Cash deposits during demonetization partially allowed with 10% disallowance under Section 68 instead of full rejection

ITAT Surat partly allowed the appeal regarding addition under Section 68 for cash deposits during demonetization period. The assessee claimed cash deposits resulted from stock sales between September-November 2016, but the tribunal found this improbable. However, since purchases weren't disputed and books weren't rejected, the tribunal couldn't reject entire sales. Applying human probability test and considering undisputed purchases, the tribunal allowed reasonable disallowance of 10% on alleged cash sales to prevent revenue leakage, rather than treating entire amount as unexplained income.

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Issues Involved:
1. Addition of Rs. 53,21,482/- as unexplained/unaccounted income from cash deposits during the demonetization period.
2. Double taxation of income already offered for taxation.
3. Validity of the cash sales claimed by the assessee.

Issue-wise Detailed Analysis:

1. Addition of Rs. 53,21,482/- as unexplained/unaccounted income from cash deposits during the demonetization period:

The assessee, engaged in the diamond business, deposited Rs. 56,35,000/- in cash during the demonetization period in four different bank accounts. The Assessing Officer (AO) questioned the source of these deposits, suspecting them to be unexplained income. The assessee claimed that the deposits were from cash sales of diamonds made between September and November 2016. However, the AO found discrepancies, noting that such cash sales were not reported in previous years and doubted the genuineness of these transactions. The AO also mentioned the lack of quality and quantity details of the diamonds sold and the absence of GIA or IGI certificates. Consequently, the AO added Rs. 53,21,482/- (after deducting the opening cash balance) to the income under Section 115BBE of the Income Tax Act, 1961.

2. Double taxation of income already offered for taxation:

The assessee argued that the cash sales were already included in the total turnover and offered for taxation, and any further addition would result in double taxation. The assessee maintained detailed books of accounts, including purchase and sale registers, stock registers, and bank books, which were not found defective by the auditors. The AO, however, did not accept this explanation, leading to the addition.

3. Validity of the cash sales claimed by the assessee:

The CIT(A) upheld the AO's decision, stating that the sale of diamonds for cash during the demonetization period was improbable and not acceptable. The CIT(A) noted that diamonds were not listed among the commodities for which cash transactions were allowed post-demonetization. The Tribunal, while considering the submissions, found that the assessee's claim of cash sales was doubtful, especially since all cash sales were reported just before demonetization and were below Rs. 20,000/-. The Tribunal referred to the Supreme Court's decision in Sumati Dayal Vs CIT, applying the test of human probabilities, and concluded that the cash deposits were not convincingly proven to be from genuine sales.

Conclusion:

The Tribunal acknowledged that while the purchases and books of accounts were not disputed, the cash sales claimed by the assessee were not convincingly proven. To avoid revenue leakage, the Tribunal deemed it reasonable to disallow 10% of the cash sales, thus partly allowing the appeal. The final order resulted in a partial allowance of the assessee's appeal, with a reasonable disallowance to address potential revenue leakage. The appeal was partly allowed, and the judgment was announced in open court on 21st August 2023.

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