2024 (4) TMI 195 - AT - Income Tax

Rejection of the books of accounts - best judgment assessment u/s 144 - addition of the sales made in cash on account of unexplained cash credit u/s 68 - HELD THAT - Before us, the assessee has not challenged the action of the authorities below with respect to the rejection of the books of accounts made by them under the provisions of section 145(3) of the Act. In simple words the decision of the authorities below for rejecting the books of accounts has reached to the finality and no interference to this effect is required to be made. It is the trite law that once the books of accounts have been rejected, the only resort available to the revenue is to determine the income of the assessee in the manner provided under section 144 of the Act to the best of the judgment. The Hon'ble Supreme Court in Kachwala Gems 2006 (12) TMI 83 - SUPREME COURT held that rejection of books of account under section 145 justified and best judgment assessment under section 144 of the Act needed. As in the case of CIT Vs. Dhiraj R. Rungta 2014 (4) TMI 711 - GUJARAT HIGH COURT held that once rejection of books of account is justified under section 145 of the Act, no other addition can be made referring the same set of books to the income of the assessee. How to make the best judgement in the manner provided under section 144 of the Act after rejecting the accounts under the provisions of section 145(3) of the Act ? - When the books are rejected, a lump sum addition is made to the original return of income. Such addition may be based on estimate of turnover and profit rate or disallowance of claims, expenditure, etc. as held in case of CIT v. Pilliah Sons 1966 (10) TMI 35 - SUPREME COURT - After rejecting book results, the Assessing Officer has to determine the income in reasonable and scientific manner after considering the results/ performance of the earlier years or some comparable cases. In the present case, what we find is this that the AO after rejecting the books of accounts has not estimated the income but has treated the amount of cash sales deposited during the demonetization period in the bank as unexplained cash credit which is against the spirit of the law as discussed above. First of all, the provisions of section 68 of the Act cannot be applied to the amount shown as sales in the books of accounts otherwise it is going to lead to the double addition which is undesirable. In holding so, we draw support and guidance from the judgement of CIT vs. Vishal exports overseas Ltd 2012 (7) TMI 1110 - GUJARAT HIGH COURT wherein the order of the ITAT was upheld that the sales cannot be treated as unexplained cash credit under section 68 of the Act. AO in the present case is treating the amount of cash deposits during the demonetisation period as sales and unexplained cash credit under section 68 of the Act which is contrary to the spirit of the provisions of law. As such the AO should have reduced the alleged amount of unexplained cash credit from the total sales and the balance sales should have been made subject to tax on some estimation basis. But the AO has not done so. Therefore, we are of the view that such addition made by the AO and confirmed by the learned CIT-A in the given facts and circumstances is not sustainable. We uphold the rejection of the books of accounts made by the authorities below but with the direction not to treat the amount of cash sales as unexplained cash credit under section 68 of the Act.

Summary

Issues Involved:
1. Rejection of books of accounts u/s 145 of the Act.
2. Addition of cash sales as unexplained cash credit u/s 68 of the Act.
3. Invocation of section 115BBE of the Act.

Summary:

1. Rejection of books of accounts u/s 145:

The assessee's books of accounts were rejected by the AO u/s 145(3) of the Act due to substantial cash deposits during the demonetisation period, which were claimed as cash sales. The AO found discrepancies in the sales records and noted that the suppliers of jewellery had not been paid for a long time. The AO concluded that the cash deposits were fabricated and treated them as unexplained cash credits. The CIT-A upheld the AO's decision. The Tribunal noted that the assessee did not challenge the rejection of the books of accounts, and it reached finality. It was emphasized that once books are rejected, the income must be determined under section 144 of the Act.

2. Addition of cash sales as unexplained cash credit u/s 68:

The AO treated the cash deposits of Rs. 3,28,75,000 during the demonetisation period as unexplained cash credits u/s 68 of the Act. The Tribunal highlighted that the provisions of section 68 cannot be applied to amounts shown as sales in the books of accounts, as it would lead to double addition. The Tribunal referred to the judgment in CIT vs. Vishal Exports Overseas Ltd, where sales were not treated as unexplained cash credit. The Tribunal also noted that the AO did not reduce the alleged unexplained cash credit from the total sales, which was contrary to the law. Therefore, the Tribunal directed the AO to delete the addition made u/s 68.

3. Invocation of section 115BBE:

The assessee contended that section 115BBE should not be invoked as the transactions occurred before the provision was inserted into the statute. However, this issue was not elaborated upon in the judgment.

Conclusion:

The Tribunal upheld the rejection of the books of accounts but directed the AO not to treat the cash sales as unexplained cash credit u/s 68. The appeal of the assessee was allowed, and the addition made by the AO was deleted.

Order pronounced in the Court on 03/04/2024 at Ahmedabad.