Cash sales during demonetisation: recorded in audited books and VAT returns, to be taxed as business income not penal unexplained credits

Assessee recorded cash sales of gold and silver during the demonetisation period in audited books, VAT returns and financial statements; VAT authority accepted those sales. Tribunal held that an assessing officer must formally reject books under the prescribed rejection procedure before disbelieving recorded transactions, and failure to do so makes direct addition on unexplained credits unsustainable. Because the cash sales arose from core business activities and were reflected in audited records and inventory, the amounts must be taxed as business income at normal rates rather than under the penal treatment for unexplained credits, and the assessing officer was directed to recompute tax accordingly.

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Issues: Whether the addition of Rs. 2,99,87,180/- made as unexplained cash credit under Section 68 read with Section 115BBE of the Income-tax Act, 1961, in respect of cash sales during the demonetisation period, is sustainable where the assessee has produced audited books, sales invoices, stock records and VAT returns recording the sales.

Analysis: The Tribunal examined the materials on record including audited cash book, stock register, sales invoices for 07/11/2016 and 08/11/2016, audited financial statements, VAT returns and acceptance by the VAT authority, and noted that total turnover was Rs. 542.72 crores while the impugned cash sales amounted to Rs. 2.99 crores (less than 1% of turnover). The Tribunal observed that the Assessing Officer did not invoke Section 145(3) to reject the books of account before disbelieving the recorded sales. Reliance was placed on authorities holding that department must show inherent weakness in evidence or rebut it with information in its possession before rejecting audited books. The Tribunal also took into account the contemporaneous context of demonetisation and various tribunal decisions regarding cash sales by jewellers during that period. The Tribunal concluded that the cash sales were recorded as business receipts and offered to tax in profit & loss account, corroborated by VAT returns and inventory reductions, and that treating the same amount as unexplained credit would result in double taxation. Acting within its discretion, the Tribunal limited the adverse treatment to a lump sum of Rs. 3,00,000/- and directed that amount be taxed as business income under normal rates rather than under Section 115BBE.

Conclusion: The addition of Rs. 2,99,87,180/- under Section 68 read with Section 115BBE is not sustainable; the appeal is partly allowed by restricting the addition to Rs. 3,00,000/-, which shall be taxed as business income at normal rates (not under Section 115BBE), and the Tribunal's direction is subject to the rider that the order shall not be treated as a precedent.

Ratio Decidendi: Where audited books, sales invoices, stock records and corroborative VAT returns are on record and the Assessing Officer has not rejected the books under Section 145(3) of the Income-tax Act, 1961, the Assessing Officer cannot disbelieve recorded sales and treat corresponding cash deposits as unexplained credits under Section 68 without first demonstrating inherent weakness in the evidence or adducing rebuttal material in its possession; treating admitted and taxed business receipts as unexplained credits would result in impermissible double taxation.

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