2025 (1) TMI 1054 - AT - Income Tax

Unexplained cash credit u/s 68 - source of the cash cannot be accepted and it is held that the assessee has introduced his unaccounted cash during the period of demonetization in the books in the guise of cash sales and proceeds of debtor realization - AO and CIT(A) both have mentioned that the assessee did not produce books of account and assessee has not filed even Cash Flow Statement only Cash Summaries have been filed. HELD THAT - The collection from debtors forming part of opening balance is miniscule. Even for collection from one debtor M/s Sati Polyweave Ltd. the assessee has filed Ledger A/c and Sale Bills issued under VAT laws. The non-compliance of summon u/s 131 by the said debtor is not a fault of assessee and the assessee cannot be penalized for that. The higher amount of cash balance held by assessee as opening balance is also substantiated from the fact that there was high scale of business during August 2016 to October 2016 on account of Diwali festival. Thus we find that the source of impugned deposits is sufficiently explained by assessee. Also once the AO has rejected books of assessee u/s 145 the addition u/s 68 cannot be made. Their Lordship in Dulla Ram 2013 (12) TMI 253 - PUNJAB HARYANA HIGH COURT have approved this proposition as held as books of accounts were rejected in their entirety the Assessing Officer could not rely upon any entry in the books of accounts for making an addition Addition made by AO in present case is neither tenable on merit nor on legal provisions of section 68. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the addition of Rs. 32,67,500/- as unexplained cash credit under Section 68 of the Income-tax Act, 1961, by the Assessing Officer (AO) was justified?
Whether the rejection of the assessee's books of account under Section 145(3) of the Income-tax Act, 1961, was valid?
Whether the application of Section 68 is permissible when the books of account are rejected under Section 145(3)?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Addition under Section 68

Relevant legal framework and precedents: Section 68 of the Income-tax Act, 1961, deals with unexplained cash credits. The AO can make additions to the income if the assessee fails to satisfactorily explain the nature and source of cash credits.
Court's interpretation and reasoning: The court examined whether the assessee provided a satisfactory explanation for the cash deposits made during the demonetization period.
Key evidence and findings: The assessee claimed that the cash deposits were sourced from cash withdrawals from the bank and a minor amount from debtor realization. The assessee provided documentary evidence, including bank statements, cash books, and purchase summaries, to support these claims.
Application of law to facts: The court found that the assessee had adequately explained the source of cash deposits through prior cash withdrawals and business transactions, such as increased purchases during the festive season.
Treatment of competing arguments: The AO argued that the cash deposits were unexplained and linked to unaccounted sales. However, the court noted that the AO did not provide contrary evidence to disprove the assessee's claims.
Conclusions: The court concluded that the addition of Rs. 32,67,500/- as unexplained cash credit was not justified as the assessee provided a satisfactory explanation with supporting evidence.

Issue 2: Validity of Rejection of Books under Section 145(3)

Relevant legal framework and precedents: Section 145(3) allows the AO to reject the books of account if they are not true and correct.
Court's interpretation and reasoning: The court evaluated whether the AO's reasons for rejecting the books were valid.
Key evidence and findings: The AO rejected the books due to non-compliance with notices and the absence of corroborative evidence from a debtor. However, the court found that the assessee had submitted the required documents, including cash books and sales bills.
Application of law to facts: The court determined that the AO's reasons for rejection were factually incorrect and that the books were improperly rejected.
Treatment of competing arguments: The assessee argued that the books were audited and consistent with the cash summaries provided. The AO's claim of non-submission was disproven by the evidence on record.
Conclusions: The court held that the rejection of the books was invalid as the assessee complied with the requirements and provided sufficient documentation.

Issue 3: Applicability of Section 68 Post Rejection of Books

Relevant legal framework and precedents: Case law suggests that once books are rejected, Section 68 cannot be applied to make additions based on those books.
Court's interpretation and reasoning: The court considered whether the AO could rely on entries in rejected books to make additions under Section 68.
Key evidence and findings: The court referenced precedents where it was held that rejected books cannot be used for making additions under Section 68.
Application of law to facts: The court found that the AO's reliance on rejected books to apply Section 68 was legally impermissible.
Treatment of competing arguments: The court noted that the AO's approach was inconsistent with established legal principles regarding the rejection of books and subsequent additions.
Conclusions: The court concluded that the addition under Section 68 was not tenable after the books were rejected.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Account books once rejected, are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue."
Core principles established: The court reinforced that once books are rejected under Section 145(3), Section 68 cannot be applied to make additions based on those books.
Final determinations on each issue: The court directed the AO to delete the addition of Rs. 32,67,500/- as unexplained cash credit, allowing the assessee's appeal.

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