2023 (9) TMI 673 - AT - Income Tax

Addition of Cash deposits u/s. 68 - immediately after the demonetization assessee had shown inflated cash sales and also made deposits in the bank account which is completely abnormal compared to the earlier year and also subsequent year - HELD THAT - From the perusal of the material placed on record and also the explanation given by the assessee before the ld. AO, it is seen that assessee has maintained regular books of accounts which was subject to audit and has produced the entire sale bills, stock register and purchases and also quantitative tally of sales and corresponding stock. The assessee has also demonstrated that there was a direct correlation of cash outflow from the books of accounts with cash deposit in the bank accounts and also produced day wise stock report, wherein the outflow of stock against sales has been clearly reflected. Assessee has duly filed cash compliance report with respect to cash sales in Form 61A giving all the details with respect to cash sales. Nowhere, the ld. AO has pointed out that assessee did not have sufficient stocks in its possession or otherwise found any defect in the stock register. If that finding has not been given and no discrepancy has been pointed out, then how the corresponding sales of same stock and quantity can be treated as undisclosed income of the assessee. Once, AO has accepted the sales and there is direct nexus with the closing stock and the sales along with movement of stock linked to purchases then such credit on account of sales cannot be added u/s. 68. Addition u/s. 68 on account of cash deposits cannot be made simply on the reason that during the demonetization period, cash deposits vis-a-vis cash sales ratio is higher. Here in this case the parties to whom notices u/s. 133(6) were issued have confirmed the purchases but also filed the purchase bills. AO cannot disbelieve the purchases made from the assessee simply on the ground that those parties could not submit the source of their funds which is not the requirement of the assessee to prove specifically when assessee is a retail seller of jewellery and even law does not prohibit any cash sales or there is any requirement to seek any further detail. For this compliance assessee has also filed Form 61A before the ld. AO. Once, it has been established that sales representing outflow of stocks is duly accounted in the books of accounts and there are no abnormal profits during the year, then there is no justification why AO should treat the deposits made in the bank account out of cash sales to be income from undisclosed sources - Decided in favour of assessee.

Summary

Issues Involved:

1. Deletion of addition under Section 68 of the Income Tax Act.
2. Justification of cash deposits during the demonetization period.
3. Reliance on VAT returns for the genuineness of sales.
4. Application of tax rate under Section 115BBE.

Summary:

1. Deletion of Addition under Section 68:

The Revenue challenged the deletion of an addition of Rs. 2,57,59,680/- made under Section 68 of the Income Tax Act. The Assessing Officer (AO) noted that there was an unusual and abnormal cash deposit in November 2016, during the demonetization period, which was not substantiated by the assessee. The AO concluded that cash sales to identifiable persons without PAN and unidentifiable persons were non-genuine. However, the CIT(A) deleted the addition, observing that the assessee maintained regular books of accounts, produced contemporaneous documentation, and demonstrated a direct correlation between cash outflow and cash deposits. The CIT(A) also noted that the AO did not find any discrepancies in the sales bills, sales register, or stock statements.

2. Justification of Cash Deposits During Demonetization Period:

The AO argued that the assessee showed inflated cash sales and made abnormal cash deposits immediately after demonetization, which could not be substantiated. The assessee, however, provided detailed explanations, maintained regular books of accounts, and demonstrated that the cash deposits were directly linked to sales duly disclosed in the books. The Tribunal found that the AO did not reject the sales or the quantity of purchase stock and sales, and there was no discrepancy in the sales bills, sales register, purchases, and stock. Therefore, the cash deposits could not be treated as undisclosed income.

3. Reliance on VAT Returns for Genuineness of Sales:

The Revenue contended that the CIT(A) erred in relying on sales declared in VAT returns to conclude that cash deposited during the demonetization period corresponded to sales. The CIT(A) observed that the sales declared under the Maharashtra VAT Act and the VAT return completely tallied with the sales shown in the books of accounts. The Tribunal upheld this view, noting that the AO did not point out any discrepancies in the VAT returns or the sales records.

4. Application of Tax Rate under Section 115BBE:

The assessee argued that the AO erred in imposing tax at 60% under Section 115BBE instead of 30%, as the cash deposits took place before the Taxation Laws (Second Amendment) Act, 2016 came into force. The CIT(A) held that since the addition under Section 68 was deleted, the issue of invoking Section 115BBE became infructuous. The Tribunal agreed, noting that the entire addition under Section 68 was deleted, making the application of Section 115BBE irrelevant.

Conclusion:

The Tribunal confirmed the order of the CIT(A) and dismissed the appeal of the Revenue, as well as the cross-objection of the assessee, as infructuous. The Tribunal held that the cash deposits during the demonetization period were substantiated by the assessee through regular books of accounts, sales records, and VAT returns, and there was no justification for treating the deposits as undisclosed income.