Demonetization cash deposit not taxable: s.69A and estimated suppression addition deleted absent s.145(3) book defects

The ITAT Kolkata allowed Assessee's appeal, deleting additions made by AO on two counts. First, addition u/s 69A on cash deposited during demonetization was held unsustainable, as the cash represented recorded cash sales already offered to tax; invoking s.69A without any finding of unexplained money or rejection of books would result in impermissible double taxation. Second, the estimated addition at 3.68% for alleged suppression of sales was deleted since AO had neither invoked s.145(3) nor identified any defects in the duly audited books. Consequently, the CIT(A)'s order was set aside and both additions were directed to be deleted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether delay of 85 days in filing the appeal before the Tribunal deserved to be condoned.

1.2 Whether cash deposits made during the demonetization period, admittedly arising from recorded cash sales and forming part of the regular books of account, could be taxed as "unexplained money" under section 69A of the Act, resulting in a second (double) addition over and above business income already offered to tax.

1.3 Whether estimation of profit at 3.68% on alleged "suppressed turnover" computed on the basis of total bank deposits was permissible in law in the absence of rejection of books of account under section 145(3) of the Act or specific defects therein.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Condonation of delay in filing appeal

Interpretation and reasoning

2.1 The Tribunal noted that the appeal was filed with a delay of 85 days. The assessee explained the reasons for delay, which were examined along with the material on record.

2.2 The Tribunal found the reasons for delay to be bona fide and genuine. The representative for the Revenue did not object to condonation.

Conclusions

2.3 The delay of 85 days in filing the appeal was condoned and the appeal was admitted for adjudication.

Issue 2 - Taxability of cash deposits during demonetization under section 69A

Legal framework (as discussed)

2.4 The Tribunal referred to section 69A of the Act, which applies where an assessee is found to be the owner of money, bullion, jewellery or other valuable article which is not recorded in the books of account maintained for any source of income and for which satisfactory explanation regarding nature and source is not offered. Such money or value may then be deemed to be the income of the assessee.

Interpretation and reasoning

2.5 It was undisputed that the assessee deposited cash of Rs. 22,00,350/- during the demonetization period in bank accounts.

2.6 The Tribunal found, on the basis of the record, that:

(a) The cash deposits were duly accounted for in the books of account.

(b) The cash was sourced from cash sales made in the normal course of business and such sales were reflected in the profit and loss account.

(c) The Assessing Officer had not rejected the books of account, nor doubted the disclosed sales.

2.7 The Tribunal held that section 69A is inapplicable to transactions which are already recorded in the regularly maintained books of account. Where the source of cash is the recorded business sales and the same has been considered in computation of business income, such cash cannot be treated as "unexplained money" under section 69A.

2.8 The Tribunal reasoned that treating the same cash sales first as turnover (for which profit is admitted and taxed) and again as unexplained money under section 69A would amount to taxing the same income twice, which is impermissible under the Act.

2.9 The Tribunal placed reliance on coordinate bench decisions holding that: (i) section 69A does not apply where the money is recorded in the books of account; and (ii) adding recorded cash sales again as unexplained cash under section 69A leads to double taxation, which violates taxation principles.

Conclusions

2.10 The invocation of section 69A in respect of cash deposits representing recorded cash sales was held to be legally untenable for two reasons:

(i) Section 69A is wrongly applied where the money is duly recorded in the books of account; and

(ii) The addition results in double taxation of the same sales income.

2.11 The addition of Rs. 20,63,763/- made under section 69A, and sustained by the first appellate authority, was set aside and the Assessing Officer was directed to delete the addition.

Issue 3 - Estimation of income on alleged suppressed turnover without rejecting books under section 145(3)

Interpretation and reasoning

2.12 The Assessing Officer compared total bank deposits of Rs. 2,87,71,678/- with disclosed sales of Rs. 2,05,27,375/-, and after excluding cash deposited during demonetization, worked out alleged "suppressed turnover" of Rs. 60,43,953/-. On this, profit was estimated at 3.68%, resulting in an addition of Rs. 2,22,417/-.

2.13 The Tribunal noted that:

(a) The assessee's books were duly audited by a chartered accountant.

(b) The Assessing Officer did not point out any specific defect, discrepancy or deficiency in the books of account.

(c) The Assessing Officer did not invoke section 145(3) to reject the books of account.

2.14 The Tribunal held that, in the absence of rejection of books under section 145(3) and in the absence of pointed defects in the regularly maintained and audited books, estimation of profits on an alleged suppressed turnover computed merely on the basis of bank deposits is not sustainable in law.

Conclusions

2.15 As the books of account were neither rejected under section 145(3) nor found defective, the estimation of income at 3.68% on the alleged suppressed sales of Rs. 60,43,953/- was held to be unsustainable.

2.16 The addition of Rs. 2,22,417/- on account of estimated profit on alleged suppressed turnover was directed to be deleted.

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