Books of accounts rejection upheld but cash sales cannot be treated as unexplained cash credit under section 68

ITAT Ahmedabad upheld rejection of books of accounts under section 145(3) but overturned addition of cash sales as unexplained cash credit under section 68. The tribunal held that once books are rejected, income must be determined through best judgment assessment under section 144, not by treating sales amounts as unexplained cash credits, which would constitute double addition. The AO erred in treating cash deposits during demonetization as both sales and unexplained cash credit. The tribunal directed that cash sales amount should be reduced from total sales with balance subject to estimation-based taxation.

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Issues Involved:
1. Rejection of books of accounts u/s 145 of the Act.
2. Addition of cash sales as unexplained cash credit u/s 68 of the Act.
3. Invocation of section 115BBE of the Act.

Summary:

1. Rejection of books of accounts u/s 145:

The assessee's books of accounts were rejected by the AO u/s 145(3) of the Act due to substantial cash deposits during the demonetisation period, which were claimed as cash sales. The AO found discrepancies in the sales records and noted that the suppliers of jewellery had not been paid for a long time. The AO concluded that the cash deposits were fabricated and treated them as unexplained cash credits. The CIT-A upheld the AO's decision. The Tribunal noted that the assessee did not challenge the rejection of the books of accounts, and it reached finality. It was emphasized that once books are rejected, the income must be determined under section 144 of the Act.

2. Addition of cash sales as unexplained cash credit u/s 68:

The AO treated the cash deposits of Rs. 3,28,75,000 during the demonetisation period as unexplained cash credits u/s 68 of the Act. The Tribunal highlighted that the provisions of section 68 cannot be applied to amounts shown as sales in the books of accounts, as it would lead to double addition. The Tribunal referred to the judgment in CIT vs. Vishal Exports Overseas Ltd, where sales were not treated as unexplained cash credit. The Tribunal also noted that the AO did not reduce the alleged unexplained cash credit from the total sales, which was contrary to the law. Therefore, the Tribunal directed the AO to delete the addition made u/s 68.

3. Invocation of section 115BBE:

The assessee contended that section 115BBE should not be invoked as the transactions occurred before the provision was inserted into the statute. However, this issue was not elaborated upon in the judgment.

Conclusion:

The Tribunal upheld the rejection of the books of accounts but directed the AO not to treat the cash sales as unexplained cash credit u/s 68. The appeal of the assessee was allowed, and the addition made by the AO was deleted.

Order pronounced in the Court on 03/04/2024 at Ahmedabad.

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