2025 (9) TMI 628 - AT - Income Tax

Matter remanded to AO for re-examination of cash-sale additions after appellant submitted cash deposit statements

Tapan Kanti Roy, Kolkata Versus Assistant Commissioner of Income Tax, Circle-36, Kolkata

ITAT remanded the matter to the file of the AO for re-examination after rejecting initial additions based on alleged unproven cash sales. The tribunal ... Rejecting the books of accounts - addition on account of cash sales allegedly not proved through presentation of books of accounts - HELD THAT:- It is not clear as to when and how the books of accounts were presented for examination and whether at all the Ld. AO had any opportunity of going through the same and comparing the cash sales with relevant entries in the cash book/ledger account. It is seen that the Ld. AR has filed complete sets of cash deposit statements in support of his claim that the cash sales are duly reflected in the books. However, it is felt that the exercise of accurately matching the sales and their consequential entries in the books of accounts can be best done at the level of Ld. AO. Considering all we deem it fit to remand the matter back to the file of Ld. AO for re-examination of the accounts contained in the books maintained by the assessee and satisfying himself as to whether the cash sales are duly reflected therein or not. Appeal filed by the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) was justified in rejecting the assessee's books of account under section 145(3) of the Income Tax Act based on alleged discrepancies in the audit report and related documents. 2. Whether addition of a specified amount as unexplained income/cash sales under section 68/other applicable provisions was sustainable where the assessee contends that cash receipts arose from genuine business sales and were recorded in books of account. 3. Whether the assessee was denied adequate opportunity of being heard when authorities expressed dissatisfaction with the quality of documentation and questioned production of books and vouchers. 4. Whether, in circumstances of contested documentary insufficiency and disputed factual record, the matter should be remitted to the AO for re-examination rather than being finally adjudicated on appeal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of rejection of books of account under section 145(3) Legal framework: Section 145(3) permits rejection of books only where they are found to be incorrect, unreliable or not maintained according to law. Rejection must be founded on cogent and articulated reasons demonstrating that the books are not dependable for computation of income. Precedent treatment: Authorities below treated discrepancies in the audit report and variances between auditor's figures and profit & loss account as grounds for rejection. The appellate authority scrutinized whether those grounds amounted to sufficient defects in the books themselves. Interpretation and reasoning: The Tribunal observed that mere discrepancies in the audit report are not ipso facto grounds to reject books; discrepancies must manifest in the assessee's accounts or demonstrate manipulation rendering the books unreliable. The AO did not identify specific, cogent defects in the accounts (e.g., systemic manipulation, non-adherence to method of accounting under section 145(1), or failure to compute income per section 145(2) standards). The fact that the assessee filed a revised audit report correcting errors further weakens the claim that books were fundamentally unreliable. Ratio vs. Obiter: Ratio - Rejection of books requires specific, cogent reasons tied to the books' unreliability; auditor-report discrepancies alone are insufficient. Obiter - Comments on types of matters (interest classification, change in GP/NP ratio) that do not, by themselves, justify rejection. Conclusion: The AO's order did not provide adequate cogent reasons to uphold rejection of books under section 145(3); estimation on that basis was not tenable. This finding formed part of the Tribunal's basis for remand (see Issue 4). Issue 2 - Sustainment of addition treating cash deposits as unexplained income (section 68/other provisions) Legal framework: When cash deposits or receipts are alleged to be unexplained, the assessee bears onus to substantiate bona fides and source; if not established, AO may treat such amounts as income. However, if those receipts are recorded in books and substantiated by evidence, such additions should not be made. Precedent treatment: The AO made a substantial addition on account of cash sales not verified from books; the first appellate authority sustained the addition on the ground that the assessee failed to prove nature and source of cash deposits. The Tribunal examined whether the cash receipts were matched to entries in books and supported by vouchers. Interpretation and reasoning: The Tribunal noted the assessee's claim of being in a cash-intensive trade and that cash sales were recorded; the assessee produced voluminous bank deposit statements (359 pages). However, the Tribunal found that it was unclear when/whether AO examined the books and whether matching between sales and cash entries was performed. Given the factual uncertainty and the need for detailed matching of receipts to ledger/cash book, the Tribunal concluded that re-examination by the AO was appropriate so that the AO can determine whether cash deposits are reflected in books and substantiated by supporting evidence. Ratio vs. Obiter: Ratio - Where factual matching of alleged unexplained cash deposits to recorded sales is necessary, the AO should perform granular verification before making additions; appellate authorities should not sustain additions without ensuring such primary verification occurred. Obiter - Observations that onus lies on assessee to substantiate source remain general law. Conclusion: The addition could not be finally sustained on the record before the Tribunal; factual re-examination by the AO was necessary to determine legitimacy of cash deposits and whether they are recorded in books. Issue 3 - Adequacy of opportunity of hearing (natural justice) Legal framework: Principles of natural justice require that an assessee be given adequate opportunity to produce evidence and be heard before adverse findings; especially where documents are contested or deemed deficient, hearing and chances to produce vouchers are required. Precedent treatment: The assessee alleged inadequate opportunity; the Department disputed completeness of production. The Tribunal assessed whether procedural fairness required remand. Interpretation and reasoning: The Tribunal observed ambiguity in the record about timing and availability of books for AO's examination. Given the contested factual matrix and the assessee's claim of production of vouchers and voluminous statements, the Tribunal emphasised that AO must give adequate opportunity for the assessee to prove bonafides and that such opportunities should be availed. The Tribunal's direction to remit implicitly addresses the hearing deficiency by instructing AO to afford opportunity during re-examination. Ratio vs. Obiter: Ratio - Where there is doubt regarding production or examination of critical documents, remand for reassessment with opportunity to the assessee is necessary to satisfy natural justice. Obiter - No specific finding on whether previous hearings formally violated natural justice; focus is on corrective process. Conclusion: The matter warranted remand to enable the AO to re-examine accounts with adequate opportunity to the assessee; this remedial direction addressed the natural justice concern. Issue 4 - Suitability of remand versus final adjudication Legal framework: Tribunal may remit matters to AO for factual verification when primary fact-finding (e.g., reconciliation of books and cash deposits) is requisite and the record does not support conclusive appellate adjudication. Precedent treatment: Lower authorities reached conflicting conclusions on rejection and additions; Tribunal assessed sufficiency of record to decide on merits. Interpretation and reasoning: Given (a) absence of cogent AO findings justifying rejection, (b) existence of voluminous supporting material produced by assessee, and (c) the need for detailed matching of cash deposits to book entries which is best undertaken at assessment stage, the Tribunal found remand appropriate. The Tribunal emphasised that AO should re-examine books, verify whether cash sales are reflected, and afford the assessee opportunities to substantiate claims. Ratio vs. Obiter: Ratio - Where factual verification essential to disposal is lacking or unclear, remand for AO's re-examination is the appropriate remedy rather than affirming additions or rejection. Obiter - Expectation that parties will cooperate and AO will give adequate opportunity. Conclusion: The Tribunal remanded the matter to the AO for re-examination of accounts and directed that adequate opportunity be provided to the assessee; the appeal was allowed for statistical purposes accordingly.