2025 (4) TMI 671 - AT - Income Tax

Cash deposits during demonetization cannot be fully taxed under Section 68 only profit element should be assessed

A.M. Suppliers (P) Ltd. Versus I.T.O., Ward-1 (1) (1), Surat.

The ITAT Surat held that complete addition of cash deposits during demonetization under Section 68 was unjustified given the extraordinary circumstances. ... Addition being cash deposited during the demonetization period - Addition u/s 68 and Section 115BBE - HELD THAT:- The addition of entire cash deposit on the peculiar facts of the case was not justified, when there was extraordinary event of demonetization during the financial year. Even though, if it is assumed that the assessee has failed to reconcile one to one sale or purchase the addition of entire cash deposit is not justified, when books of assessee was not rejected. It is settled position under income tax proceedings that only profit from business is to be taxed and not the cash or credit entry in the Bank account. We find that in a series of decisions in similar cases where the business transaction of assessee is in cash, only profit element to avoid the revenue leakage is estimated. Assessee strongly relied on the decision of Amrita Gems Pvt. Ltd. [2023 (8) TMI 1491 - ITAT SURAT] wherein as estimated 10% of profit as reasonable profit to avoid the possibility of revenue leakage. Thus, AO is directed to tax 10% of cash deposit during demonetization period/cash deposited identified by Assessing Officer in two bank accounts of assessee. Applicability of Section 115BBE - We find that once we have estimated addition @ 10% as profit element, therefore, there is no applicability of Section 115BBE of the Act as it has been considered as business profit of assessee. Even otherwise, this Bench in a series of decisions has held that Section 115BBE of the Act is not applicable for A.Y. 2017-18. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the cash deposits made by the assessee during the demonetization period can be treated as unexplained cash credits under Section 68 of the Income Tax Act.2. Whether the invocation of Section 115BBE for taxing the unexplained cash credits is appropriate for the Assessment Year 2017-18.ISSUE-WISE DETAILED ANALYSISIssue 1: Treatment of Cash Deposits as Unexplained Cash CreditsRelevant Legal Framework and Precedents:The legal framework involves Section 68 of the Income Tax Act, which pertains to unexplained cash credits. The burden of proof lies on the assessee to explain the nature and source of cash deposits.Court's Interpretation and Reasoning:The Tribunal examined whether the cash deposits during the demonetization period were adequately explained by the assessee. The assessee claimed that the deposits were from cash sales, supported by sales bills and delivery challans. The Tribunal noted that the Assessing Officer (AO) did not reject the books of accounts but questioned the genuineness of sales due to non-response from parties under Section 133(6).Key Evidence and Findings:The Tribunal considered the evidence provided by the assessee, including confirmation from some parties and the explanation of cash flow. The AO's reliance on the statement of a purchaser, Pankajbhai Desai, who acknowledged a smaller purchase than claimed, was also scrutinized.Application of Law to Facts:The Tribunal found that the AO did not conduct further verification of new addresses provided by the assessee and relied on initial non-responses. The Tribunal emphasized that the entire cash deposit could not be treated as unexplained when the books were not rejected, and the sales were part of regular business transactions.Treatment of Competing Arguments:The Tribunal balanced the AO's concerns about unexplained cash with the assessee's explanations and evidence of sales transactions. The Tribunal also considered the extraordinary circumstances of demonetization.Conclusions:The Tribunal concluded that only the profit element from the cash deposits should be taxed, not the entire amount. It directed the AO to estimate a 10% profit on the cash deposits, aligning with similar decisions in comparable cases.Issue 2: Applicability of Section 115BBERelevant Legal Framework and Precedents:Section 115BBE pertains to taxing unexplained income at a higher rate. The applicability for the assessment year in question was contested.Court's Interpretation and Reasoning:The Tribunal considered whether Section 115BBE applies when the cash deposits are treated as business profits. It noted precedents where Section 115BBE was deemed inapplicable for AY 2017-18.Key Evidence and Findings:The Tribunal relied on its decision to treat the cash deposits as business income, thereby negating the need for Section 115BBE application.Application of Law to Facts:Since the Tribunal treated the cash deposits as part of business profits, Section 115BBE was not applicable.Treatment of Competing Arguments:The Tribunal considered the Department's stance but found the assessee's argument and supporting precedents more persuasive.Conclusions:The Tribunal ruled that Section 115BBE was not applicable for AY 2017-18, as the cash deposits were considered business income.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:The Tribunal emphasized that 'only profit from business is to be taxed and not the cash or credit entry in the Bank account.'Core Principles Established:The judgment reinforced the principle that unexplained cash deposits during extraordinary events like demonetization should be assessed with consideration of the business context and not automatically treated as unexplained credits.Final Determinations on Each Issue:1. The Tribunal directed the AO to tax only 10% of the cash deposits as profit, recognizing the business nature of the transactions.2. The Tribunal ruled that Section 115BBE does not apply, as the cash deposits were considered business income.In conclusion, the Tribunal partially allowed the appeal, adjusting the tax treatment of cash deposits and negating the application of Section 115BBE for the assessment year in question.