2025 (8) TMI 1435 - AT - Income Tax

Additions under s.68 for demonetisation-period cash deposits unjustified; s.40A(3) disallowances partly sustained, partly deleted on facts

Income Tax Officer Versus Sunita Gold and Diamonds Pvt. Ltd.

Income Tax Officer Versus Sunita Gold and Diamonds Pvt. Ltd. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits made into bank accounts during the demonetization period, allegedly representing cash sales and advances, can be treated as unexplained cash credit under Section 68 of the Income Tax Act when (a) those sales/advances are recorded in regular books of account, (b) books are not rejected, (c) VAT/Sales tax returns corroborate the sales, and (d) sufficient stock existed to effect the sales. 2. Whether the Assessing Officer may invoke the principle of 'human probabilities' and surrounding circumstances to reject recorded single-day large cash sales and advances (raised through multiple invoices below statutory PAN threshold) as a sham, thereby treating deposits as unexplained under Section 68. 3. Whether cash payments made for purchase of old jewellery from sellers who insisted on cash, and some payments occurring on Sundays/holidays, are disallowable under Section 40A(3) of the Income Tax Act, or fall within exceptions in Rule 6DD of the Income Tax Rules. 4. Whether consequential penalty proceedings under Section 270A (for under-reporting/misreporting) are sustain-able where additions under Section 40A(3) are in issue (not finally determined by the Tribunal here). ISSUE-WISE DETAILED ANALYSIS - SECTION 68 (CASH DEPOSITS DURING DEMONETIZATION) Legal framework: Section 68 treats unexplained cash credits as income unless the assessee satisfactorily explains identity, genuineness and source. Books of account, corroborative records and acceptance by other authorities (e.g., VAT assessment) are relevant to discharge the onus. Precedent treatment: The Tribunal relied on coordinate decisions holding that where cash sales recorded in books are accepted by the assessing authority or corroborated by VAT returns and stock records, subsequent deposits of sale proceeds during demonetization cannot be treated as unexplained income (cited decisions of various Tribunal benches including jurisdictional bench decisions). Interpretation and reasoning: The Tribunal examined (a) contemporaneous books (cash book, sales registers), (b) month-wise sales/purchases, (c) stock records and purchase invoices, (d) VAT returns and acceptance by VAT authorities, and (e) the fact that the Assessing Officer did not reject the books. The Tribunal found a contradiction in the AO treating cash sales as accepted for computing turnover while simultaneously treating the same cash when deposited as unexplained cash credit. The Tribunal held that mere conjecture as to improbability of making many small invoices in a single day, without independent corroborative evidence (e.g., mismatch in stock, purchases or other affirmative proof of fabrication), is insufficient to displace the recorded transactions. The Tribunal also gave weight to the business context (jewellery trade being cash-centric; festival/wedding season and demonetization impulse) and to precedents where similar facts led to deletion of additions. Ratio vs. Obiter: Ratio - where cash sales and advances are recorded in books not rejected by AO, corroborated by VAT returns and supported by sufficient stock, deposits of proceeds during demonetization are explained and cannot be treated as unexplained cash credit under Section 68 absent independent evidence discrediting genuineness. Obiter - general observations on human probabilities and colorable devices to avoid PAN quoting (derived from AO's reasoning) are discussed but not adopted. Conclusions: The addition under Section 68 of Rs. 3,72,69,265 based on the Assessing Officer's finding that large single-day cash sales and advances were a sham was deleted. The Tribunal concluded that the AO's reliance on conjecture and surmise without corroborative evidence was unsustainable, and deletion follows consistent Tribunal precedent that accepted recorded cash sales (not doubted by AO) explain demonetization-period deposits. ISSUE-WISE DETAILED ANALYSIS - 'HUMAN PROBABILITIES' AND SURROGATE FACTORS Legal framework: Courts may apply the test of human probabilities and examine surrounding circumstances to test genuineness; however, such tests require evidentiary foundation and cannot supplant primary documentary records absent independent contradictions. Precedent treatment: While jurisprudence recognizes human-probabilities reasoning (Sumati Dayal, Durga Prasad More cited by AO), Tribunals have also held that speculation on improbability cannot prevail over accepted books and corroborative records unless affirmative contradictory evidence exists. Interpretation and reasoning: The Tribunal acknowledged that AO invoked human probabilities to challenge the plausibility of raising 206 invoices below PAN threshold in one day, but found no independent factual material (e.g., stock mismatches, rejected books, adverse findings by VAT authority) to support rejection. The Tribunal emphasized that the AO himself accepted the turnover and the books elsewhere, generating an internal inconsistency. Ratio vs. Obiter: Ratio - application of human-probabilities cannot justify additions when records are intact, corroborative statutory records exist, and AO has not produced independent evidence of fabrication. Obiter - remarks on potential tax-avoidance motives or structuring invoices below PAN limit remain observations not forming basis for decision. Conclusions: Human-probabilities concerns raised by the AO did not justify addition absent corroborative evidence; therefore the AO's exercise based on conjecture was set aside. ISSUE-WISE DETAILED ANALYSIS - SECTION 40A(3) (CASH PAYMENTS FOR PURCHASES) Legal framework: Section 40A(3) disallows business expenditure if payment in excess of statutory limit is made in cash, subject to exceptions provided by rules (notably Rule 6DD) which carve out certain payments (e.g., payments on Sunday/holidays) from disallowance. Precedent treatment: Tribunals and courts have recognized that Rule 6DD exceptions and business exigencies must be considered; where payments fall within Rule 6DD exceptions (payments on Sundays/holidays), disallowance under Section 40A(3) may not be warranted. Interpretation and reasoning: The Tribunal examined the list of cash purchases totaling Rs. 28,50,886 and found that Rs. 15,16,115 were paid on Sundays (covered by Rule 6DD exception) while the balance (Rs. 13,34,771) were on non-holidays (Wednesdays, Fridays, Saturdays). The assessee's explanation - refusal by sellers to accept account-payee cheques and business necessity - was accepted only insofar as payments on Sundays; payments on non-holidays remained unexplained and the CIT(A) rightly sustained disallowance in respect of those amounts. The Tribunal upheld the CIT(A)'s partial deletion: delete amounts paid on Sundays, sustain disallowance for other days where explanation was not furnished or corroborated and audit report variance existed. Ratio vs. Obiter: Ratio - cash payments made on Sundays/holidays, where sellers refused non-cash modes and are otherwise recorded in books, fall within Rule 6DD exception and cannot be disallowed under Section 40A(3); payments on non-holidays are liable to disallowance if no satisfactory explanation/corroboration is produced. Obiter - general remarks on business expediency and auditor report inconsistencies. Conclusions: The Tribunal upheld partial relief: deletion of disallowance for cash payments made on Sundays (per Rule 6DD), but sustained disallowance insofar as cash payments on non-holidays remained unexplained. ISSUE-WISE DETAILED ANALYSIS - PENALTY UNDER SECTION 270A Legal framework: Section 270A penalty provisions apply for under-reporting/misreporting of income consequential to additions. Penalty determination requires establishment of nature and quantum of under-reporting and applicable explanations. Interpretation and reasoning: The assessment order initiated penalty proceedings in relation to alleged non-reporting of cash payments exceeding prescribed limits. The Tribunal's order deals with substantive additions under Section 40A(3) and Section 68; it does not finally decide penalty issues in detail beyond noting initiation and the interconnection between substantive disallowance and penalty allegations. Ratio vs. Obiter: Obiter - remarks noting that penalty proceedings were initiated but not conclusively adjudicated by the Tribunal in this order; penalty viability will depend on outcome and scope of substantive additions. Conclusions: Penalty issues were acknowledged but not finally determined by the Tribunal in this order; any penalty consequence will hinge on the finality of additions upheld or deleted.