2016 saw a spurt in cash sales below the limit of Rs.2,00,000/-, for which the assessee was not in a position to furnish details of purchasers, the sales made by the assessee cannot be doubted unless the purchases, sales and stock depletion are also cast into doubt."

Further, the Tribunal articulated the core principle that "unless it could be shown that the sales had not occurred or that the assessee did not have the stock to sell that which he claimed to have sold... the credits made in the said cash book on account of cash sales, remain uncontroverted."

On the matter of the PMGKY deduction, the Tribunal confirmed the principle that "once an income had been declared as undisclosed, it could not be treated as an expense that was allowable under section 37 of the Act."

In conclusion, the Tribunal dismissed the Revenue's appeal challenging the deletion of the addition under section 68, upheld the disallowance of the PMGKY deduction under section 37, and dismissed the assessee's cross objection. The decision reinforces that additions under section 68 require substantive evidence beyond suspicion, that the onus lies on the Revenue to disprove sales and stock genuineness, and that declared undisclosed income cannot be allowed as an expense deduction.