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of <h1>Jewellery business cash deposits during demonetization upheld as genuine sales with proper documentation under Rule 114B</h1> ITAT Chennai upheld CIT(A)'s deletion of additions made by AO regarding unexplained cash deposits during demonetization period. The assessee, a jewellery ... Unexplained cash deposits made during the demonetisation period - assessee's explanation that the source is from sales and admitted as revenue receipts - HELD THAT:- Assuming for a moment, there is a slight increase in cash deposits during demonetization period, but that alone is not the ground to reject cash sales declared by the assessee with corresponding evidence. Increase/decrease in sales may be for various reasons. It cannot be equal for all the days or months or years. In some months cash sales may be more because of various reasons like festivals sales, clearance sales etc. It is a well-known fact that, during demonetization period on the eve of 08.11.2016, there was a huge crowd in jewellery shops, where people rushed to buy jewellery by tendering old demonetized notes. Therefore, merely for the reason that there is a huge increase in sales for the above period, it cannot be held that sales declared by the assessee is bogus in nature. AO never disputed sales declared by the assessee which are supported by sales bills, corresponding purchase bills and stock details etc. In our considered view, when AO has not pointed out any discrepancy in books of accounts, then merely for the reason of increase in sales, explanation offered by the assessee for source for cash deposits cannot be rejected. Observation of AO with regard to KYC details of customers in term of Rule 114B of I.T. Rules, 1962 - We find that as per said rules, if sales made to single customer is in excess of Rs. 2 lakhs, then the seller needs to obtain KYC details of customers. In the present case, there is no observation from the Assessing Officer with regard to sales declared by the assessee and violation of Rule 114B of I.T. Rules, 1962. Although, the ld. DR referred to certain cash receipts in cash book maintained by the assessee which was in excess of Rs. 2 lakhs, but the ld. DR failed to bring on record further evidences to prove that, said cash receipts was on account of cash sales in excess of Rs. 2 lakhs to a customer and that, the appellant was required to obtain KYC details of customers. In absence of any contrary findings from the Assessing Officer, in our considered view, the assessee is not required to obtain KYC details of customers if cash sales does not exceed Rs. 2 lakhs to a single customer. Therefore, reasons given by the Assessing Officer to reject explanation furnished by the assessee for source for cash deposits into bank account is devoid of merits and thus, rejected. The ld. CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer towards cash deposits. No error in the reasons given by the CIT(A) to delete additions made by the AO towards cash deposits during demonetization period and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue. The core legal questions considered by the Tribunal in this appeal pertain to the treatment of cash deposits made during the demonetization period and the applicability of provisions under the Income-tax Act, 1961, specifically sections 69A, 68, and 115BBE. The issues include whether the cash deposits made in specified bank notes (SBNs) during demonetization can be treated as explained based on the assessee's claim of sales revenue; the interpretation of legislative intent behind restrictions on acceptance of SBNs; the adequacy and reliability of documentary evidence such as sales bills and customer details; the compliance with Rule 114B and 114C of the Income Tax Rules regarding PAN and KYC requirements; the significance of increased cash sales and deposits during demonetization; and the correctness of additions made by the Assessing Officer (AO) as unexplained income.Regarding the first issue on whether cash deposits made during demonetization can be considered explained, the Tribunal examined the legal framework under sections 69A and 115BBE of the Income-tax Act. Section 69A deals with unexplained cash credits, allowing the AO to treat such deposits as income if not satisfactorily explained. Section 115BBE imposes tax at the maximum marginal rate on unexplained cash deposits. The AO had disallowed the assessee's explanation that the cash deposits originated from opening cash in hand and cash sales, citing high cash sales during the demonetization period and lack of proper documentation such as PAN and KYC details. The Tribunal analyzed the assessee's submissions, including stock registers, bank statements, cash books, sales and purchase bills, and found that the opening cash balance as per the books was Rs. 1.69 crores, which was undisputed. The remaining deposits were explained as cash sales supported by documentary evidence and stock records. The Tribunal noted that the AO did not dispute the correctness of the books or point out any discrepancies in stock or purchases. The Tribunal emphasized that mere increase in cash sales during demonetization is not sufficient ground to reject the explanation, especially considering the natural surge in jewellery sales during that period due to demonetization-induced demand. The Tribunal thus concluded that the explanation was bona fide and the additions under section 69A and 115BBE were rightly deleted by the Commissioner of Income Tax (Appeals) [CIT(A)].On the second issue concerning the legislative intent and restrictions on acceptance of SBNs, the Tribunal referred to Notification No. 2652 dated 08.11.2016, which prohibited acceptance of SBNs by persons other than exempted categories, aiming to curb unaccounted wealth. The revenue argued that this legislative intent should have been considered by the CIT(A) in rejecting the assessee's explanation. However, the Tribunal found that the AO and CIT(A) had duly considered the facts and evidence, and the legislative intent could not override the factual matrix where the assessee had satisfactorily explained the source of cash deposits. The Tribunal held that the legislative intent does not justify ignoring credible evidence supporting the assessee's case.Thirdly, regarding the adequacy of documentary evidence and compliance with Rule 114B and 114C of the Income Tax Rules, the AO contended that the assessee failed to produce complete PAN and address details of customers, especially where cash sales exceeded Rs. 2 lakhs, thus violating KYC norms. The Tribunal observed that Rule 114B requires PAN details only when sales to a single customer exceed Rs. 2 lakhs. The AO did not produce evidence that any single transaction breached this threshold. Moreover, the Tribunal found no adverse observation by the AO on the books of accounts or sales records. The Tribunal further noted that the Prevention of Money Laundering Act's KYC requirements were not applicable for the assessment year in question. Hence, the Tribunal held that the AO's reliance on incomplete KYC details was insufficient to reject the assessee's explanation.The Tribunal also considered the pattern of cash sales and deposits over multiple years. It found that cash deposits during demonetization were not abnormally high compared to previous years, and any increase was consistent with the business cycle and festival sales. This comparative analysis undermined the AO's suspicion of bogus sales. The Tribunal emphasized that fluctuations in sales are natural and cannot be a sole basis for disbelieving declared sales.In addressing the AO's rejection of the assessee's explanation based on summons issued under section 131(1) to customers who either did not respond or denied transactions, the Tribunal distinguished between cash credits under section 68 and cash sales recorded in books. It held that trade advances subsequently converted into sales recorded in books cannot be treated as unexplained cash credits under section 68. The Tribunal underscored that the assessee had furnished names and addresses of customers, and the law did not mandate collection of PAN for sales below Rs. 2 lakhs. Consequently, the AO's reliance on non-response to summons was misplaced.The Tribunal also examined the assessee's alternative explanation that cash deposits were out of cash withdrawals from the same bank account before demonetization. The assessee produced bank statements and cash book entries showing substantial cash withdrawals prior to demonetization, which were undisputed. The Tribunal accepted this explanation, finding no reason to reject it.The Tribunal relied heavily on judicial precedents, notably decisions of coordinate benches of the Tribunal and the Delhi High Court, which upheld the principle that cash deposits backed by sales recorded in books, supported by purchase bills and stock records, cannot be treated as unexplained income merely due to timing or volume of deposits. The Tribunal cited a notable case where the Delhi High Court held that the identity, creditworthiness, and genuineness of transactions must be considered contextually, and mere suspicion or increase in cash deposits does not justify additions under sections 68 or 69A without tangible evidence. The Tribunal also referred to a decision of the Visakhapatnam Bench where similar facts led to deletion of additions, emphasizing the interlinked nature of purchases, sales, and stock, and the absence of any defect in books or stock records.In treatment of competing arguments, the Tribunal carefully weighed the AO's concerns about legislative intent, KYC compliance, and customer verification against the assessee's documentary evidence and consistent accounting records. The Tribunal found the AO's conclusions to be based on assumptions and procedural lapses rather than substantive evidence. The Tribunal underscored that the AO failed to identify any patent or latent defects in the books or stock registers, nor disproved the sales with tangible evidence. The Tribunal rejected the AO's approach of treating trade advances as unexplained cash credits and the reliance on non-response to summons as insufficient grounds for additions.Ultimately, the Tribunal concluded that the CIT(A) correctly deleted the additions made by the AO under sections 69A and 115BBE. The Tribunal dismissed the revenue's appeal and also rejected the assessee's cross-objection challenging the provisions of section 115BBE as infructuous in light of the dismissal of the appeal.Significant holdings established by the Tribunal include:'When the Assessing Officer has not pointed out any discrepancy in books of accounts, then merely for the reason of increase in sales, explanation offered by the assessee for source for cash deposits cannot be rejected.''There is a distinction between cash credits and cash receipts towards sales. If the assessee claims certain cash credits and is unable to explain, section 68 applies. However, trade advances subsequently converted into sales recorded in books cannot be examined under section 68.''The law does not mandate collection of PAN details if sales to a single person do not exceed Rs. 2 lakhs as per Rule 114B of Income Tax Rules, 1962.''The legislative intent behind demonetization notifications cannot override credible documentary evidence explaining cash deposits.''Additions under sections 69A and 115BBE cannot be sustained where cash deposits are satisfactorily explained by opening cash balance and cash sales supported by books of accounts, purchase bills, and stock registers.'These principles affirm that unexplained cash deposits must be supported by substantive evidence to be taxed as unexplained income and that procedural non-compliances or suspicions alone do not justify additions where books of account are consistent and credible.
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