2023 (10) TMI 202 - AT - Income Tax

Unexplained deposits in demonetization period to be out of books or tempered books - Assessee had made a submission that the cash was deposited out of cash balance available from cash sales and as the assessee is in the business of wheat flour, maida etc. accordingly, it is regular business practice to receive cash and all the cash deposited is out of cash in hand - HELD THAT - CIT(A) has satisfied himself of trading results including quantified details of stock. There is substance in the contention of Ld. AR that once sales stood accepted, by Ld. AO, which has been also considered and offered for taxation, how could the cash deposited out of the very same cash sales can be regarded as unexplained cash credits. The bench is also of the view that when the nature of business is accepted by the Tax authorities to be of substantial cash component in purchase and sales, both, then without there being evidence to the contrary, cash flow as accounted in books should be accepted. There is no matter to show there was any discrepancy in the cash balances, withdrawals, cash expenditures. Merely on assumptions Ld. AO could not have considered that deposits in demonetization period to be out of books or tempered books. The ground thus raised by the Revenue has no substance. SBNs received from the undisclosed sources - HELD THAT - Assessee should not be expected to establish the cash flow from cash sales with mathematical precisions and what is essential is to establish that on preponderance of probability the business of assessee was able to generate surplus cash to be deposited in the bank. Only because the period under examination is of demonetisation that does not change the basic principle with regard to discharge of burden of proof for purpose of Section 68 of the Act. The nature of business of the assessee was one which would have been directly affected by market forces, where whole sale dealers and customers would have used SBNs for cash purchases. To allege without any evidence that there can be possibility that the appellant might have booked these sales in books by 08.11.2016 to deposit the SBNs, but actually made sales thereafter, to keep the stock as per books, on mere conjectures is not sustainable. The Ld. CIT(A) has accepted the major part of the cash deposits on basis of examination of all information about sales, purchases, stock etc. but to disbelieve part on the basis of mere assumptions is not justified. Long back in the case of Lakshmi Rice Mills 1974 (4) TMI 8 - PATNA HIGH COURT it has been held that, when books of account of the assessee were accepted by the revenue as genuine and cash balance shown therein was sufficient to cover high denomination notes held by the assessee, then the assessee was not required to prove source of receipt of said high denomination notes which were legal tender at that time. The claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit loss account) and on the other hand cash sales subjected to reported income are added u/s. 68 of the Act. Consequently we are inclined to accept the grounds raised by assessee.

Summary

Issues Involved:
1. Legitimacy of cash deposits during the demonetization period.
2. Validity of the addition made by the Assessing Officer (AO) under Section 68 and taxed under Section 115BBE of the Income Tax Act.
3. Justification of the partial relief provided by the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue 1: Legitimacy of Cash Deposits During Demonetization

The assessee filed a return declaring an income of Rs. 17,41,450/- and deposited Rs. 2,16,87,500/- in its bank accounts during the demonetization period. The assessee claimed the cash deposits were from cash sales related to its business in wheat flour and related products. The AO did not accept this explanation, considering the deposits abnormal compared to previous years and concluding that Rs. 2,16,87,500/- was unexplained money, thus adding it to the total income under Section 68 of the Act and taxing it under Section 115BBE at 60%.

Issue 2: Validity of Addition by AO under Section 68 and Section 115BBE

The AO's addition was based on the assumption that the cash deposits were not in line with the business's regular cash flow. The CIT(A), after examining the data, restricted the addition to Rs. 38.25 lakhs, concluding that the cash sales and cash in hand were consistent with the business's trends. The CIT(A) observed that the AO had not provided evidence of manipulation for October 2016 and noted that the cash in hand as of 31.10.2016 was consistent with the business's historical cash balances.

Issue 3: Justification of Partial Relief by CIT(A)

The CIT(A) concluded that the cash sales and cash in hand were in line with the business's trends, but still sustained an addition of Rs. 38.25 lakhs, assuming the possibility of inflated sales to introduce unaccounted Specified Bank Notes (SBNs). The Tribunal, however, found that the CIT(A)'s partial disallowance was based on assumptions without concrete evidence. It noted that the assessee's books were audited and accepted by the authorities, and the cash sales were part of the income disclosed. The Tribunal emphasized that the nature of the business involved substantial cash transactions and that the burden of proof under Section 68 was not met by mere assumptions. Consequently, the Tribunal deleted the addition sustained by the CIT(A), accepting the assessee's grounds.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, deleting the addition sustained by the CIT(A). The Tribunal found that the AO's and CIT(A)'s assumptions were not substantiated by evidence, and the cash deposits were consistent with the business's regular cash flow.

Order Pronounced:

Order pronounced in the open court on 27th September, 2023.