2025 (4) TMI 784 - AT - Income Tax

Rejection of the assessee s books of accounts - increase of sales to invoke the provisions of section 68 - As per DR nature of manufacturing and trading business of the assessee is not such that due to demonetization the customers would have purchased more of the stock - assessee is a manufacturer of tobacco products and also is in the trading business of perfumery - HELD THAT - When the assessee had given details of the parties from whom purchases were made and the details of sundry debtors was given the relevant statutory returns to the VAT and Service Tax authorities were filed when the assessee had made available all the stock registers as maintained then by alleging that the stocks does not depict item-wise day-wise inventory and on that basis alone to discredit the books of account is not justified. The assessee had furnished the audited books of account which included trading and profit loss Accounts. Pertinent to mention is that assessee had manufacturing and trading units a various places and their separate accounting was part of the audited financial. The opening stock sales and closing stocks have been duly disclosed which has been accepted in audit. No deficiency or inaccuracy in the inventories is cited by the ld. AO. Thus without even going through the audited financial and raising queries on the basis of any inaccuracy and infirmity found in the audit report the rejection of books of account is not sustainable. There seems to have been no inquiry on the part of the ld. AO with regard to the transactions which were reported in the audited books of account. So much so that the assessee s justification for the overall fall in GP rate by providing segment wise trading result for manufacturing and trading activity was accepted. AO has failed to appreciate that in demonetization period there was every possibility of increase in sales as the assessee was a manufacturer and dealer of products which have high consumption through may be the most exhaustive retailers. There was every possibility that retailers dealing with the nature of products the assessee was manufacturing and trading may have increased their own stocks and without making any effort to examine and verify the sales as reported to identifiable parties the ld. AO has considered the sales to be suspicious. In any case the rejection of books of account only qua a particular entry of cash deposits during the demonetization period is not justified while the other components of trading results and profit margins as reported have been accepted. There was inherent arbitrariness and adhocism in the conclusion of ld. AO by arriving at a figure of Rs. 1, 02, 59, 935 as possible genuine cash sales out of total cash sales of Rs. 3, 23, 51, 657/- during demonitisation as reported by the assessee. CIT(A) has merely endorsed the observations of ld. AO without appreciating any of the submission of the assessee and for the aforesaid reasons we are inclined to sustain the grounds. Consequently the appeal of the assessee is allowed and the impugned addition is directed to be deleted. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

• Whether the rejection of the assessee's books of accounts under Section 145(3) of the Income Tax Act, 1961, was justified.
• Whether the addition of Rs. 2,20,91,722 as unexplained cash credit under Section 68 of the Income Tax Act, 1961, was warranted.
• Whether the cash sales during the demonetization period were genuine and whether the assessee's explanation for the cash deposits was acceptable.

ISSUE-WISE DETAILED ANALYSIS

1. Rejection of Books of Accounts under Section 145(3)

• Relevant Legal Framework and Precedents: Section 145(3) allows the Assessing Officer (AO) to reject the books of accounts if they do not provide a true and fair view of the income. The AO must have concrete reasons and evidence to support such rejection.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's decision to reject the books was based on general assumptions and not on specific deficiencies in the accounts. The Tribunal noted that the assessee had provided all necessary documents, including ledger accounts, stock registers, and statutory returns, which were not adequately considered by the AO.
• Key Evidence and Findings: The assessee submitted detailed records, including purchase and sales registers, stock details, and VAT returns. The Tribunal observed that these records were consistent with the audited accounts and no inaccuracies were identified by the AO.
• Application of Law to Facts: The Tribunal applied the principle that books of accounts can only be rejected based on specific discrepancies or inaccuracies, which were not demonstrated in this case.
• Treatment of Competing Arguments: The Tribunal considered the AO's argument that the cash sales were disproportionate but found that the AO did not provide sufficient evidence to substantiate this claim.
• Conclusions: The Tribunal concluded that the rejection of the books of accounts was not justified as the AO did not identify specific deficiencies or inaccuracies in the records provided by the assessee.

2. Addition under Section 68 as Unexplained Cash Credit

• Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, where the assessee must provide a satisfactory explanation for the nature and source of any sum credited in the books.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's addition of Rs. 2,20,91,722 as unexplained cash credit was based on the presumption that the cash sales were fictitious. However, the Tribunal noted that the assessee had provided a plausible explanation for the cash deposits, supported by documentary evidence.
• Key Evidence and Findings: The assessee explained that the increase in cash sales was due to a shift in business focus and market conditions. The Tribunal found that the AO did not adequately consider this explanation or the supporting documents.
• Application of Law to Facts: The Tribunal applied the principle that an addition under Section 68 requires the AO to demonstrate that the assessee's explanation is unsatisfactory, which was not done in this case.
• Treatment of Competing Arguments: The Tribunal considered the AO's argument that the cash sales were inflated but found that the AO did not provide concrete evidence to support this claim.
• Conclusions: The Tribunal concluded that the addition under Section 68 was not justified as the AO did not demonstrate that the assessee's explanation for the cash deposits was unsatisfactory.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "The rejection of books of account is not sustainable. There seems to have been no inquiry on the part of the AO with regard to the transactions which were reported in the audited books of account."
• Core Principles Established: The Tribunal reinforced the principle that books of accounts can only be rejected based on specific deficiencies and that additions under Section 68 require the AO to demonstrate that the assessee's explanation is unsatisfactory.
• Final Determinations on Each Issue: The Tribunal allowed the appeal, directing the deletion of the impugned addition and holding that the rejection of the books of accounts was not justified.