2025 (4) TMI 993 - AT - Income Tax

Abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period - HELD THAT - When the assessee has explained the reasons for increase in sales for the month of November 2016 and further it is not even the case of the AO that the product dealt by the assessee is having sales throughout the year the reasons given by the AO to disbelieve the claim of the assessee for source for cash deposit cannot be appreciated. AO has arrived at a conclusion on the basis of his own assumption of cash sales prior to demonetization period and during demonetization period without appreciating the fact that the sales are never predictable and just because the sales are high in the period of demonetization AO cannot assume that such sales were fictitious sales and more particularly when the assessee has submitted relevant sale bills in respect of sales. Since the assessee is having sufficient cash in hand as on 08.11.2016 as per the cash book maintained for the period in our considered view the explanation of assessee with regard to source for cash deposit into bank account during demonetization period ought to have been accepted by the AO. CIT(A) without considering the relevant facts simply sustained the additions made by the AO towards cash deposit as unexplained cash credits u/sec.68. Thus we direct the AO to delete the additions made towards cash deposit u/sec.68 - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the cash deposits made by the assessee during the demonetization period can be treated as unexplained cash credits under section 68 of the Income Tax Act, 1961, when the assessee claims the source of such deposits as cash in hand as per books of accounts maintained prior to demonetization;

(b) Whether the Assessing Officer and the CIT(A) were justified in rejecting the assessee's explanation for the source of cash deposits based on alleged abnormal increase in cash sales and the purported unverifiability of sales invoices;

(c) Whether the addition made towards unexplained cash credits amounts to double taxation when the sales have already been declared and taxed in the income of the assessee;

(d) The applicability and interpretation of precedents relating to the genuineness of transactions and the evidentiary value of sales invoices lacking certain purchaser details;

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Treatment of cash deposits during demonetization period as unexplained cash credits under section 68

The legal framework under section 68 of the Income Tax Act mandates that where any sum is found credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, it is liable to be treated as unexplained cash credits and added to the income of the assessee.

The Assessing Officer observed an abnormal increase in cash deposits during the demonetization period (November 2016) compared to the pre-demonetization period. The average daily cash deposit increased from Rs. 7,636/- to Rs. 3,97,072/-, which raised suspicion regarding the genuineness of the source. The Assessing Officer rejected the assessee's explanation that the source was cash in hand as per books maintained.

The assessee submitted that as on 08.11.2016, the cash in hand was Rs. 80,53,566/- as per the cash book, which was sufficient to cover the cash deposits made during the demonetization period (Rs. 65,11,500/-). The assessee also filed comparative data of cash sales for preceding financial years to demonstrate consistency in cash sales and deposits.

The Tribunal noted that the Assessing Officer's comparison of cash sales for November 2016 with other months was misplaced, especially considering the demonetization context and the nature of the business. The Tribunal held that the sales are not necessarily predictable and that the increase in cash sales during demonetization was not inherently suspicious.

Accordingly, the Tribunal found that the explanation of source of cash deposits as cash in hand was satisfactorily established and ought to have been accepted by the Assessing Officer.

Issue (b): Rejection of sales invoices and genuineness of source

The CIT(A) upheld the addition on the ground that the sales invoices were unverifiable as they lacked complete purchaser details such as address and phone number. The CIT(A) relied on the Supreme Court decisions in CIT vs. Durga Prasad More and Sumati Dayal vs. CIT, which emphasize the need to establish the genuineness of transactions beyond mere documentary evidence.

The assessee argued that for sales less than Rs. 2 lakhs, there is no statutory requirement to maintain KYC details of purchasers. Furthermore, the nature of business involved goods sold with handwritten bills, and the absence of certain purchaser details did not invalidate the genuineness of sales.

The Tribunal agreed with the assessee's submission, observing that the mere absence of complete purchaser details on sales invoices cannot be a ground to doubt the genuineness of the sales, especially when the sales value is below the threshold requiring KYC compliance. The Tribunal also noted that the Assessing Officer and CIT(A) failed to consider the overall evidence including cash book and comparative sales data.

Issue (c): Double taxation argument

The assessee contended that the addition towards unexplained cash credits under section 68 amounts to double taxation since the sales have already been declared and taxed in the income. The Assessing Officer's addition on account of cash deposits effectively taxes the same income twice.

The Tribunal implicitly accepted this argument by holding that the cash deposits were out of cash in hand derived from declared sales and, therefore, the addition under section 68 was unwarranted.

Issue (d): Application of precedents and evidentiary standards

The CIT(A) relied on the Apex Court rulings in CIT vs. Durga Prasad More and Sumati Dayal vs. CIT to support the rejection of the assessee's explanation. These cases emphasize that documentary evidence must be corroborated by human conduct and surrounding circumstances, and that the assessee must establish the genuineness of transactions beyond doubt.

However, the Tribunal distinguished the present facts by highlighting that the assessee produced consistent books of accounts, cash books, sales invoices, and comparative sales data for multiple years, which collectively established the genuineness of the transactions. The Tribunal found that the authorities below failed to appreciate the totality of evidence and relied unduly on technical deficiencies in invoices.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Since the assessee is having sufficient cash in hand as on 08.11.2016, as per the cash book maintained for the period, in our considered view, the explanation of assessee with regard to source for cash deposit into bank account during demonetization period ought to have been accepted by the Assessing Officer."

"It is incorrect to compare cash sales for the month of November, 2016 alone just because the said month is the demonetization period."

"The reasons given by the Assessing Officer to disbelieve the claim of the assessee for source for cash deposit cannot be appreciated."

"Merely for the reason of non-availability of certain details in the sale bills, the genuineness of the sales cannot be doubted."

"The learned CIT(A), without considering the relevant facts, simply sustained the additions made by the Assessing Officer towards cash deposit as unexplained cash credits u/sec.68 of the Act. Thus, we set aside the order of the learned CIT(A) and direct the Assessing Officer to delete the additions made towards cash deposit u/sec.68 of the Income Tax Act, 1961."

The core principles established include:

- The explanation of cash deposits as sourced from cash in hand reflected in books of accounts must be accepted if supported by consistent evidence and no contrary material is found.

- An abnormal increase in cash deposits during demonetization period cannot be presumed to be unexplained merely on comparison with other periods without considering business realities and supporting evidence.

- Deficiencies in sales invoices, such as absence of purchaser details, do not ipso facto render the transactions fictitious, especially when statutory thresholds for KYC are not crossed.

- Additions under section 68 should not result in double taxation where the underlying income has already been declared and assessed.

Final determinations:

The Tribunal allowed the appeal of the assessee, set aside the orders of the Assessing Officer and CIT(A), and directed deletion of the additions made under section 68 towards unexplained cash credits relating to cash deposits during the demonetization period for the assessment year 2017-2018.