Books of accounts cannot be rejected under section 145 without satisfying statutory conditions when no defects found

ITAT Jaipur held that CIT(A) improperly rejected books of accounts under section 145 without satisfying statutory conditions, as AO found no defects in records and accepted partial sales as genuine. The tribunal ruled that revenue cannot accept part of sales as explained while rejecting the remainder from identical evidence. Cash deposits from demonetized currency during sales transactions cannot be treated as unexplained credits under sections 68/69A since sales were already recorded in profit/loss accounts. Both grounds raised by assessee were allowed.

---

---

Issues Involved:

1. Rejection of books of account under Section 145(3) of the Income Tax Act.
2. Addition of Rs. 2,64,00,000/- as unexplained cash credit under Section 68 of the Income Tax Act.
3. Application of Section 115BBE for taxing the unexplained cash credit at a higher rate.
4. Whether CIT(A) can apply Section 68 instead of Section 69A.
5. Double taxation of the same income.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):

The assessee challenged the rejection of its books of account by the CIT(A) under Section 145(3) without examining the books or asking the assessee to produce them. The CIT(A) invoked this provision on the grounds that the assessee failed to furnish credible evidence supporting the source of cash deposited during demonetization. However, the Tribunal observed that the Assessing Officer (AO) did not reject the books of account during the assessment proceedings and found no defects in the records maintained by the assessee. The Tribunal noted that the books were audited under both the Companies Act and the Income Tax Act without any adverse remarks. The Tribunal held that the CIT(A) rejected the books based on mere suspicion without pointing out specific defects, which is not a valid reason to invoke Section 145(3). Thus, the Tribunal allowed the assessee's appeal on this ground.

2. Addition as Unexplained Cash Credit under Section 68:

The CIT(A) upheld the addition of Rs. 2,64,00,000/- as unexplained cash credit under Section 68, treating the cash deposited during demonetization as unexplained. The assessee argued that the cash sales were duly recorded in the books of account and that the addition under Section 68 was not justified. The Tribunal found that the AO and CIT(A) had accepted part of the sales as genuine and part as unexplained without any basis. The Tribunal held that the provisions of Section 68 are not applicable to sales transactions already recorded in the books of account. The Tribunal relied on the decision of the Rajasthan High Court in Smt. Harshila Chordia vs. ITO, which held that no addition could be made for amounts standing in the books as cash receipts from customers. Consequently, the Tribunal allowed the assessee's appeal on this ground.

3. Application of Section 115BBE:

The CIT(A) applied Section 115BBE to tax the unexplained cash credit at a higher rate. The assessee contended that Section 115BBE should not apply to genuine receipts already offered to tax as income. The Tribunal observed that the CIT(A) applied Section 115BBE without a specific show cause notice, which is not required by law. However, since the Tribunal found that the addition under Section 68 was not justified, the application of Section 115BBE was also not warranted. Thus, the Tribunal allowed the assessee's appeal on this ground.

4. Whether CIT(A) can Apply Section 68 Instead of Section 69A:

The CIT(A) applied Section 68 instead of Section 69A, which was originally applied by the AO. The assessee argued that the CIT(A) cannot apply a different section without a specific notice. The Tribunal noted that the CIT(A) has coterminous powers with the AO and can do what the AO ought to have done. However, since the Tribunal found that the addition was not justified under either section, the issue of applying Section 68 instead of Section 69A became moot.

5. Double Taxation of the Same Income:

The assessee contended that the same income was taxed twice: once as sales and again as unexplained cash credit. The Tribunal agreed with the assessee, noting that the sales were already recorded in the books and subjected to tax. The Tribunal held that taxing the same amount again as unexplained cash credit would result in double taxation, which is impermissible. Thus, the Tribunal allowed the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the assessee's appeal, holding that the rejection of books of account under Section 145(3), the addition under Section 68, and the application of Section 115BBE were not justified. The Tribunal emphasized that the same income cannot be taxed twice and that the provisions of Section 68 are not applicable to sales transactions already recorded in the books of account.

---