2025 (6) TMI 45 - AT - Income Tax

Cash deposits from declared profits cannot be taxed again under section 69A when already subjected to tax

Digvijay Chemicals Ltd. Versus CIT (A) -3, Gurgaon

Digvijay Chemicals Ltd. Versus CIT (A) -3, Gurgaon - TMI The core legal questions considered in this appeal revolve around the applicability of section 69A and section 115BBE of the Income Tax Act, 1961 to cash deposits made during the demonetization period, specifically:1. Whether the addition of INR 50 Lakhs under section 69A and taxation under section 115BBE is justified when the cash deposits correspond to sales already recorded and taxed in the books of account.2. Whether the Assessing Officer (AO) was correct in invoking section 69A despite the books of account being audited and not rejected, and the cash deposits being reflected therein.3. Whether the addition results in double taxation of income already offered to tax.4. The relevance and applicability of judicial precedents concerning additions under sections 68, 69A, and 115BBE in cases involving cash deposits during demonetization.5. The extent to which surmises and conjectures can justify additions when the assessee has furnished explanations and documentary evidence.Issue-wise Detailed AnalysisIssue 1: Justification for Addition under Section 69A and Taxation under Section 115BBELegal Framework and Precedents: Section 69A empowers the AO to deem unexplained money, bullion, jewellery, or other valuable articles not recorded in books of account as income of the assessee. Section 115BBE provides for taxation of income declared under certain sections including 69A at a flat rate. The essential conditions for invoking section 69A are:Existence of money or valuables not recorded in books of account;Failure of the assessee to offer an explanation about the nature and source; orThe explanation offered is unsatisfactory to the AO.Judicial precedents such as the decisions of the Hon'ble Delhi High Court in CIT v. Kailash Jewellery House and various ITAT decisions (e.g., ACIT v. Ramlal Jewellers, S. Balaji Mech-Tech Pvt Ltd v. ITO) have held that additions under section 69A or 68 cannot be made where cash deposits correspond to sales duly recorded and accepted in audited books of account.Court's Interpretation and Reasoning: The Tribunal observed that the AO did not allege non-maintenance or rejection of books of account. The assessee's turnover inclusive of cash sales was accepted, and profits on such sales were offered to tax. The cash deposits during demonetization were explained as arising from cash sales, supported by bank statements, sale registers, and audited financial statements. No contradictory material was produced by the AO to disprove this. Therefore, the primary condition for invoking section 69A-unrecorded money-was not met.Key Evidence and Findings: The assessee's books were audited and not rejected; cash sales were recorded and accepted by VAT authorities; documentary evidence including month-wise sales and bank statements were furnished; no adverse findings against stock or purchases were made.Application of Law to Facts: Since the cash deposits were already recorded in books and profits declared, invoking section 69A to add the same amount again constitutes double taxation and is contrary to the statutory scheme.Treatment of Competing Arguments: The AO contended that the source of cash deposits was not proved and relied on abnormal cash deposits during demonetization. The Tribunal rejected this, emphasizing the absence of any adverse findings on books or sales authenticity and reliance on conjectures and surmises by the AO.Conclusion: The addition of INR 50 Lakhs under section 69A and taxation under section 115BBE is unjustified and liable to be deleted except for a minor portion where sales bills were not produced.Issue 2: Whether Books of Account Were Properly Maintained and Reliance on SurmisesLegal Framework and Precedents: It is settled law that additions cannot be made solely on surmises and conjectures without direct evidence. The courts have held that when books of account are regularly maintained and audited, and no defect is pointed out, the AO cannot reject explanations without material evidence.Court's Interpretation and Reasoning: The Tribunal noted that the AO did not reject the books of account or point out any major discrepancies. The assessee had submitted stock reconciliation, audit reports, and other documentary evidence. The AO's reliance on abnormal cash deposits without disproving the genuineness of sales or stock was held to be insufficient.Key Evidence and Findings: Audited accounts, stock registers, purchase records, and VAT assessments corroborated the genuineness of sales and cash deposits. The Tribunal cited multiple precedents where similar facts led to deletion of additions.Application of Law to Facts: The AO's approach was found to be arbitrary and lacking in evidentiary basis. The Tribunal held that the AO must establish a link between evidence and addition, which was not done here.Treatment of Competing Arguments: Revenue's argument that cash deposits were unexplained was negated by documentary proof and acceptance of sales by VAT authorities. The Tribunal emphasized that mere suspicion or abnormality does not justify additions.Conclusion: The addition based on conjectures and surmises without rejecting books of account or disproving sales is not sustainable.Issue 3: Double Taxation of Income Already Offered to TaxLegal Framework and Precedents: The principle against double taxation is well established. Once income is offered and accepted for tax, taxing the same income again under a different provision is impermissible.Court's Interpretation and Reasoning: The Tribunal observed that the assessee had included the cash sales in turnover and paid tax on profits. The addition under section 69A and taxation under section 115BBE on the same amount amounted to double taxation.Key Evidence and Findings: The audited books and VAT assessments confirmed the inclusion of cash sales in income. No evidence suggested that the cash deposits represented undisclosed income.Application of Law to Facts: The Tribunal held that taxing the same income twice violates the statutory scheme and principles of tax law.Treatment of Competing Arguments: Revenue did not produce evidence to show that the cash deposits were separate undisclosed income.Conclusion: The addition leading to double taxation is not justified.Issue 4: Applicability of Section 69A When Books Are Not RejectedLegal Framework and Precedents: Section 69A applies only when money or valuables are not recorded in books of account or explanation is unsatisfactory. If books are maintained and not rejected, and the source is explained, section 69A cannot be invoked.Court's Interpretation and Reasoning: The Tribunal emphasized that the AO must express reasons for rejecting the explanation. In this case, no such rejection or adverse finding was made.Key Evidence and Findings: The assessee's books were audited and accepted; cash sales were recorded; explanations were supported by evidence.Application of Law to Facts: The AO's invocation of section 69A without rejecting books or explanation was held to be legally untenable.Treatment of Competing Arguments: Revenue's reliance on abnormal cash deposits was insufficient to override the acceptance of books and explanations.Conclusion: Section 69A was wrongly invoked.Issue 5: Treatment of Cash Deposits During Demonetization PeriodLegal Framework and Precedents: Several ITAT decisions have dealt with cash deposits during demonetization, holding that if cash sales are recorded and stock reconciled, additions under sections 68 or 69A cannot be made merely because of increased cash deposits.Court's Interpretation and Reasoning: The Tribunal relied on multiple co-ordinate bench decisions (e.g., ACIT v. Ramlal Jewellers, S. Balaji Mech-Tech Pvt Ltd, Fine Gujaranwala Jewellers, Godwin Tourism Pvt Ltd) which held that cash deposits during demonetization, if explained and recorded, cannot be treated as undisclosed income.Key Evidence and Findings: The assessee had sufficient stock, sales were genuine and recorded, and cash deposits matched cash sales.Application of Law to Facts: The Tribunal applied these precedents to hold that the cash deposits in SBN during demonetization were legitimate business transactions.Treatment of Competing Arguments: Revenue's contention that cash deposits were suspicious was rejected in light of documentary evidence and judicial precedents.Conclusion: Majority of the addition related to cash deposits during demonetization is not sustainable.Significant Holdings'Where the assessee has maintained regular books of account, which have been audited and not rejected, and the cash deposits in specified bank notes during demonetization period are duly recorded as cash sales in the books and profits thereon have been offered to tax, the provisions of section 69A cannot be invoked to make addition on the basis of conjectures and surmises.''The Assessing Officer must establish that the money or valuables are not recorded in the books of account and the explanation offered is unsatisfactory before invoking section 69A.''Addition under section 69A or 68 cannot be made on cash deposits already accounted for as sales in audited books of account and accepted by tax authorities, as it results in double taxation.''Mere abnormality in cash deposits during demonetization period without disproving genuineness of sales or rejecting books of account is insufficient to make additions.''Where the assessee furnishes documentary evidence including audited financial statements, sale registers, stock reconciliation, and bank statements to explain cash deposits, and no adverse findings are made against the books of account, the AO cannot disregard such evidence and make additions.''Additions based on conjectures, surmises, or suspicion without direct evidence or rejection of books of account are not sustainable.''A minor addition is justified where the assessee fails to produce sales bills for some cash deposits, but the bulk of the addition is to be deleted.'In conclusion, the Tribunal partly allowed the appeal by deleting INR 45 Lakhs of the addition and sustaining INR 5 Lakhs where documentary evidence was lacking. The invocation of section 69A and consequential taxation under section 115BBE was held to be improper in respect of the majority of the cash deposits, thereby preventing double taxation and upholding the sanctity of audited books of account and declared income.