2024 (1) TMI 112 - AT - Income Tax

Trade advances for jewellery sales cannot be examined under Section 68 when converted to legitimate sales

The ITAT Chennai ruled in favor of the assessee regarding cash deposits during demonetization. The court held that trade advances for jewellery sales ... Addition u/s 68 r.w.s.115BBE - unexplained cash deposits into bank account during demonetization period - additions towards cash receipts pertains to sale of jewellery on the ground that the assessee could not prove the identity of the creditors, genuineness of transactions, and creditworthiness of the parties - persons from whom assessee claims to have been received advance are not responded to summons issued u/s. 131(1) of the Act, and in few cases, they have denied any kind of transactions with the assessee HELD THAT:- We find that there is a distinction between cash credits and cash receipts towards sales. If assessee claims certain cash credits in his books of accounts and not able to explain credits to the satisfaction of the AO, then, such cash credits need to be examined in light of provisions of Sec.68. In case, the assessee claims that it has received trade advances in cash and the same has been subsequently converted into sales by issuing sale bills, then, said trade advance cannot be examined in light of provisions of Sec.68 of the Act, because, trade advances have been subsequently converted into sales and sales has been accounted in the books of accounts of the assessee. Therefore, in our considered view, the AO has committed a fundamental mistake in examining the cash receipts claimed to have been received by the assessee towards sale of jewellery in light of provisions of Sec.68 of the Act. Assessee has furnished name and address of the customers from whom it has received cash for sale of jewellery. The assessee need not obtain confirmation and submit to the AO, because, the law does not mandate colleting PAN details of the persons, if sale value of jewellery does not exceed Rs. 2 lakhs as per Rule 114B of Income Tax Rules, 1962. In so far as compliance of KYC norms, it is mandatory under Prevention of Money Laundering Act, 2002, w.e.f. 04.05.2023 onwards and not applicable for the impugned assessment year. Therefore, in our considered view, when the assessee has furnished name and address of the persons from whom it has received trade advances for sale of jewellery, the assessee has satisfactorily discharged onus cast upon to furnish name and address of the persons. Therefore, the observation of the AO in light of provisions of Sec.68 of the Act, that the assessee has not satisfactorily explained cash receipts is unwarranted and devoid of merits. Whether the assessee could able to explain source for cash deposits made during demonetization period or not? - It is not a case of the AO that the assessee has declared sales without purchases. In fact, a sale declared by the assessee is backed by corresponding purchases, and is supported by necessary purchase bills. The AO could not point out any discrepancy in stock register maintained by the assessee nor made out a case that the assessee has declared sales without there being any stock in hand. Therefore, in absence of any contrary findings to the effect that the sales declared by the assessee is not backed by any corresponding purchase or supported by stock in hand, in our considered view, simply sales cannot be rejected on the ground that sale for the particular month or period is higher when compared to corresponding previous period. In our considered view, there cannot be any reason for uniform sales in all days or month or year. There may be various reasons for increase or decrease in sales which depends upon various factors, including festival sales, clearing sales, yearend sales, etc. Therefore, in our considered view, the explanation of the assessee that it has received cash from various customers towards sale of jewellery and subsequently the advances have been converted into sales, appears to be bona fide and reasonable. AO in rejecting explanation of the assessee with regard to source for cash deposits - As per the details furnished by the assessee like bank statements, cash book, it is undoubtedly clear that assessee was having sufficient withdrawals from very same bank accounts before the date of demonetization which was recorded in the books of accounts of the assessee. Further, the cash balance maintained by the assessee as per books of accounts as on 08.11.2016 was much higher than the amount of cash deposited to bank account during demonetization period. Therefore, in our considered view, when the assessee is able to file necessary evidences to prove that there was sufficient cash withdrawal from very same bank account which is further backed by bank statements, where it has been clearly evident that there are sufficient cash withdrawals, in our considered view, there is no reason for the AO to reject explanation of the assessee that cash deposits are out of cash withdrawals from very same bank account. AO is erred in making additions towards cash receipts received for sale of jewellery, which has been subsequently converted into sales, for the impugned assessment year as unexplained cash credits taxable u/s. 68 - Decided in favour of assessee. Issues Involved:1. Validity of the Ld. CIT(A)'s order against the facts and circumstances of the case.2. Failure to prove identity, creditworthiness, and genuineness of creditors and transactions.3. Non-furnishing of complete details like purchase bills and sale bills.4. Explanation of cash deposits during the demonetization period.5. Treatment of trade advances as unexplained cash credits under Section 68 of the Income Tax Act.Summary:1. Validity of the Ld. CIT(A)'s Order:The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which was in favor of the assessee, M/s. Sahana Jewellery Exports Pvt. Ltd. The primary contention was that the CIT(A)'s order was against the facts and circumstances of the case.2. Identity, Creditworthiness, and Genuineness of Creditors:The Revenue argued that the assessee failed to prove the identity, creditworthiness, and genuineness of the creditors, which is a prerequisite for accepting the entries in the books of accounts. The Assessing Officer (AO) issued summons to 50 persons, out of which 46 were returned undelivered, and two persons denied any transaction with the assessee. Only one person confirmed the transaction but did not provide supporting evidence.3. Non-furnishing of Complete Details:The Revenue contended that the assessee did not furnish complete details such as purchase bills and sale bills, which were necessary for finalizing the assessment. The AO observed that the assessee did not produce any evidence to substantiate its claims.4. Explanation of Cash Deposits During Demonetization:The AO found that the assessee deposited Rs. 48,80,73,000/- during the demonetization period. The assessee claimed that the source of these deposits was trade advances received from customers and recorded in the books of accounts. However, the AO noted discrepancies and concluded that the assessee could not satisfactorily explain the cash deposits.5. Treatment of Trade Advances as Unexplained Cash Credits:The AO treated the cash receipts as unexplained cash credits under Section 68 of the Income Tax Act, as the assessee failed to provide sufficient evidence to prove the source of these deposits. The CIT(A), however, opined that trade advances, which were subsequently accounted as sales, cannot be treated as cash credits under Section 68. The CIT(A) relied on various judicial precedents, including the decision of the Hon'ble Supreme Court in Lalchand Bhagat Ambica Ram v. CIT, and concluded that the AO erred in making additions towards cash receipts.Conclusion:The ITAT upheld the CIT(A)'s order, stating that the assessee satisfactorily explained the source of cash deposits during the demonetization period. The ITAT emphasized that trade advances, which were subsequently converted into sales, cannot be treated as unexplained cash credits under Section 68. The appeal filed by the Revenue was dismissed.Order Pronounced:The order was pronounced on the 20th day of December, 2023, in Chennai.