Taxability of cash deposits limited to profit element when books and electronic receipts are accepted; estimation may apply an 8% profit rate.

Where books and traceable electronic transactions are accepted, wholesale rejection and estimation of entire turnover is inappropriate; the appellate authority upheld the books and deleted an assessing officer's addition based on an 8% net profit estimate. For cash deposits during the demonetisation window that lacked a plausible prior accumulation explanation but were connected to business, taxability was confined to the profit element: the taxable portion was estimated by applying an 8% profit rate to the deposits, sustaining an addition limited to that profit element while deleting the balance.

---

---

Issues: (i) Whether the deletion by the Commissioner of Income-tax (Appeals) of the Assessing Officer's addition made by estimating net profit at 8% of total turnover was justified; (ii) Whether the addition of Rs. 2,03,00,000 made under Section 69A of the Income-tax Act, 1961 in respect of cash deposited during the demonetisation period was justified.

Issue (i): Deletion by the appellate authority of the AO's estimation of net profit at 8% of turnover and consequent addition to income.

Analysis: Documentary evidence showed significant traceable electronic sales through a merchant platform and purchases by account payee cheques; books of account were not shown to be flawed except for doubt on margins and commission computations. The appellate authority evaluated records and evidence relating to turnover, commission payments, and traceability of electronic transactions and found no basis to reject the books and the figures relied upon.

Conclusion: In favour of the assessee; the deletion of the AO's estimated addition at 8% of total turnover is sustained.

Issue (ii): Addition under Section 69A of the Income-tax Act, 1961 in respect of cash deposits of Rs. 2,03,00,000 made during the demonetisation period.

Analysis: The deposits occurred during the demonetisation window and the appellant's explanation of prior accumulation was found implausible on the facts, including absence of prior-year cash sales. However, the deposits were connected to business activity. Rather than treating the entire deposit as unexplained money, an appropriate method is to estimate the taxable profit element embedded in the deposits. Applying an 8% profit rate to the deposited amount was selected as the estimation method to determine the taxable element.

Conclusion: Partly in favour of the assessee; addition under Section 69A sustained only to the extent of profit element of Rs. 16,24,000 and the balance amount of Rs. 1,86,76,000 deleted.

Final Conclusion: The appeal filed by the assessee is partly allowed (limited addition sustained on profit element of cash deposits) and the appeal filed by the revenue is dismissed; overall outcome is partly in favour of the assessee.

Ratio Decidendi: Where cash deposits related to business are not fully explained, taxability may be limited to the profit element which may be estimated by applying a reasonable percentage to the deposits; acceptance of books of account and traceable electronic transactions negates wholesale rejection and estimation of entire turnover is inappropriate.

---