2025 (2) TMI 1239 - AT - Income Tax

Appeal allowed: Books accepted under s.145(3); additions under s.68 and s.69A deleted on reliable evidence

M/s Kiran Fine Jewellers Private Limited Versus DCIT, Central Circle-02, Jaipur

M/s Kiran Fine Jewellers Private Limited Versus DCIT, Central Circle-02, Jaipur - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in rejecting the assessee's books of account under section 145(3) on grounds that cash sales and related records for the demonetisation period were fabricated and unverifiable. 2. Whether cash deposits in specified bank notes during the demonetisation period, recorded in the assessee's books as sales (netting out an amount already surrendered), could be treated as unexplained cash credits under section 68 and therefore added to income. 3. Whether an amount declared by the assessee during search proceedings as additional business income could nonetheless be characterised as unexplained money under section 69A (income from other sources) rather than business income. 4. Whether additions determined as unexplained credits/moneys are taxable at the special higher rate under section 115BBE, and whether the statutory/ procedural requirements for taxing under that section were met. 5. Ancillary: appropriate estimation of net profit rate after rejection of books and whether interest under section 234B is to be given consequential effect. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Rejection of books under section 145(3) Legal framework: Section 145(3) permits assessment under best judgment (section 144) where Assessing Officer is not satisfied as to correctness/completeness of accounts. Precedent treatment: Authorities recognize that books regularly maintained and audited should normally be accepted unless there are strong and specific reasons to treat them as unreliable; mere conjecture is insufficient. Interpretation and reasoning: The authorities below relied on several factual pointers - unusually high concentration of cash sales in the demonetisation window, lack of purchaser identification on high-value bills while low-value bills had such details, splitting of bills to avoid PAN limits, discrepancies in timing/physical capacity to generate claimed number of bills, seized contemporaneous papers suggesting post-dated/booked entries and revisions to VAT returns - to conclude books were afterthoughts and unverifiable. The Tribunal examined these materials and the assessee's counter-assertions (audited books, stock registers, VAT filings, seized electronic records) and found that acceptance of quantity (opening/closing stock, purchases) by revenue and presence of invoices/stock records undermined a wholesale rejection. The Tribunal also considered context of demonetisation and contemporaneous rush which could explain abnormal sales patterns and deficiencies in bill particulars. Ratio vs. Obiter: Ratio - Rejection of books demands specific, material defects; where books, stock records and corroborative documents exist and were seized/available to revenue, mere isolated infirmities or situational irregularities (e.g., hurried billing during demonetisation) do not automatically justify section 145(3) rejection. Obiter - observations about practices in the trade and practicalities of billing under panic conditions. Conclusion: On the facts, global rejection of books under section 145(3) was unwarranted; the Tribunal allowed the ground and directed deletion of additions that exclusively flowed from that rejection. Issue 2 - Treatment of demonetisation-period deposits as unexplained cash credits under section 68 Legal framework: Section 68 permits taxing of unexplained cash credits appearing as entries in books when the taxpayer fails to satisfactorily explain identity/genuineness/creditworthiness of entries; special provisions (69/69A/69B/69C) operate to deem unexplained money/investments/expenditure as income where explanation is unsatisfactory. Precedent treatment: Courts/tribunals have held that onus of explaining receipts lies on assessee; in absence of satisfactory explanation, revenue may treat receipts as income. However, where receipts are supported by deliveries against invoices and corroborated by stock/purchase records and returns (e.g., VAT), treating such receipts as unexplained may not be justified. Interpretation and reasoning: The Assessing Officer treated a large portion of demonetisation-period deposits as unexplained on basis that corresponding sales were fabricated; the Tribunal analysed seized material, statements and documentary record. It accepted that where sales are recorded in books, supported by stock outflow and VAT, and not disproved by revenue's search evidence, cash receipts that are genuine sales cannot be treated as unexplained cash credits. The Tribunal distinguished instances where contemporaneous evidence proved fabrication or purchaser denial; it required positive material to displace recorded sales and delivery evidence. Ratio vs. Obiter: Ratio - If recorded sales reflect genuine delivery of stock and are supported by books/invoices/stock/VAT (and not directly contradicted by search recoveries), corresponding cash deposits cannot be taxed as unexplained credits under section 68. Obiter - discussion on comparative sales patterns and commercial plausibility under demonetisation conditions. Conclusion: The Tribunal vacated the addition under section 68 in respect of the bulk of the deposits where sales were established by record/delivery; those additions could not stand absent specific proof of fabrication. Issue 3 - Characterisation of an amount offered during search as business income vs unexplained money under section 69A Legal framework: Section 69A deems unrecorded money/bullion/jewellery as income where owner cannot satisfactorily explain nature and source. The classification between business income and unexplained money depends on whether the sum pertains to business transactions and is properly reflected/explainable as such. Precedent treatment: Where surrender in search corresponds to business receipts and is identified as such (with accounting treatment and explanatory material), it may be taxed as business income; where independent evidence or denial by third parties contradicts claim, revenue may treat it as unexplained money. Interpretation and reasoning: The seized paper showed an entry of a sum (declared in assessee's books as other business receipt). Revenue relied on denial by a third party and other seizure notes to treat it as unexplained; Tribunal examined inter-company/third-party records and found that the same sum had been treated as unexplained in another entity's assessment, and that given the overall factual matrix and that sales/delivery evidence existed, taxing it as business income was appropriate. The Tribunal emphasised that money shown in seized papers and/or disclosed in the assessee's P&L as business-related cannot be deemed unexplained absent contrary material undermining that source. Ratio vs. Obiter: Ratio - Amounts declared as business receipts during search and reflected in accounts should be treated as business income (with normal tax treatment) unless independent, cogent evidence demonstrates they stem from undisclosed non-business sources. Obiter - comments on evidentiary weight of statements/denials by named third parties. Conclusion: The Tribunal held in favour of treating the declared Rs. 6.30 crore as business income (deleting the 69A addition) given combined accounting entries, lack of conclusive contrary proof and related treatment in connected records. Issue 4 - Applicability and procedural requirements for charging tax under section 115BBE Legal framework: Section 115BBE prescribes special rate(s) for incomes determined under sections relating to unexplained credits/money etc.; its application follows determination that income is unexplained under those special provisions. Precedent treatment: Courts/tribunals accept that once income is held to arise under sections 68/69/69A etc., section 115BBE applies; procedural fairness (opportunity to explain) and show-cause considerations are relevant when AO proposes to tax under the special regime. Interpretation and reasoning: The Tribunal concluded that section 115BBE applies only where income is rightly brought to tax under the deeming/ unexplained provisions. Since the Tribunal set aside the principal additions under sections 68/69A for the amounts held to be genuine business receipts, section 115BBE was rendered inapplicable to those sums. For amounts legitimately held unexplained (if any remained), the Tribunal noted that taxing at the higher rate follows the special deeming provisions; the Tribunal also observed that where additional higher-rate treatment was proposed, procedural steps (such as specific show-cause on section 115BBE application) are relevant, and lack of fair opportunity may vitiate higher-rate application. Ratio vs. Obiter: Ratio - Section 115BBE applies only where underlying addition is proper under sections 68/69/69A etc.; absent that, higher-rate tax cannot be sustained. Obiter - procedural observations on issuance of show-cause prior to invoking section 115BBE. Conclusion: Because the Tribunal set aside the unexplained-credit additions in respect of the sales-backed deposits and the Rs.6.30 crore was treated as business income, section 115BBE did not apply to those amounts; where section 115BBE is invoked, procedural fairness must be observed. Issue 5 - Net profit estimation and consequential interest Legal framework: If books are rejected in part, AO may estimate net profit rate reasonably; interest under section 234B is consequential on tax determination. Interpretation and reasoning: The AO had estimated NP at 14.50% after rejecting a portion of turnover; Tribunal observed that where books are partly accepted and genuine sales found, net profit on genuine turnover should reflect declared/consistent NP (14.32%) and allowed adjustment accordingly. Interest under section 234B is consequential and to be given effect in assessment compliance. Ratio vs. Obiter: Ratio - Profitability estimation must be fair and based on validated data; reductions flowing from struck-down additions must be recalculated. Obiter - detailed apportionment of expenses tied to unlawful activity. Conclusion: Tribunal restored NP to a level consistent with declared figures for genuine sales and directed consequential adjustments, including interest calculations to follow the revised tax computation.