2024 (12) TMI 490 - AT - Income Tax

Addition u/s 68 - abnormal increase in cash deposit during the demonetization period as compared to pre-demonetization period and higher turnover reported in service-tax return as compared to ITR - DR submitted that the assessee has made cash deposits specially during the Demonetization period by manipulating the cash sales declared in the books of account. Actual issues raised by the AO that the assessee has recorded sales only during the demonetization period and there is no history of such cash sales in the earlier period and the assessee has introduced its own undisclosed cash into the system and booked the cash sales without there being any cash sales. HELD THAT - From the information submitted before us, all the purchase and sales are properly recorded in the books and also substantiated by the information submitted before the GST officials and relevant quarterly reports. There is absolutely no discrepancies found by the lower authorities either in the stock registers submitted or quarterly reports submission before the GST authorities. The results declared by the assessee is within the range of book results. The lower authorities has not made any adverse comments nor found any deviations in the book results. Stock movement and excess sales , we observed that the assessee has submitted relevant stock reconciliation and auditors report of stock movements and there is no negative stock movement which will indicate that the assessee has booked excess sales without there being proper purchases. There are chances that during the demonetization period the regular customers may have chose to buy the spare parts and bearing by making payment by cash so that their excess SBN is transferred. We noticed that the credit sales has come down during this period and the sales of the assessee is more or less maintained during this period. Therefore, it shows that the changes in the patterns recorded in the sales are not abnormal. Whether the recording of cash sales which is already declared in the books of account will attract the deeming provisions of sec.68 or 69A of Act.? - As per provisions of the section, it is necessary that the assessee be found with the money, the same is not recorded in the books accounts maintained by it for any source and not offers any explanation or such explanations are not found to be satisfactory to the AO. In this case, the assessee has already declared the cash sales in its books of account and offers the explanation as cash sales, which the lower authorities has accepted it as regular business transactions because they have not rejected the book results and brought to tax the total sales declared by the assessee in its books. Since the cash were already recorded and explanation is already part of the book results, there is no avenue for the CIT(A) to reject such explanations. This expression explanation is found not satisfactory to the AO is purely relates to the money found with the assessee which are not recorded in the books of account. In this case, the above expression has no relevance since the assessee had already declared the cash sales in its books. Thus, we are inclined to allow the grounds raised by the assessee with the observation that the AO/CIT(A) cannot invoke the provisions of section 68 or 69A when the assessee is already declared the source for cash deposits in the books of accounts and the lower authorities without their being any material to support on their contrary view, the provisions of section 68 or 69A cannot be invoked. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Legitimacy of cash deposits during the demonetization period.
2. Applicability of Section 68 and Section 69A of the Income Tax Act.
3. Rejection of books of accounts under Section 145(3).
4. Double taxation concerns.
5. Procedural fairness and adherence to principles of natural justice.

Detailed Analysis:

1. Legitimacy of Cash Deposits During the Demonetization Period:

The core issue revolves around the substantial cash deposits made by the assessee during the demonetization period. The Assessing Officer (AO) questioned the legitimacy of these deposits, suspecting them to be unexplained money. The assessee contended that these deposits were sourced from cash sales recorded in the books, which were also reflected in the VAT returns. The AO, however, was not convinced and treated a significant portion of these deposits as unexplained, leading to an addition under Section 68 of the Income Tax Act.

2. Applicability of Section 68 and Section 69A of the Income Tax Act:

The AO initially invoked Section 68, which deals with unexplained cash credits, to make the addition. However, the CIT(A) later applied Section 69A, which pertains to unexplained money, after rejecting the books of accounts under Section 145(3). The CIT(A) reasoned that the cash deposits were not satisfactorily explained and thus constituted unexplained money. The assessee argued that the cash deposits were duly recorded in the books, and the source was adequately explained as cash sales, which were already taxed, thus challenging the applicability of Section 69A.

3. Rejection of Books of Accounts Under Section 145(3):

The CIT(A) rejected the books of accounts on the grounds that the stock register was not maintained and the sales were not substantiated with complete documentation, such as customer details. The assessee countered that maintaining detailed stock records was impractical given the nature of their business, which involved numerous small transactions. Moreover, the assessee argued that the CIT(A) did not provide an opportunity to explain these perceived deficiencies, violating procedural fairness.

4. Double Taxation Concerns:

The assessee raised concerns about double taxation, arguing that the cash sales had already been offered to tax in the regular course of business. By treating the same cash deposits as unexplained money under Section 69A, the authorities effectively taxed the same income twice. The assessee emphasized that such an approach was contrary to the principles of income tax law, which do not permit double taxation of the same income.

5. Procedural Fairness and Adherence to Principles of Natural Justice:

The assessee contended that the CIT(A) did not adhere to the principles of natural justice by failing to provide a fair opportunity to address the issues before rejecting the books of accounts and making the addition under Section 69A. The assessee argued that the CIT(A) acted on assumptions and without proper inquiry or evidence, which is against the established legal standards. The tribunal highlighted the necessity for authorities to base their findings on concrete evidence rather than suspicions or conjectures.

In conclusion, the tribunal found merit in the assessee's arguments, particularly regarding the procedural lapses and the inappropriate application of Section 69A. The tribunal noted that the cash sales were recorded in the books and substantiated by VAT returns, and the rejection of the books of accounts was not justified. Consequently, the tribunal allowed the appeal, directing the deletion of the addition made under Section 69A.