2024 (11) TMI 872 - AT - Income Tax

Addition u/s 68 - unexplained cash credits - cash deposited into bank account during the demonetization period - Use of theory of human probability - HELD THAT - As going by the analysis of purchase and sales, there is no abnormality in sales declared by the assessee during the demonetization period. As undisputedly clear that the AO has conveniently ignored the supporting evidences filed by the assessee to justify the cash sales made during the period October 2016 and upto 08/11/2016, because, if we go by the analysis of purchase and sales, there is no reason for doubting the sales declared by the assessee during the period of October and November, 2016. AO has not made out any case of discrepancy in the books of accounts maintained by the assessee nor made out a case for any incorrectness in purchase, sales declared during relevant period. In fact, purchases are supported by necessary purchase bills and sales declared by the assessee including cash sales are supported by sale bills. Although the AO made observation with regard to uniform cash sales, in our considered view, only on the basis of uniform pattern of sales, it cannot be held that the sales declared by the assessee is not genuine. Further in so far as the non-maintenance of phone number and PAN of the buyers, in our considered view, as per Rule 114B of IT Rules, 1962 there is no mandatory requirement of PAN of the buyers in case sales to single customer does not exceed Rs. 2 lakhs. Similarly, in respect of KYC compliances, the same is mandatory, in view of amendment to provisions of Money Laundering Act,2002 w.e.f. 04/05/2022 and the same is not applicable for the impugned assessment year. The observation of the AO on non-maintenance of phone and PAN number of the customer and adverse inference drawn against sales declared by the assessee is devoid of merit and cannot be accepted. Assessee has furnished all relevant details in respect of cash deposited during demonetization period into bank account when the DDIT(Investigation) Wing has carried out enquiries with regard to source for huge cash deposit into bank account. In fact, the appellant has submitted all relevant information including supporting evidence for sales and cash in hand available as on 08/11/2016 to explain the source for cash deposits. As undoubtedly clear that the additions made by the Assessing Officer towards cash deposited into bank account u/s 68 of the Act is purely on suspicion and surmises, without there being any contradictory evidence to suggest that the sales declared by the assessee is not genuine. It is not the case of the AO that the cash sales made prior to 08/11/2016 were not recorded in the books of accounts. It is also admitted fact that the assessee has filed VAT returns and declared sales to VAT authorities. Closing stock of the year is carried forward as opening stock of the next year and even in the subsequent year, scrutiny assessment was made by accepting the opening stock which shows that the sales made in the year under consideration and income earned thereon was never disputed. Although the Assessing Officer doubted purchases made from related parties, the fact remains that there is no evidence with the AO to allege that said purchases are not genuine. Therefore, in our considered view, merely for the reason of purchase from a related party, genuineness of purchases cannot be doubted in case said purchases are supported by necessary evidence. Further, the assessee has made payment against purchases through proper banking channel - adverse inference drawn by the Assessing Officer is devoid of merit. AO ignored all evidence filed in support of the claim for cash deposit, which is in favour of the assessee. However, consider only the elements which go against the assessee, which is evident from the discussion of the Assessing Officer in the assessment order to draw adverse inference against the assessee. The Assessing Officer rested his discussion only on the basis of cash in hand maintained by the assessee during demonetization period, prior to demonetization period and post demonetization period. According to the Assessing Officer, the cash balance held by the assessee is against human tendency. In our considered view, theory of human tendency or probability cannot work in a situation which is an exception to the normal conditions / situations. No one was aware as to what was the right step to move. Further huge amounts cannot be sent at a time through any one employee to avoid the risk of employees running away, theft, snatching money from employees etc. Therefore, the adverse inference drawn by the Assessing Officer considering human probability that no prudent person would carry huge cash in hand is only on suspicion and surmises. Therefore, in our considered view, the Assessing Officer is not justified in giving more weightage to unnecessary factors even though the evidence filed by the assessee clearly shows that the cash deposited in the bank account during demonetization period is out of opening cash in hand available as on 08/11/2016, which is supported by sales declared with supporting evidence. Merely for the reason of carrying excess cash balance during a particular period when compared to other periods, it cannot be held that the argument of the assessee is against the theory of human probability, more particularly, when evidences clearly suggest that the explanation of the assessee is genuine and supported by necessary evidences - Decided in favour of assessee.

Summary

Issues Involved:

1. Legitimacy of cash deposits during the demonetization period.
2. Application of Section 68 of the Income Tax Act, 1961.
3. Use of the theory of human probability in assessing unexplained cash credits.
4. Evaluation of evidence supporting cash sales and deposits.
5. Applicability of case law precedents.

Issue-wise Detailed Analysis:

1. Legitimacy of Cash Deposits During the Demonetization Period:

The primary issue revolves around the legitimacy of Rs. 16.24 crores deposited by the assessee during the demonetization period. The Assessing Officer (AO) observed abnormal variations in cash deposits during this period compared to prior periods, leading to suspicion about the source of these funds. The AO noted that the assessee maintained a minimal cash balance before demonetization, which dramatically increased during the demonetization period, suggesting this was against human probability. The assessee argued that these deposits were from cash sales made before demonetization, supported by sales bills and stock records.

2. Application of Section 68 of the Income Tax Act, 1961:

The AO treated Rs. 15.74 crores of the cash deposits as unexplained cash credits under Section 68 of the Income Tax Act, 1961. The AO's decision was based on the inability of the assessee to provide a satisfactory explanation for the sudden increase in cash balance during the demonetization period. The CIT(A) later overturned this addition, stating that the AO failed to provide evidence of discrepancies in the sales declared or in the books of accounts maintained by the assessee.

3. Use of the Theory of Human Probability:

The AO applied the theory of human probability, citing Supreme Court decisions in CIT Vs. Durga Prasad More and Sumati Dayal Vs. CIT, to argue that the cash deposits were improbable given the assessee's past financial behavior. However, the CIT(A) and the Tribunal disagreed, stating that the theory of human probability cannot be universally applied and must be supported by concrete evidence, which the AO failed to provide.

4. Evaluation of Evidence Supporting Cash Sales and Deposits:

The assessee provided comparative statements of purchases, sales, cash sales, and cash deposits over several financial years, arguing that there was no abnormal variation during the demonetization period. The CIT(A) found no discrepancies in the sales declared or the books of accounts. The Tribunal noted that the AO did not dispute the purchases or stock-in-trade, nor did they find discrepancies in the books of accounts. The Tribunal concluded that the AO's reliance on the theory of human probability was based on suspicion rather than evidence.

5. Applicability of Case Law Precedents:

The AO relied on Supreme Court rulings to justify the addition under Section 68. However, the Tribunal found these cases inapplicable, as they involved different factual scenarios. The Tribunal emphasized that the assessee's explanation was supported by evidence, distinguishing it from the cases cited by the AO. The Tribunal also referenced similar judgments, such as the ITAT Visakhapatnam Bench's decision in ACIT Vs. M/s Hirapanna Jewellers, which supported the assessee's position.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, finding that the cash deposits were adequately explained by the assessee and supported by documentary evidence. The appeal filed by the Revenue was dismissed, affirming the legitimacy of the cash deposits during the demonetization period.