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TMI Blog2025 (4) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... d as: "Abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period." During the course of assessment proceedings, the AO observed that the assessee had deposited cash aggregating to Rs. 2,18,00,000/- during the demonetization period (09.11.2016 to 30.12.2016). The assessee explained that the cash deposits were out of cash sales of gold ornaments. The AO observed that the assessee had deposited cash aggregating to Rs. 2,18,00,000/- in its bank account during the demonetization period, i.e., between 09.11.2016 to 30.12.2016. In examining the explanation offered by the assessee that such deposits were made out of cash sales of gold ornaments, the AO conducted a detailed inquiry into the business operations and the financial records of the assessee. The AO first noted an abnormal and unexplained surge in cash sales and cash deposits during the relevant period. It was specifically recorded that cash sales had increased by 785.56% as compared to the corresponding period of the preceding year, and that cash deposits during the demonetization window had increased by 12804% over the earlier year. The AO found this surge wholly disproportionate, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, it was noticed that the bills did not contain the names of buyers, nor any detailed description of the jewellery sold. The description merely stated, "Gold Ornament," without specification of type, weight, or design, which was considered highly unusual in the case of sale of high-value goods like jewellery. The AO observed that in the normal course of business, no customer would purchase gold ornaments without precise description and documentation. The genuineness of the sales and purchases was further doubted by the AO upon issuing notices under section 133(6) of the Act to nine different parties. Of these, five notices were returned unserved by the postal department, while four parties, though notices were served, failed to respond. The AO recorded that when such a large number of confirmations are unavailable or untraceable, the transactions cannot be considered genuine. An additional inconsistency was identified by the AO relating to the timing of purchases. The AO noted that during the Gujarati festival season of Diwali and Labh Panchami, which fell between 30.10.2016 and 05.11.2016, business establishments traditionally remain closed. However, the assessee had recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso drew attention to the fact that the stock position had increased substantially during the year. It was submitted that the closing stock for the year stood higher compared to earlier years, there was a corresponding rise in debtors and in gross profit and the overall financial indicators demonstrated that there was no abnormality or suppression in business activities. 3.2. The assessee submitted that the cash book, ledger accounts, purchase and sales registers, stock registers, VAT returns, bank statements, and other primary documents were made available before the AO, and there was no finding recorded regarding any discrepancy in these primary records. The assessee highlighted that the AO's rejection of the books was merely based on suspicion arising from the magnitude of cash deposits, without appreciation of the documentary evidence submitted. 3.3. In respect of the purchases made from M/s. Veeram Spiritual Energies Pvt. Ltd., the assessee submitted that purchases were made in the normal course of business, and that the related party status was duly disclosed in the Form 3CD under section 40A(2)(b) of the Act. It was contended that the purchases recorded in the books we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or small cash sales could not be a ground for rejecting the sales altogether. The CIT(A) emphasized that the AO had not doubted the existence of the stock or the movement of stock in the books. Once the stock position and cash sales were matched and properly recorded in the books, and no adverse material was found regarding the purchases or stock register, the addition under section 68 could not be sustained. 5. Aggrieved by the order of CIT(A), the Revenue is in appeal before us raising following grounds of appeal: 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 2,18,00,000/-, being cash deposit, u/s 68 of the Act, without appreciating the facts narrated in detail in the assessment order? 2. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. It is therefore prayed that the order of Ld. CIT(A) may be set aside ans that of the AO be restores. 6. During the course of hearing before us, the Learned Departmental Representative (DR) extensively relied upon the findings recorded by the AO in the assessment order. The DR submitted that the AO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed on record. Referring to paragraph 5.3 and onwards of the CIT(A)'s order, the Ld. AR submitted that the assessee was carrying on the business of trading in gold ornaments and was maintaining regular books of accounts, which were duly audited under the Companies Act and section 44AB of the Income Tax Act, 1961, with no adverse comments in the audit reports. 7. The Ld. AR pointed out that the CIT(A) recorded that during the assessment proceedings, the assessee had furnished a copy of the trading account, purchase and sales details, stock statement, cash book, and bank statements for verification. It was contended that the assessee had demonstrated, through contemporaneous cash book entries, that a cash balance of Rs. 2.57 crores was available as on 08.11.2016, out of which Rs. 2.18 crores was deposited in the bank between 10.11.2016 and 14.11.2016. The Ld. AR emphasized that this crucial factual finding was specifically recorded by the CIT(A) in relation to Ground Nos. 1 to 3 of the assessee's appeal. 7.1. On the issue of rejection of books of account under section 145(3) of the Act, the Ld. AR submitted that the CIT(A) had observed that although the AO rejected the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmations or suspicion regarding timing of sales. It was thus submitted by the Ld. AR that the CIT(A) had properly appreciated the facts, considered the documentary evidence produced, applied settled judicial principles, and had rightly deleted the addition made under section 68. The Ld. AR prayed for upholding the appellate order passed by the CIT(A) and for dismissal of the Revenue's appeal. 8. We have carefully considered the rival submissions, perused the assessment order, the order of the Learned CIT(A), the grounds raised by the Revenue, and the material placed on record. 8.1. The core issue arising for adjudication is whether the CIT(A) was justified in deleting the addition of Rs. 2,18,00,000/- made by the AO under section 68 of the Act towards unexplained cash deposits, without properly appreciating the factual discrepancies noted by the AO and without conducting an independent verification of the stock records, sale / purchases, and related party transactions. 8.2. Upon examination of the assessment order, it is noted that the AO rejected the books of account under section 145(3) of the Act after recording detailed findings. The AO observed an abnormal and dispro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cies, the AO lawfully rejected the books under section 145(3) of the Act and treated the cash deposits of Rs. 2,18,00,000/- as unexplained cash credit under section 68 of the Act. 8.6. On the other hand, the CIT(A) deleted the addition primarily by relying upon the audited books of accounts, cash book, availability of cashin- hand, and the judicial precedents. The CIT(A) observed that once cash sales were recorded in books and no specific discrepancy in cash book or stock registers was pointed out, addition under section 68 could not be sustained. 8.7. However, upon careful consideration, we find merit in the contentions raised by the Learned DR. While the CIT(A) has extensively relied on the books of accounts and the availability of cash-in-hand, there is no independent verification of the crucial aspects raised by the AO. The issue of related party purchases from M/s. Veeram Spiritual Energies Pvt. Ltd. and the complete absence of disclosure of such transactions in the Annual Report and Audit Report has been overlooked. No attempt was made to verify the genuineness of the purchases, which is a critical factor in cases where sales are cited as the source of cash deposits, partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A). The CIT(A) also did not address the material inconsistencies relating to related party purchases and unverified sales. In the absence of reconciliation of discrepancies or independent verification, the CIT(A) could not have accepted the assessee's explanation at face value after lawful rejection of the books of account by the AO. The failure of the CIT(A) to properly deal with the rejection of books vitiates the appellate order and necessitates restoration of the matter for fresh adjudication. 8.11. Thus, we are of the considered opinion that the CIT(A) has not passed a sufficiently reasoned and comprehensive order dealing with the serious discrepancies highlighted by the AO. The order of the CIT(A) suffers from lack of factual verification and examination of critical issues necessary to establish the genuineness of the cash deposits. 8.12. Accordingly, in the interest of justice, we deem it appropriate to set aside the order of the CIT(A) and restore the matter back to his file for fresh adjudication in accordance with law. The CIT(A) shall: * Verify the quantitative stock details with reference to purchase and sale records maintained by the assessee. * Examine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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