2025 (10) TMI 574 - AT - Income Tax

Addition under Section 68 for old-currency demonetization deposits deleted; authorities ignored cash book and pre-demonetization balance

Dairy India Private Limited Versus ACIT, Circle 7 (1), Delhi

ITAT DELHI - AT allowed the appeal and deleted the addition under section 68 relating to old-currency deposits during the demonetization period. The ... Addition u/s 68 - Deposits in old currency during demonetization period - assessee could not submit the relevant cash deposit made by the assessee during the impugned year as well as previous year during the assessment proceeding - HELD THAT:-We observe that before demonetization i.e. on 07.11.2016, the assessee had closing cash balance which was not considered by the lower authorities and also they themselves observed that there is a difference of Rs. 71.39 lakhs pre-demonetization period from the total cash sales and cash deposited by the assessee. They presumed that the above said difference must have been utilised by the assessee for business purpose without duly verifying the cash book maintained by the assessee. Since they proceeded to sustain the addition arbitrarily without actually verifying the cash book maintained by the assessee. When we look at the total cash sales and total cash deposit made by the assessee during the year, it clearly shows that assessee has made total cash sales of Rs. 48.03 crores and made the cash deposit of Rs. 47.45 crores. Therefore, there is absolutely not justified for making the above said addition u/s 68. We are inclined to allow the grounds raised by the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether unexplained cash deposits made during the demonetization period can be treated as undisclosed income and added to income under section 68 of the Income-tax Act when (a) contemporaneous books and cash-sales records have been filed on remand and (b) there exists a pre-demonetization closing cash balance and near reconciliation between total cash sales and total cash deposits for the year. 2. Whether the Assessing Officer and the Commissioner of Income-tax (Appeals) were justified in sustaining an addition based on the absence of 'verifiable documentary evidence' when (a) the assessee furnished bank-wise cash deposit particulars, month-wise cash sales reconciliations, VAT returns and other business records in remand proceedings and (b) the authorities did not inspect or verify the cash book. 3. Whether application of section 68 to the impugned cash deposits results in double taxation where the cash receipts represent amounts already shown as income in the books/returns (i.e., income from a source already taxed). 4. Whether any other ancillary grounds pressed (failure to provide video-conference hearing as per CBDT instructions; initiation of penalty proceedings under section 271(1)(c); jurisdictional objections to issuance of notices) affect the validity of the addition sustained by the lower authorities. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of addition under section 68 for cash deposits during demonetization when books and reconciliations are produced on remand Legal framework: Section 68 permits addition where unexplained credits (including cash deposits) are not satisfactorily explained by the assessee. The Assessing Officer must examine whether the assessee has satisfactorily explained the nature and source of the receipt; the standard of proof rests on the assessee to show genuineness. Precedent treatment: The judgment does not cite or follow any specific precedents; no precedent was relied upon or distinguished in the reasons. Interpretation and reasoning: The Tribunal examined the factual matrix: (a) remand proceedings produced detailed bank-wise cash deposits, cash-sales schedules for pre- and during-demonetization periods, VAT reconciliations and other business documents; (b) the Assessing Officer's own remand finding showed pre-demonetization cash sales of Rs. 36.54 crores and cash deposits of Rs. 35.83 crores (a shortfall of Rs. 71.4 lakhs) which the AO assumed to have been used for business expenses without verifying the cash book; (c) during demonetization the AO computed a gap of Rs. 53.51 lakhs between cash sales and deposits and treated that as unexplained; (d) overall for the year total cash sales (Rs. 48.03 crores) and total cash deposits (Rs. 47.45 crores) were substantially reconciled. The Tribunal found that lower authorities made the impugned addition principally by presumption and without verifying the cash book or other records that had been placed on record on remand; the authorities failed to consider the assessee's opening/closing cash balances and the overall year-end reconciliation which negated the inference of undisclosed income. Ratio vs. Obiter: Ratio - An addition under section 68 cannot be sustained where the assessee, on remand, produces contemporaneous bankwise deposit details, cash-sales reconciliations and other records that, when taken together with opening/closing cash balances and year-end totals, show no material unexplained credit; conclusions based on presumption without verifying the cash book or considering the overall reconciliation are not sustainable. Obiter - Observations characterizing the dairy business as cash-intensive and the practicalities of demonetization are explanatory but not dispositive beyond the facts of the case. Conclusions: The Tribunal allowed the appeal on this ground and held that the addition under section 68 was unjustified because the authorities did not properly verify the cash book and ignored the year-end reconciliation and opening cash balance; the addition was therefore arbitrary and must be deleted. Issue 2 - Sufficiency of evidence and the requirement of 'verifiable documentary evidence' when additional documents are filed in remand proceedings Legal framework: The Assessing Officer must test the credibility and veracity of documents presented; however, mere absence of some voucher details does not automatically justify treating deposits as unexplained if the assessee furnishes coherent, verifiable documentary reconciliations and bank records that explain the deposits. Precedent treatment: No precedents cited; assessment of sufficiency was fact-driven. Interpretation and reasoning: The Tribunal found that the assessee produced detailed documentation in remand proceedings including cash-sales schedules, bankwise deposit particulars, VAT reconciliations and explanations of business practice. The lower authorities' assertion of lack of 'verifiable documentary evidence' was not substantiated by an independent verification (inspection of cash book) and ignored the documentation that reconciled cash sales with deposits over the year. The authorities' selective reliance on gaps in a limited period (demonetization window) without situating them within the entire year's cash flow led to an unsustainable inference of unexplained credits. Ratio vs. Obiter: Ratio - Where an assessee furnishes detailed reconciliations and contemporaneous bank and business records on remand, the AO must verify the cash book or other primary records before treating deposits as unexplained; conclusory statements about absence of verifiable documents are insufficient. Obiter - The utility of month-wise particulars and party-wise bills as corroboration is noted but not exhaustively delineated. Conclusions: The Tribunal concluded that the assessee's documentary production on remand was sufficient to rebut the presumption of undisclosed income and that the AO/CIT(A) erred in sustaining the addition without proper verification. Issue 3 - Applicability of section 68 where receipts have been shown as income (double taxation argument) Legal framework: Section 68 targets unexplained credits; if amounts are already reflected in the books/return as income (and taxed), treating the same receipts again as unexplained credits can amount to double taxation. The AO must ensure additions under section 68 are not based on amounts already offered to tax as income from the same source. Precedent treatment: No binding precedent was applied or distinguished in the decision; the point was raised by the assessee but the Tribunal's determination rests mainly on reconciliation and verification failures rather than a full legal exposition on double taxation principle. Interpretation and reasoning: The Tribunal observed that the Assessing Officer's approach effectively re-characterized amounts already recorded as cash sales into unexplained deposits without adequate basis; where the assessee's books already reflect cash sales and corresponding reconciliations, invoking section 68 to tax the same amounts again is unjustified. The Tribunal relied on the factual finding that the year-end totals substantially matched and that the AO's limited focus on the demonetization window ignored this larger context. Ratio vs. Obiter: Ratio - Section 68 should not be invoked in a manner that results in double taxation where the receipts have been explained by books/returns and reconciliations; any addition must be founded on positive material showing explanation is unsatisfactory. Obiter - The submission that application of section 68 in such circumstances necessarily constitutes double taxation is accepted in principle but the decision is primarily fact-based. Conclusions: The Tribunal accepted the contention in substance and found that sustaining the section 68 addition in the circumstances would amount to inappropriate double treatment of amounts already reflected as cash sales; this supported deletion of the addition. Issue 4 - Ancillary grounds: procedural hearing by video conference, penalty proceedings under section 271(1)(c), and jurisdictional objections Legal framework: Procedural mandates (e.g., opportunity of hearing) and jurisdictional compliance are prerequisite to valid assessments; penalty provisions under section 271(1)(c) attach on specific findings of concealment or furnishing inaccurate particulars. Precedent treatment: No detailed adjudication or precedent analysis recorded in the order on these ancillary grounds. Interpretation and reasoning: The order records that ancillary grounds were raised (failure to provide video-conference hearing; confirmation of penalty proceedings; writ jurisdiction objections to issuance of notice). The Tribunal's reasons for allowing the appeal focus exclusively on the substantive deletion of the addition under section 68 based on documentary reconciliation and lack of verification by the authorities. The record does not contain a separate adjudication on the penalty or jurisdictional grounds; those grounds were pleaded but not expressly decided by the Tribunal in the reported reasoning. Ratio vs. Obiter: Obiter - Observations on these ancillary grounds are not treated as part of the operative ratio because the decision is founded on deletion of the addition; absence of express adjudication renders comments on these grounds non-binding in the present order. Conclusions: The Tribunal allowed the appeal by deleting the addition under section 68 for the reasons stated. Ancillary claims (procedure, penalty, jurisdiction) were raised but not expressly decided in the operative part of the order and therefore remain unadjudicated in this judgment.