2023 (8) TMI 217 - AT - Income Tax

Tribunal overturns addition under section 68, finding appellant's cash deposits explained with evidence.

M/s. Micky Fireworks Industries Versus ACIT Non-Corporate Circle-2, Madurai.

The Tribunal allowed the appeal in favor of the appellant, directing the deletion of the addition made under section 68. The Tribunal found that the ... Addition u/s 68 - undisclosed cash deposit - HELD THAT:- As in the present case, the cash so received by the assessee is backed by sales carried out by the assessee as recorded in the books of accounts. Therefore, the source of cash is duly explained. The provisions of Sec.68 could be invoked only in cases when there was unexplained cash credit in the books of accounts maintained by the assessee. Assessee has duly identified the debtors from whom the cash was received and the same could not be disputed by lower authorities. The PAN of respective debtors as well as quantum of cash realized from each of them has duly been detailed by the assessee before AO during assessment proceedings. No defect has been pointed out in the books of accounts. In such a case, the credit could not be held to be unexplained cash credit and the impugned additions are not sustainable in law. Thus in Rahul Cold Storage [2022 (12) TMI 437 - ITAT RAIPUR] wherein it has similarly been held that when the deposits were sourced out of business receipts duly recorded in the books of accounts, no such addition could be made u/s 68. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits in the form of Specified Bank Notes (SBN) made after 08-11-2016 can be treated as unexplained cash credit under Section 68 of the Income Tax Act when the assessee alleges the deposits represent receipts from recorded business sales. 2. Whether the Assessing Officer's reliance on the S.O. notification declaring SBN ceased to be legal tender (post 08-11-2016) precludes acceptance of otherwise recorded business receipts as a satisfactory explanation of cash deposits. 3. Whether failure of the Assessing Officer to follow the specified standard operating procedure (SOP) / circular for demonetisation-related assessments (comparative analysis, indicators of bogus/backdated sales) vitiates the addition under Section 68. 4. Whether documentary and accountal evidence (books of account, audit, ledger entries, details of depositors with PAN, monthly cash flow statements, day book/cash book) furnished by the assessee suffice to discharge the onus under Section 68. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatability of post-08-11-2016 SBN deposits as unexplained cash credit under Section 68 Legal framework: Section 68 permits addition where any sum found credited in the books is shown as unexplained by the assessee. The assessee must explain nature and source of credit. The S.O. dated 08-11-2016 and related legal framework declared SBN to cease as legal tender except for limited exchange/deposit mechanisms. Precedent treatment: Co-ordinate bench decisions of the Tribunal (SMC Bench in Umamaheswari; Raipur SMC in Rahul Cold Storage; Bengaluru Bench in Manasa Medicals) were relied upon and followed to the extent that recorded business receipts established the source of deposits and additions under Section 68 were deleted. Interpretation and reasoning: The Tribunal analysed whether the deposits were genuinely unexplained credits or receipts of business sales evidenced in books. The undisputed material showed (a) audited books of account, (b) sales recorded during festival season, (c) debtors realized in cash (including SBN), (d) ledger entries and month-wise cash deposits, and (e) details of depositors with PAN. No allegation of bogus/backdated sales or defect in books was made by the Revenue. The mere fact that the currency deposited was SBN post-08-11-2016 did not, by itself, render a recorded business receipt 'unexplained' where contemporaneous accountal and corroborative documents identify the source. Ratio vs. Obiter: Ratio - where cash credits are supported by books of account and identifiably traceable to recorded business receipts (with corroborative particulars of debtors), Section 68 cannot be invoked merely because deposits comprise SBN post-demonetisation. Obiter - broader implications about every SBN deposit being permissible per se were not addressed beyond the facts. Conclusion: Addition under Section 68 deleted; the source of cash was satisfactorily explained by sales recorded in books and corroborated by debtor particulars and audit/ledgers. Issue 2 - Effect of the S.O. notification (cessation of SBN as legal tender) on acceptance of recorded receipts Legal framework: The government notification ceased the legal tender character of SBN after 08-11-2016, while permitting exchange/deposit in banks within specified conditions. Transactions using SBN after that date were not recognized as valid commercial transactions under the notification's strict sense. Precedent treatment: The Tribunal followed co-ordinate decisions holding that the legal status of SBN does not automatically negate the commercial reality of receipts evidenced in books when the assessee produces credible corroboration. Interpretation and reasoning: The Tribunal distinguished between legal invalidity of using SBN as a medium of exchange after the notification and evidentiary sufficiency of business records showing that cash (which happened to be SBN) was received and deposited. The crucial enquiry under Section 68 is whether the credit in books is satisfactorily explained. The notification did not, ipso facto, convert all post-08-11-2016 deposits into unexplained credits where the assessee demonstrated the deposits were proceeds of recorded sales and provided the identity and PAN of depositors, audited accounts and other documentary support. The Tribunal observed that the AO's sole basis for treating deposits as unexplained was the prohibition on dealing in SBN - absent any finding of fabricated sales, this was insufficient. Ratio vs. Obiter: Ratio - The S.O. declaring cessation of SBN does not automatically render recorded receipts unexplained for purposes of Section 68 when the assessee produces contemporaneous and credible documentary/accountal evidence linking deposits to business receipts. Obiter - the decision does not adjudicate on the permissibility of any particular mode of exchange beyond recordal and corroboration. Conclusion: The notification's existence is not determinative; accepted and evidenced sales receipts can explain SBN deposits sufficiently to preclude addition under Section 68. Issue 3 - Relevance of Assessing Officer's compliance with SOP / circular in demonetisation assessments Legal framework: Revenue circulars and SOPs provide procedural guidance (comparative analysis of cash sales vs deposits, indicators of bogus/backdated sales) to be followed in demonetisation-related assessments. Non-compliance may affect the correctness of findings if material steps are omitted. Precedent treatment: The Tribunal noted the assessee's contention of non-adherence to SOP and considered the requirement to examine whether AO applied the guidelines meaningfully; co-ordinate decisions have required factual analysis under SOP in similar contexts. Interpretation and reasoning: Although the assessee contended that the AO did not undertake comparative analysis as per SOP, the record showed extensive information was called for and furnished (monthly cash flow, inventory, monthly deposits, day book/cash book, names/PAN of depositors). No specific omission causing prejudice or any negative inference was sustained against the assessee. Moreover, AO did not point to findings of bogus or backdated sales which the SOP indicators would have triggered. On the facts, the absence of a formal SOP matrix did not alter the conclusion that books and corroborative evidence explained the deposits. Ratio vs. Obiter: Ratio - Failure to mechanically follow SOP does not automatically validate an addition under Section 68 where the assessee has furnished full and consistent documentary evidence and no indicia of fabrication are found. Obiter - a strict procedural lapse may be material where it results in failure to test veracity of records, but that was not the case on these facts. Conclusion: No prejudice arose from alleged SOP non-compliance; AO's reliance on prohibition of SBN without further findings was insufficient to sustain addition. Issue 4 - Sufficiency of books, audit and depositor particulars to discharge onus under Section 68 Legal framework: Under Section 68 the assessee must explain nature/source of credit; maintenance of books, audit and corroborative documents (debtors' identity, PAN, ledger entries) are relevant to discharge the onus. Precedent treatment: Tribunal decisions cited and followed show that where deposits are traceable to recorded business receipts and supported by particulars and book-keeping, additions under Section 68 cannot be sustained. Interpretation and reasoning: The assessee produced audited accounts, monthly sales figures, day book/cash book, ledger accounts, month-wise cash deposits, details of old and new notes deposited, and names/addresses/PAN of depositors. The AO did not allege any defect in the books nor show inconsistency or fabrication. Given this undisputed documentary matrix, the Tribunal found the source of cash adequately explained and the statutory precondition for invoking Section 68 (unexplained credit) absent. Ratio vs. Obiter: Ratio - Complete and credible documentary/accountal evidence identifying the source of deposits and depositors negates a finding of unexplained cash credit under Section 68. Obiter - the quality and reliability of such evidence must be judged on facts; mere production of documents is insufficient where material contradictions or indicia of fabrication exist (not present here). Conclusion: Documentary and accountal evidence furnished by the assessee sufficed to explain the deposits; therefore, the addition under Section 68 was not sustainable and was deleted. Overall Conclusion The Court allowed the appeal, deleting the addition made under Section 68. The Tribunal held that where cash deposits (including SBN) are traceable to recorded business sales evidenced by audited books, ledger entries and depositors' particulars (with PAN), and no allegation or finding of bogus/backdated sales or defects in accounts is made, Section 68 cannot be invoked merely because the deposits comprised SBN after 08-11-2016; the AO's reliance solely on the cessation of legal tender status of SBN without further adverse findings is insufficient to sustain an addition.