2025 (11) TMI 794 - AT - Income Tax

Assessing Officer Unjustifiedly Rejected Books Under s.145(3); Additions Under s.68 Read With s.115BBE Deleted for Assessee

ITAT held that the assessing officer wrongly rejected the assessee's books under s.145(3), finding no recorded defects and noting the assessee had ... Rejection of books of accounts u/s 145(3) - assessee is engaged in the business of manufacturing of poultry feed and running of poultry farming - AO noted that during the demonetization period assessee has deposited cash treated as unexplained cash credits u/s 68 HELD THAT:- We find that the ld. AO has not recorded any single defect in the books of accounts. The only defect pointed out by the ld. AO was that the books of accounts were manipulated to accumulate the cash as on 08.11.2016. We also note that the ld. AO has analyzed the cash sales/ receipts during the F.Y. 2015-2016 and 2016-2017 and rather found that the cash sales during the year under consideration has decreased by 43.41%. We also note that the AO has recorded a clear-cut finding that during the month of October 2015, the sales were ₹8,012,35,328 which fell to ₹6,07,29,850/-, which was again not in consonance with the market trend. Thereafter, the Learned AO has not assigned a single reason as to what defects were found in the books warranting the rejection u/s145(3) of the Act. We also note that even the assessee suomoto reported in the Tax Audit Report the details of specified bank accounts and transactions during 9-11-2016 to 30-12-2016 with dates which showed the details of cash deposited into various bank accounts by the assessee. Rejection of books by the assessee is not in accordance with the provisions of Section 145(3) of the Act as the necessary underlying conditions were not satisfied. Accordingly, we hold that the books were wrongly rejected by the Learned AO. Ground No. 2 is allowed. Unexplained cash credit by invoking provisions of Section 68 read with Section 115BBE - We note that even the books of accounts of the assessee were audited by the Chartered Accountant and no adverse inference was drawn. We note that the SBN were duly recorded by the auditor in Note 25 appended to final accounts titled as Details of Specified Bank Notes held and transaction during 9-11-2016 to 30-12-2016. Therefore, the addition made by the AO has resulted in double addition and also double taxation as the same income was taxed twice. Once the assessee has shown as sales from the business and secondly, the addition under Section 68 which is wrong and against the provisions of the Act. The case of the assessee finds support from the decision of ITO vs. Joydeb Kundu [2023 (5) TMI 738 - ITAT KOLKATA] as held that guess work adopted by the ld. AO in arriving at probable sales value and the judicial precedents relied upon, we find no reason to interfere with the factual findings given by the Ld. CIT(A) in deleting the addition. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer validly rejected the assessee's books of account under section 145(3) of the Act when no specific defect in the books was recorded and the only basis alleged was manipulation to accumulate cash during demonetization. 2. Whether cash deposits made during the demonetization period, shown as business sales in audited books and disclosed in tax audit note regarding specified bank notes, can be treated as unexplained cash credits under section 68 read with section 115BBE, resulting in addition to income. 3. Whether the addition made on account of EPF and ESI stands when the ground is not pressed before the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of rejection of books of account under section 145(3) Legal framework: Section 145(3) permits rejection of books of account maintained by an assessee if the Assessing Officer is not satisfied with the correctness of such accounts, but the provision requires that the AO record specific reasons/defects in the books to justify rejection and that such action be in accordance with the statutory conditions. Precedent treatment: The authorities below were assessed against prior principles that rejection of books cannot be grounded on conjecture and must be supported by identified defects; the Tribunal noted and applied these established requirements. Interpretation and reasoning: The Tribunal examined the AO's reasoning and found no recorded defect in the books - the AO relied on an inference that books were manipulated to generate a fabricated cash-in-hand balance on a particular date. The AO's own comparison showed a decrease in cash sales in the relevant period and no specific discrepancy in purchases or other ledger entries. The assessee had contemporaneously reported specified bank note transactions in the tax audit report. On these facts, the AO failed to demonstrate the statutory prerequisites for rejection under section 145(3); the finding was based on mere suspicion and hypothesis rather than identification of tangible defects in books or transactions. Ratio vs. Obiter: Ratio - rejection under section 145(3) requires recorded, articulable defects in books and cannot rest on conjecture; the AO's failure to specify such defects rendered the rejection unsustainable. Obiter - observations on comparative turnover and month-wise sales trends are noted but were insufficient to support rejection. Conclusions: Books of account were wrongly rejected under section 145(3); ground allowing reversal of the rejection was allowed by the Tribunal. Issue 2 - Treatment of demonetization-period cash deposits as unexplained cash credits under section 68 read with section 115BBE Legal framework: Section 68 deals with unexplained cash credits - where the assessee fails to satisfactorily explain the nature and source of money credited - and section 115BBE prescribes tax treatment for certain unexplained income. Additions under these provisions presuppose that cash receipts credited in the books do not have a satisfactory, credible explanation supported by evidence. Precedent treatment: The Tribunal relied on earlier decisions of similarly constituted benches which scrutinized AO's methodology when treating demonetization-period cash receipts as unexplained. Those decisions criticized AO estimations based on assumptions about probable sales during a narrow time window and emphasized that where audited books, stock registers, VAT returns and contemporaneous records support that cash receipts were sales proceeds, AO's conjectural computation cannot sustain addition. Interpretation and reasoning: The AO treated specified cash deposits as unexplained and added them to income, invoking section 68/115BBE. The assessee's position - supported by audited accounts, tax audit note explicitly recording specified bank note transactions, stock records, sales invoices (cash sales), and unaltered VAT returns - established that the deposits represented sale proceeds accounted for in the books. The AO's approach rested on hypothetical estimation of probable sales on the demonetization announcement date, relying on assumptions about logistics and customer flow without scientific basis or third-party comparables. The Tribunal found the AO's method to be speculation, lacking evidential foundation, and amounting to double taxation where the same receipts were already included in profit computation. The Tribunal also noted that in cash sales contexts it may be impractical to record purchaser details on every invoice, and absence of complete customer particulars does not ipso facto render sales unexplained. Ratio vs. Obiter: Ratio - where audited books and contemporaneous documentary evidence credibly account for demonetization-period cash receipts as business sales, mere conjectural estimation by the AO cannot convert such receipts into unexplained cash credits under section 68; addition in such circumstances is unsustainable and results in double taxation. Obiter - comparative references to festival-day sales or operational capacity are illustrative of feasible business capability to effect high-volume sales in short windows but are not essential to the legal holding. Conclusions: The addition of the demonetization-period cash deposits as unexplained cash credits under section 68/115BBE was deleted; ground allowing relief to the assessee was allowed. Issue 3 - Addition on account of EPF and ESI when not pressed Legal framework: Additions must be contested to be adjudicated on appeal; appellate relief on unpressed grounds is generally not granted. Precedent treatment: Not applicable beyond the principle that unpressed grounds are deemed abandoned. Interpretation and reasoning: The assessee did not press the ground challenging the addition of Rs.98,504 relating to EPF and ESI at hearing; the Tribunal dismissed the ground as not pressed. Ratio vs. Obiter: Ratio - unpressed grounds are dismissed; no adjudication on merits was undertaken. Obiter - none. Conclusions: Ground against EPF/ESI addition dismissed as not pressed. Overall disposition The Tribunal allowed the appeal in part by (a) holding that rejection of books under section 145(3) was not in accordance with statutory requirements and (b) deleting the addition treating demonetization-period cash deposits as unexplained cash credits under section 68 read with section 115BBE; the ground on EPF/ESI stood dismissed as not pressed.