2023 (2) TMI 1236 - AT - Income Tax

Cash sales from opening stock and purchases cannot be taxed under section 68 to avoid double taxation

Himalaya Spinning Mills Versus Income Tax Officer, Ward 2 (1), Amritsar

The ITAT Amritsar allowed the assessee's appeal against addition u/s 68 for alleged bogus cash sales. The AO rejected cash sales claimed from opening ... Addition u/s 68 - Bogus cash sales - AO rejecting the Cash Sales being claimed to be made out of Opening Stocks and purchases made during the year duly supported with the VAT paid on such cash sales as per the VAT returns of the period under consideration - HELD THAT:- Admittedly, the assessee has made cash sales out of the opening stock and purchases made during the year duly supported with audited stamen of account and VAT Return. The authorities below has neither pointed out any discrepancy in the audited books of account nor rejected assessee’s books. CIT(A) has made contradictory observation in one para that there was no cash sale in the earlier year FY 2015-16 whereas in another para he observed that there was cash sale of Rs. 560204/- in FY 2015-16. Merely, making a comparison of cash sales with the preceding assessment year in hypothetical manner bases on assumption, surmises and conjectures without supporting corroborative documentary evidence to disprove disputed cash sales as bogus sales cannot be approved. There is no bar in making cash sales by the manufacturer. AO has also admitted that there was cash sale of Rs. 560204/- in Financial Year 2015-16. Thus, the AO wrongly held that no goods in cash was sold during the earlier Financial Year 2015-16. The AO failed to appreciate that there was no excess sale of 546 kgs of shoddy yarn in the range of Rs. 105/- to Rs. 145/-. AR explained that the goods were sold out of balance stock of shoddy yarn and even at the year end, the unsold stocks of shoddy yarn was 2960 kgs with the support of Paper book placed on record. In the case of “Principal Commissioner of Income Tax, 20, Delhi v. Akshit Kumar”, [2020 (11) TMI 873 - DELHI HIGH COURT] held that the quantum figure and the closing stock which stood accepted in the earlier years had to be taken as actual stock available with the Respondent-Assessee. In view of these facts, the sales made by the Respondent-Assessee out of its opening stock were not treated as unexplained income, to be taxed as income from other sources. In another case of ‘Anantpur Kalpana v. Income-tax Officer’, [2021 (12) TMI 599 - ITAT BANGALORE] observed that since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation. On similar fact, in the case of Hirapanna Jewellers [2021 (5) TMI 447 - ITAT VISAKHAPATNAM] as observed that since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. This view is also supported by the decision of.Kailash Jewellery House [2010 (4) TMI 1070 - DELHI HIGH COURT] and Vishal Exports Overseas Ltd. [2012 (7) TMI 1110 - GUJARAT HIGH COURT] We hold that the disputed cash sales by the appellant assessee were made out of Opening Stocks and purchases made during the year which are offered for Taxation as revenue receipts as per audited books of accounts and financial statements filed before the authorities below and before us, duly supported with VAT Return. As such, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. Therefore, the addition is deleted. Assessee appeal allowed. Issues Involved:1. Addition of Rs. 27,00,000 under Section 68 of the Income Tax Act, 1961.2. Application of Section 115BBE of the Income Tax Act.3. Rejection of cash sales made from opening stock and purchases during the year.4. VAT paid on cash sales and inclusion in VAT returns.5. Comparison of cash sales with previous years.6. Rejection of sales without rejecting the Books of Account.7. Prospective application of amended provisions of Section 115BBE.Detailed Analysis:1. Addition of Rs. 27,00,000 under Section 68 of the Income Tax Act, 1961:The assessee explained that the cash deposits of Rs. 27,00,000 during the demonetization period were from cash sales made out of opening stocks and purchases during the year. The Assessing Officer (AO) rejected this explanation, citing a significant increase in cash deposits compared to the previous financial year and the inability of the assessee to provide names and addresses of the parties to whom cash sales were made. The AO added Rs. 27,00,000 under Section 68, which was upheld by the CIT(A).2. Application of Section 115BBE of the Income Tax Act:The AO applied Section 115BBE, which deals with tax on income referred to in Section 68, treating the cash deposits as unexplained income. The assessee contended that the amended provisions of Section 115BBE were applied prospectively and not retrospectively.3. Rejection of cash sales made from opening stock and purchases during the year:The assessee argued that the cash sales were made from the opening stock of Rs. 44,61,330 and purchases made during the year, supported by VAT returns. The CIT(A) confirmed the AO's rejection, noting that the assessee failed to provide sufficient evidence to substantiate the cash sales, such as stock records, gate passes, and names of parties involved in the transactions.4. VAT paid on cash sales and inclusion in VAT returns:The assessee emphasized that VAT was duly paid on the cash sales, and these sales were included in the VAT returns for the period. This was presented as evidence of the legitimacy of the cash sales. However, the CIT(A) upheld the AO's decision, stating that the VAT returns alone were insufficient to prove the genuineness of the cash sales.5. Comparison of cash sales with previous years:The AO compared the cash sales during the financial year 2016-17 with those of the previous year, noting a significant increase. The CIT(A) agreed with the AO's observation, stating that the sudden spike in cash sales during the demonetization period raised suspicion. The assessee contended that each assessment year is independent, and such comparisons were hypothetical and based on assumptions.6. Rejection of sales without rejecting the Books of Account:The assessee argued that the AO rejected the cash sales without rejecting the Books of Account, which were duly audited and showed no discrepancies. The CIT(A) did not address this argument specifically but upheld the AO's addition based on the overall lack of evidence supporting the cash sales.7. Prospective application of amended provisions of Section 115BBE:The assessee contended that the amended provisions of Section 115BBE, which were applied by the AO, should be applied prospectively from December 15, 2016, and not retrospectively. This argument was not specifically addressed by the CIT(A) in the order.Conclusion:The Tribunal, after considering the submissions, material on record, and relevant case laws, concluded that the cash sales of Rs. 27,00,000 were made out of the opening stock and purchases during the year, duly supported by audited books of account and VAT returns. The Tribunal noted that there was no discrepancy in the audited books, and the AO's comparison of cash sales with previous years was hypothetical. The Tribunal also referred to judicial precedents where it was held that sales made out of opening stock should not be treated as unexplained income. Therefore, the addition of Rs. 27,00,000 under Section 68 was deleted, and the appeal of the assessee was allowed.Order:The appeal of the assessee is allowed, and the addition of Rs. 27,00,000 under Section 68 is deleted. The order was pronounced in the open court on February 20, 2023.