ITAT upholds deletion of additions for estimated cash sales and unexplained expenditure under section 69C during demonetization

ITAT Delhi dismissed revenue's appeal regarding additions for estimated cash sales of gold and silver during demonetization period and interest payments treated as unexplained expenditure under section 69C. The tribunal upheld CIT(A)'s deletion of additions, ruling that since assessee had properly reflected actual cash and credit sales in profit and loss account and income tax return, any additional estimates would constitute double addition. The tribunal found no infirmity in CIT(A)'s order deleting the contested additions.

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The principal issues considered by the Tribunal in the appeal pertain to: (1) the validity of the addition of Rs. 2 crores on account of estimated cash sales of gold and silver during the demonetization period, and (2) the deletion of addition made under section 69C of the Income-tax Act, 1961 (the Act) amounting to Rs. 16,06,335 treating interest paid as unexplained expenditure.

Regarding the first issue, the Assessing Officer (AO) had made an addition on the basis that the cash sales reported by the assessee on 08.11.2016 (gold) and during October 2016 (silver) were not genuine but fabricated to explain cash deposits in Specified Bank Notes (SBNs) during the demonetization period. The AO observed an abnormal surge in the number of customers and cash sales on these dates, which was inconsistent with the assessee's usual business pattern. Consequently, the AO estimated additions of Rs. 90 lakhs for gold and Rs. 1.10 crores for silver sales as unaccounted business income, taxing the same under section 68 read with section 115BBE of the Act.

The Tribunal, however, undertook a detailed and data-driven analysis of the facts. It examined multiple comparative charts and data tables submitted by the assessee, which included:

• Percentage of cash turnover vis-`a-vis total turnover over the preceding five years, showing cash sales consistently constituting over 60% of total sales prior to the impugned year, and 45.38% during the year under consideration;
• Quarterly and monthly sales data comparing October to December periods of 2015 and 2016, revealing a 67.1% increase in total sales but only a 22% increase in cash sales, indicating a decline in the proportion of cash sales;
• Month-wise average daily sales for FY 2015-16 and 2016-17, showing comparable sales patterns without any extraordinary spike solely in November 2016;
• Comparative data of cash sales and cash deposits in bank accounts for corresponding periods in 2015 and 2016, demonstrating consistent cash deposit trends;
• Silver purchase and sales data over six years, reflecting consistent sales and stock levels;
• Opening and closing stock of gold and silver over six years, confirming sufficient stock availability to support the sales;
• Cash deposits in bank accounts over multiple years, showing a regular pattern of cash deposits correlating with cash sales.

The Tribunal noted that the AO's method of estimation was ad hoc and not supported by incriminating material from the survey or search operations. The primary evidence, including audited financial statements, VAT returns, stock registers, and bill books, was not contradicted or discredited by the AO. The Tribunal emphasized that the sales recorded in the books of account were accepted by the AO and matched with the VAT returns, which were not revised post demonetization. Further, the Tribunal observed that the surge in sales on 08.11.2016 coincided with the demonetization announcement, an extraordinary event likely to cause increased demand for jewellery, a fact that could not be overlooked.

Additionally, the Tribunal highlighted that the cash sales and corresponding bank deposits were a regular feature of the assessee's business, and the stock levels of gold and silver were sufficient to cover the sales made during the demonetization period. No evidence of backdating of invoices, bogus billing, or stock shortages was found during the survey or search operations. The Tribunal underscored the principle that when primary evidence is available and uncontradicted, it cannot be discarded in favor of an estimate.

In reliance on precedent, particularly the decision in Agson Global (P.) Ltd. Vs Assistant Commissioner of Income Tax (2020), where similar additions on account of cash deposits post demonetization were deleted due to lack of incriminating evidence and consistent business records, the Tribunal concluded that the addition of Rs. 2 crores was unwarranted and deleted the same.

On the second issue concerning the addition under section 69C of the Act related to interest expenditure of Rs. 16,06,335 paid on an unsecured loan from M/s Vagmi Financials Pvt. Ltd. (formerly Fitworth Constructions Pvt. Ltd.), the AO had treated the interest as unexplained expenditure. This conclusion was based on statements recorded under section 131 implicating the lender as a paper company providing accommodation entries.

The Tribunal analyzed the facts and submissions in detail. The unsecured loan of Rs. 1.70 crores was received through account payee cheques and was repaid fully along with interest @ 9% during the relevant financial year through banking channels. The interest payment was duly recorded in the audited financial statements and income tax returns, with applicable TDS deducted and deposited. The lender company was assessed to tax, had a substantial net worth exceeding the loan amount, and was an active company as per Ministry of Corporate Affairs records.

The Tribunal noted that no incriminating material was found during the search or survey indicating that the loan or interest payment was bogus or formed part of any accommodation entry scheme. The statements relied upon by the AO were recorded after the search and without affording the assessee an opportunity to cross-examine the declarants, rendering such statements inadmissible under principles of natural justice and relevant Supreme Court precedent. The assessee also denied any transactions with the individuals implicated in the statements.

The Tribunal further observed that the AO did not demonstrate that the interest expenditure was incurred without an explainable source, a necessary condition for invoking section 69C. Since the loan and interest were accounted for in the books and no adverse material was brought on record, the addition was rightly deleted by the CIT(A).

In conclusion, the Tribunal upheld the deletion of the addition of Rs. 2 crores on account of estimated cash sales during the demonetization period, finding the AO's estimation method flawed and unsupported by evidence. It also affirmed the deletion of the addition under section 69C relating to interest expenditure, emphasizing the genuineness of the loan transaction and the absence of incriminating material. The appeal of the revenue was dismissed.

Significant holdings include the following legal principles and observations:

• "When primary evidence is available, it cannot be discarded to prefer an estimate." The Tribunal rejected the AO's ad hoc estimation in the absence of contradictory evidence.
• The Tribunal recognized that extraordinary events such as demonetization can legitimately cause abnormal business patterns and sales spikes, which cannot be presumed to be fabricated without concrete evidence.
• Cash sales and corresponding bank deposits, when consistent over years and supported by stock and purchase records, cannot be treated as unexplained income merely due to statistical anomalies.
• Statements recorded under section 131 post search, without opportunity for cross-examination, are inadmissible and violate principles of natural justice, following apex court jurisprudence.
• For invoking section 69C, it is imperative to establish that the expenditure was incurred without an explainable source; mere suspicion or statements against third parties are insufficient.
• The genuineness of unsecured loans and interest payments evidenced by banking channels, audited accounts, and tax compliance cannot be disregarded without cogent evidence.

These principles collectively underline the necessity of evidentiary support for additions and the protection of taxpayers against arbitrary or estimation-based assessments lacking substantive proof.

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