Demonetization cash deposits cannot be taxed under section 68 if supported by proper documentation and sales records

The ITAT Chandigarh allowed the assessee's appeal regarding cash deposits made during demonetization. The AO had added these deposits to taxable income under section 68, treating them as unexplained cash credits. The assessee explained the deposits originated from cash sales, supported by cash books, bank statements, VAT returns, and audited accounts. The ITAT held that merely higher cash deposits compared to previous years cannot justify rejecting the explanation without identifying specific defects in documentation or stock availability. Since cash sales were already offered to tax and VAT was paid, taxing the cash realization would constitute impermissible double taxation.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Addition of Rs. 19,13,078 on account of 'cash deposits' in the bank account.
3. Application of section 68 r.w.s 115BBE of the Income Tax Act.

Summary:

Condonation of Delay:

At the outset, it is noted that there is a delay in filing the present appeal by 8 days as pointed out by the Registry. The Assessee, through its partner, moved a condonation delay application along with an Affidavit citing viral fever and office shifting as reasons for the delay. The Ld. DR did not raise any serious objection to the condonation of delay. After hearing both parties and considering the material on record, the delay in filing the present appeal is condoned, and the appeal is admitted for adjudication.

Addition of Rs. 19,13,078 on Account of 'Cash Deposits':

The Assessee firm, engaged in manufacturing and trading Hosiery goods and readymade Garments, filed its return for AY 2017-18 declaring an income of Rs. 1,33,650/-. During scrutiny, the AO noted cash deposits of Rs. 50,00,000/- during the demonetization period, with Rs. 48,00,000/- deposited on 13/11/2016. The Assessee explained that Rs. 17,13,078/- were cash receipts from identifiable persons with PAN, and Rs. 30,86,922/- were from cash sales to unidentifiable persons without PAN. The AO found abnormalities in the cash book and deemed the cash deposits as unexplained, thus adding Rs. 19,13,078/- as undisclosed cash credit u/s 68 r.w.s 115BBE.

The Ld. CIT(A) confirmed the AO's addition, noting that the Assessee's cash sales and deposits during the demonetization period were significantly higher than usual, and no similar sales were reported in prior years. The CIT(A) held that the AO was liberal in accepting the opening cash balance and sales to persons with PAN, confirming the addition of Rs. 19,13,078/-.

Application of Section 68 r.w.s 115BBE:

During the hearing, the Assessee argued that the cash deposits were from regular business sales, duly recorded in audited books, and VAT returns were filed. The Assessee cited various judicial precedents to argue that cash sales do not require customer addresses and that treating such deposits as undisclosed income would result in double taxation. The Assessee also highlighted that the total sales had increased by 35% compared to the previous year, and the increased sales were not doubted by the department.

The Tribunal noted that the Assessee provided sufficient documentation, including cash book entries, bank statements, VAT returns, and audited financial statements. No defects were pointed out by the AO in the stock or documentation. The Tribunal held that merely higher cash deposits during demonetization, without any defects in the records, cannot justify treating the cash sales as bogus. The Tribunal agreed that accepting cash sales and taxing the realization of sale proceeds would amount to double taxation. Therefore, the addition made by the AO and confirmed by the CIT(A) was directed to be deleted.

In the result, the appeal of the Assessee is allowed.

Order pronounced in the open Court on 20/03/2024.

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