2025 (8) TMI 905 - AT - Income Tax

Additions under section 68 r.w.s. 115BBE deleted where AO failed to record dissatisfaction or rebut audited books and records

Kapoor Abhushan palace Pvt. Ltd. Versus ITO, Ward-14 (2), Delhi

Kapoor Abhushan palace Pvt. Ltd. Versus ITO, Ward-14 (2), Delhi - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the addition made under section 68 read with section 115BBE of the Income Tax Act, 1961, on account of cash deposits during the demonetization period, is justified when the assessee has declared the sales and maintained audited books of accounts. Whether the turnover declared by the assessee for the months of October and November 2016 is excessive and unexplained, warranting disallowance and addition to income. Whether the Assessing Officer (AO) was justified in rejecting the explanation and documentary evidence furnished by the assessee regarding the nature and source of cash deposits. Whether the provisions of section 68 can be invoked when the assessee has already declared cash sales in its books of account and offered explanation supported by audited accounts and VAT returns. Whether the AO's reliance on assumptions, presumptions, and surmises without specific defects or contrary material can sustain the addition. Whether the AO was required to verify the genuineness of sales by making inquiries with buyers or verifying stock and purchase registers before making additions. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification for Addition under Section 68 read with Section 115BBE on Cash Deposits during Demonetization Legal Framework and Precedents: Section 68 of the Income Tax Act provides that if any sum is credited in the books of an assessee and the assessee fails to provide a satisfactory explanation about the nature and source of such credit, the sum may be charged to income tax as income of that previous year. Section 115BBE imposes a special tax on unexplained cash credits. Precedents establish that additions under section 68 require either no explanation or an unsatisfactory explanation by the assessee. Mere cash deposits during demonetization cannot be treated as unexplained income if supported by books of accounts and documentary evidence. Court's Interpretation and Reasoning: The Tribunal observed that the assessee maintained regular audited books of accounts, including sales, purchase, stock registers, and cash books. The AO did not point out any specific defect in these documents nor conducted any verification of buyers or stock records. The assessee's explanation that cash deposits were from genuine cash sales was supported by VAT returns accepted by the respective authorities. The AO's addition was based on assumption that the turnover was inflated to cover undisclosed cash deposits. However, no contrary material or evidence was brought on record to disprove the assessee's explanation or documentation. Therefore, the addition under section 68 read with section 115BBE was held unjustified. Key Evidence and Findings: Audited financial statements, sale and purchase bills, stock registers, cash books, and VAT returns filed by the assessee. No defect or infirmity was found in these records by the AO. Application of Law to Facts: Since the assessee provided a satisfactory explanation supported by documentary evidence, the conditions for invoking section 68 were not met. Treatment of Competing Arguments: The AO's reliance on presumptions without corroborative evidence was rejected. The assessee's explanation was accepted as genuine and credible. Conclusion: Addition under section 68 and 115BBE on cash deposits during demonetization was deleted. Issue 2: Validity of Declared Turnover for October and November 2016 Legal Framework and Precedents: The turnover declared by an assessee is presumed correct unless disproved by the AO with valid reasons and evidence. Section 145(3) provides for best judgment assessment if books are found unreliable. Court's Interpretation and Reasoning: The AO doubted the turnover for October and November 2016 as being exorbitantly high compared to preceding years and estimated much lower sales for these months. However, the AO did not invoke section 145(3) or reject the books of account. The AO also failed to verify the buyers mentioned in sale bills or make inquiries regarding the sales. The Tribunal noted that exceptional circumstances could have led to higher sales during these months and that the assessee's books were audited without objection. The VAT returns also corroborated the declared turnover. Key Evidence and Findings: Audited accounts, sale bills showing buyer details, stock registers, VAT returns. Application of Law to Facts: Without specific defects or contrary evidence, mere comparison with previous years' turnover is insufficient to disallow declared sales. Treatment of Competing Arguments: AO's presumption of inflated turnover was rejected for lack of evidence. The assessee's explanation was accepted. Conclusion: Declared turnover for October and November 2016 was held to be genuine and not excessive or unexplained. Issue 3: Requirement for AO to Verify Documentary Evidence and Conduct Inquiries Legal Framework and Precedents: AO is duty-bound to verify the genuineness of transactions when making additions, including verifying buyers, stock, and purchase records, before making adverse findings. Court's Interpretation and Reasoning: The AO failed to verify the buyers mentioned in sale bills or make inquiries with parties. No specific defects in bills or vouchers were pointed out. The AO also did not question the stock availability or purchases corresponding to sales. Key Evidence and Findings: Sale bills with buyer details, stock and purchase registers, audit reports. Application of Law to Facts: The AO's failure to conduct verification undermined the basis for addition. Treatment of Competing Arguments: AO's reliance on assumptions without verification was criticized. Conclusion: AO's addition without verification or inquiry was unjustified. Issue 4: Applicability of Section 68 when Cash Sales are Declared in Books and Supported by VAT Returns Legal Framework and Precedents: Section 68 applies when unexplained credits are found in books. If cash sales are recorded in books and accepted by VAT authorities, they cannot be treated as unexplained income. Several coordinate bench decisions and High Court rulings confirm that once sales are declared and accepted, additions under section 68 or 69A cannot be made on the same transactions. Court's Interpretation and Reasoning: The Tribunal relied on precedents where additions under section 68 were deleted when cash sales were duly recorded and accepted by VAT authorities, and stock movements supported the sales. Key Evidence and Findings: Audited books, VAT returns, stock reconciliation, absence of abnormal profits. Application of Law to Facts: Since cash sales were declared and accepted, and stock movements corroborated sales, section 68 could not be invoked. Treatment of Competing Arguments: AO's attempt to invoke section 68 despite acceptance of books and sales was rejected. Conclusion: Provisions of section 68 are not applicable to declared and accepted cash sales. Issue 5: Legitimacy of AO's Use of Assumptions and Presumptions Without Specific Evidence Legal Framework and Precedents: Additions to income must be based on direct evidence or material, not on conjectures, surmises, or assumptions. Court's Interpretation and Reasoning: The AO's addition was based on the premise that turnover was inflated to cover undisclosed cash deposits, without any direct evidence or verification. The Tribunal emphasized that such additions cannot be sustained on mere assumptions. Key Evidence and Findings: No defects in books or vouchers, no inquiries with buyers, no contradictory material. Application of Law to Facts: Additions based solely on assumptions were held to be arbitrary and unsustainable. Treatment of Competing Arguments: AO's approach was rejected as lacking evidentiary basis. Conclusion: Additions based on assumptions and presumptions without evidence are invalid. Issue 6: Double Taxation of Income by Addition of Cash Deposits Already Included in Sales Legal Framework and Precedents: Income cannot be taxed twice by including the same amount once in sales turnover and again as unexplained cash credit under section 68. Court's Interpretation and Reasoning: The Tribunal noted that the assessee had included the entire cash sales in total sales and offered profits for tax. The addition of cash deposits as unexplained income without reducing the declared sales results in double taxation. Key Evidence and Findings: Sales declared and profits offered for tax, no rejection of books. Application of Law to Facts: Addition of cash deposits without adjusting declared sales is impermissible. Treatment of Competing Arguments: AO's failure to adjust declared sales was criticized. Conclusion: Addition of cash deposits without reducing declared sales amounts to double taxation and is unjustified.