2025 (1) TMI 1342 - AT - Income Tax

Addition u/s. 69A - cash deposits made by the assessee during the demonetization period unexplained - HELD THAT - Assessee did not furnish the details of physical stock available in its hands before him. Admittedly the assessee could make cash sales only if it could show that it was having sufficient quantity of physical stock. Hence the examination of availability of physical stock is essential to examine the claim of cash sales. Accordingly we are of the view that the details of stock summary furnished by the assessee before the Tribunal by way of additional evidence are very much necessary to adjudicate the issue before us. Accordingly we admit the same. If the AO had doubted the claim of availability of cash in the books of the assessee which was claimed to have been generated out of cash sales it is necessary for him to conduct proper enquiries to find out the veracity of the claim made by the assessee. Without conducting necessary enquiries the AO should not take any adverse view. Since the AO has not conducted any enquiry we are of the view that the AO has made the impugned addition of Rs. 3.05 crores u/s. 69A of the Act under suspicion which is not permitted under the law. There is a lacunae on the part of the assessee also. We noticed that the assessee did not furnish details of physical stock before the AO which is essential to prove the claim of cash sales. As noted earlier the assessee could make cash sales only of gold silver precious stones etc. only if it was having sufficient quantity physical stock in its possession. Hence in order to examine the claim of cash sales it is imperative for the AO to examine the availability of physical stock also. We noticed that the details of stock summary have been furnished for the first time before the Tribunal in the form of additional evidence. Hence we are of the view that this issue needs to be examined afresh at the end of the AO. Appeal of the assessee is treated as allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue in this case revolves around the addition of Rs. 3.50 crores made by the Assessing Officer (AO) under Section 69A of the Income Tax Act, 1961. The Tribunal considered whether the cash deposits made by the assessee during the demonetization period were unexplained and liable to be taxed under this provision. The specific questions addressed include:

• Whether the cash deposits in the bank accounts during the demonetization period were unexplained and thus taxable under Section 69A of the Act.
• Whether the discrepancies in reporting cash deposits and the substantial increase in cash sales during the demonetization period justified the AO's conclusion of manipulation in the assessee's books of accounts.
• Whether the additional evidence regarding the physical stock of gold, silver, and other stones should be admitted to support the assessee's claim of cash sales.

ISSUE-WISE DETAILED ANALYSIS

1. Relevant Legal Framework and Precedents

Section 69A of the Income Tax Act, 1961, deals with unexplained money, bullion, jewelry, or other valuable articles. If such items are not recorded in the books of account and the assessee cannot satisfactorily explain their nature and source, they may be deemed as the income of the assessee for that financial year.

2. Court's Interpretation and Reasoning

The Tribunal focused on the necessity of verifying the availability of physical stock to substantiate the cash sales claimed by the assessee. It emphasized that the AO should have conducted proper inquiries to verify the claims rather than making additions based on suspicion.

3. Key Evidence and Findings

The assessee provided ledger account copies of cash in hand, details of cash sales, and cash deposits. The AO noted discrepancies in reporting cash deposits and a significant increase in cash sales during the demonetization period. However, the assessee argued that these discrepancies were clerical errors and that the cash deposits were supported by cash sales and available stock. The assessee also submitted additional evidence of stock summary to the Tribunal.

4. Application of Law to Facts

The Tribunal determined that the AO's failure to conduct necessary inquiries into the availability of physical stock and the veracity of cash sales claims rendered the addition under Section 69A unsustainable. The Tribunal acknowledged the assessee's lapse in not providing stock details earlier but admitted the additional evidence to ensure a fair adjudication.

5. Treatment of Competing Arguments

The assessee argued that the cash deposits were from legitimate cash sales and that any discrepancies were clerical. The Revenue contended that the increase in cash sales was suspicious, and the assessee failed to prove sufficient stock for such sales. The Tribunal balanced these arguments by emphasizing the need for a thorough examination of stock availability and cash sales.

6. Conclusions

The Tribunal concluded that the issue required fresh examination by the AO, with a focus on verifying the physical stock and cash sales. It set aside the CIT(A)'s order and remanded the matter to the AO for a detailed inquiry, allowing the assessee to present additional evidence.

SIGNIFICANT HOLDINGS

Core Principles Established

• The necessity for proper inquiry and verification by the AO when assessing unexplained income under Section 69A, particularly in cases involving significant cash transactions during demonetization.
• The importance of considering additional evidence to ensure a fair and thorough adjudication of claims related to cash sales and stock availability.

Final Determinations on Each Issue

• The Tribunal admitted the additional evidence regarding physical stock and remanded the case to the AO for fresh examination.
• The Tribunal directed the AO to verify the physical stock and cash sales to determine if the cash deposits were indeed unexplained income under Section 69A.
• The appeal was treated as allowed, indicating that the Tribunal found merit in the assessee's arguments for a re-examination of the facts.