2025 (3) TMI 1571 - AT - Income Tax

Cash deposits during demonetization from reported cash sales-whether taxable as unexplained income u/ss 68/115BBE; addition deleted.

The dominant issue was whether cash deposits during demonetization could be treated as unexplained and added u/s 68 r/w s.115BBE. The ITAT held that once ... Unexplained cash deposits in the bank account during the period of demonetization - Addition u/s 68 r/w section 115BBE - HELD THAT:- Whenever Appellant provides explanation, before rejecting the same ld. AO has to record dissatisfaction as to why the explanation furnished by Appellant is not acceptable. As is evident from the facts of the present case that assessee had not only offered the explanation regarding nature and source of cash deposits in SBN but also substantiated the same with the help of documentary evidences in the shape of Audited Financial Statements, Sale Register, Purchase Register, Stock Register and Cash book before the lower authorities. No specific defects whatsoever was brought out on record by the AO/ CIT(A) in those evidences and books of accounts so furnished. We are of the considered view that the assessee has been able to explain the source of cash deposited in SBN during the period of demonetization and already paid taxes on the income earned from the cash sales which was the immediate source of such deposit, therefore, no further addition could be made towards such cash. Accordingly, we delete the addition made by AO. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits in specified bank notes during the demonetization period, when recorded in the cash book and claimed to be sourced from disclosed cash sales and explained cash balance, could be assessed as 'unexplained cash credit' under section 68. 2. Whether the tax authority could sustain an addition under section 68 by alleging manipulation of purchases/sales and credit purchases, despite acceptance of audited books, trading results, and stock records and without identifying defects or bringing contrary material on record. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 68 to demonetization cash deposits explained as cash sales/cash balance Legal framework (as discussed by the Court): The Court reproduced and applied section 68, noting that an addition may be made where a sum is found credited in the books and the assessee offers no explanation as to nature and source, or the explanation is not satisfactory in the Assessing Officer's opinion; rejection of an explanation requires recording dissatisfaction with reasons. Interpretation and reasoning: The Court found that the assessee maintained regular audited books and produced documentary evidence including audited financial statements, sale register, purchase register, day-to-day and item-wise stock records, and cash book. The Assessing Officer neither pointed out defects in the books/records nor disputed the trading results and stock position. The cash deposits were found to be out of the cash balance as on 08.11.2016, accumulated from daily cash sales and bank withdrawals. The Court also considered the nature of the assessee's business in agricultural produce, observing that maintaining substantial cash was consistent with business needs, including cash dealings with farmers. Since the assessee explained the nature and source of the cash deposits with supporting records and no contrary evidence was brought to disprove them, the statutory conditions for sustaining an addition under section 68 were not met. Conclusions: The cash deposits during demonetization, being duly recorded and satisfactorily explained as arising from disclosed cash sales/cash balance reflected in accepted books, could not be taxed again as unexplained cash credit under section 68. The addition was deleted. Issue 2: Sustainability of addition based on alleged manipulation of purchases/sales and non-payment to a supplier, despite accepted books and absence of defects Legal framework (as applied in reasoning): The Court applied the requirement inherent in section 68 that where an explanation is furnished and supported, the tax authority must demonstrate why it is unacceptable; mere suspicion or unsubstantiated allegation is insufficient, particularly when books and stock records are not rejected or shown defective. Interpretation and reasoning: The Assessing Officer's principal basis was that purchases from a supplier during a specified post-demonetization period were allegedly unpaid and that purchases/sales during certain months appeared abnormal, leading to an inference that accounts were manipulated to justify deposits. The Court examined the supplier account evidence placed on record and found that payments were in fact made through RTGS on specified dates, rendering the core allegation baseless. The Court held that once this allegation failed, the 'foundation' of the addition collapsed, especially because the books, day-to-day stock records, and sales were not found defective and were effectively accepted. The Court further held that when sales forming the source of cash were already included in turnover and profits were offered to tax, treating the corresponding cash deposits as unexplained would amount to double taxation of the same economic receipt-first through business profits on sales and again through section 68 as unexplained income-without evidentiary basis. Conclusions: The addition could not be sustained on the premise of manipulation/non-genuineness of purchases or sales where the key factual allegation was disproved by record evidence and where the authorities did not identify defects in the books/stock records or bring contrary material. Consequently, the section 68 addition (and the consequential treatment of the amount as unexplained) was set aside and the appeal was allowed.