2025 (3) TMI 402 - AT - Income Tax

Addition u/s 68 - unexplained credit - cash deposit during demonetization as undisclosed income and addition on account of under valuation of stock - HELD THAT - Whenever Appellant provides explanation before rejecting the same ld. AO has to record dissatisfaction as to why the explanation furnished by Appellant is not acceptable. As is evident that assessee not only offered explanation regarding nature and source of such credits but also substantiated the same with documentary evidences in the shape of Audited Financial Statements Stock Register and Cash book. No specific defects whatsoever was brought out on record by CIT(A) in those evidences and books of accounts so furnished. It is not understood as to how the addition has been made by the lower authorities when the source of such cash deposits being cash sales was duly accepted. Even no discrepancy was pointed out by the VAT department in respect of purchases and sales made by the assessee. Therefore addition so made u/s 68 without finding out any specific defects in books of account and also without rebutting the evidences produced is unjustified and be deleted. CIT(A) has committed gross error in not accepting the cash generated out of sales made by the assessee on 08/11/2016 as genuine when he himself has accepted the part sales made which is also supported by the same bills which have not been accepted for confirming the addition. Accordingly we hereby direct to delete the addition upheld by the Ld. CIT(A) u/s 68 of the Act. The ground of appeal No. 2 is allowed. Addition on account of under valuation of stock towards the stock which has not been sold - We find that this addition is made solely for the reason that the cash deposited during the demonetization period was held as undisclosed income of the assessee and not generated out of the cash sale claimed by the assessee. Since while dealing the assessee s ground of appeal No. 2 above we have already held the sales made on 08/11/2016 as genuine and deleted the additions made of the cash deposited in SBN during the demonetization thus there is no reason for making the addition by holding the cost of goods out of such sale as unexplained. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

- Whether the addition of Rs. 85,00,000/- under Section 68 of the Income Tax Act, 1961, for unexplained cash deposits during the demonetization period was justified.

- Whether the addition of Rs. 23,99,550/- for under-valuation of stock was correctly upheld by the Commissioner of Income Tax (Appeals) (CIT(A)).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 for unexplained cash deposits

Relevant legal framework and precedents:

Section 68 of the Income Tax Act allows the assessing officer to charge unexplained credits in the books of an assessee as income if the assessee fails to offer a satisfactory explanation regarding the nature and source of the credits.

Court's interpretation and reasoning:

The Tribunal noted that the assessee maintained regular books of accounts, which were audited without any defects pointed out by the auditor or the Assessing Officer (AO). The sales were declared and accepted in the VAT returns, and no discrepancies were noted in the stock records. The Tribunal emphasized that the AO did not provide any contrary material or conduct independent inquiries to disprove the assessee's claims.

Key evidence and findings:

The assessee provided detailed explanations and documentary evidence, including audited financial statements, stock registers, and cash books. The Tribunal found no specific defects in these records, and the sales were already taxed, indicating potential double taxation if the cash deposits were taxed again.

Application of law to facts:

The Tribunal applied Section 68, noting that the AO must record dissatisfaction with the explanation provided by the assessee before making an addition. Since the assessee substantiated the cash deposits with evidence and no defects were found, the Tribunal found the addition unjustified.

Treatment of competing arguments:

The Department argued that the sales were concocted to justify the cash deposits. However, the Tribunal found no evidence supporting this claim and noted that the CIT(A) accepted part of the sales as genuine, undermining the Department's position.

Conclusions:

The Tribunal concluded that the addition of Rs. 85,00,000/- under Section 68 was unjustified and directed its deletion.

Issue 2: Addition for under-valuation of stock

Relevant legal framework and precedents:

The addition was based on the assumption that the cash deposits were from undisclosed sources, affecting the valuation of stock.

Court's interpretation and reasoning:

The Tribunal noted that the addition was consequential to the finding of unexplained cash deposits. Since the Tribunal found the cash sales genuine, the basis for the stock valuation addition was invalid.

Key evidence and findings:

The Tribunal observed that the addition was based on the incorrect assumption of undisclosed income, which was not supported by the records or evidence.

Application of law to facts:

The Tribunal applied its findings from the first issue, noting that since the cash sales were genuine, the stock valuation could not be questioned based on the same flawed premise.

Treatment of competing arguments:

The Department's argument relied on the initial finding of unexplained income, which the Tribunal had already rejected.

Conclusions:

The Tribunal concluded that the addition of Rs. 23,99,550/- for under-valuation of stock was unjustified and directed its deletion.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"It is not correct to say that the cash deposited out of such cash sales which duly reflected in the books of accounts is unexplained."

Core principles established:

The Tribunal emphasized the importance of substantiating claims with evidence and the requirement for the AO to provide specific reasons for rejecting an assessee's explanation under Section 68.

Final determinations on each issue:

- The Tribunal directed the deletion of the Rs. 85,00,000/- addition under Section 68, finding the cash deposits explained by the cash sales.

- The Tribunal also directed the deletion of the Rs. 23,99,550/- addition for under-valuation of stock, as it was based on the flawed assumption of unexplained income.