Addition on demonetisation cash deposits deleted as double taxation, s.68 read with s.115BBE not attracted

ITAT Delhi-AT dismissed Revenue's appeal and upheld deletion of addition u/s 68 r.w. s.115BBE on cash deposits of specified bank notes during the demonetisation period. It held that the cash deposits were duly recorded as sales in the audited books and already credited to the Profit & Loss account, rendering any further addition a prohibited double addition. The AO had neither rejected the books of account nor pointed out discrepancies in sales, purchases or stock, and the assessee's sales were declared in VAT/Sales Tax returns. In absence of contrary evidence from the Department, the onus under s.68 was held not to be discharged, and the addition was unsustainable.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether cash deposits in specified bank notes during the demonetization period, arising from recorded cash sales, could be treated as unexplained cash credit under section 68 read with section 115BBE of the Income-tax Act in the absence of any specific defects or rejection of books of account.

1.2 Whether the Assessing Officer was justified in disbelieving the assessee's cash sales for the period 01.11.2016 to 08.11.2016, and recasting cash availability on the basis of average daily cash deposits, despite accepted purchases, stock and audited books, including post-search/survey verification.

1.3 Whether an addition under section 68 in respect of cash deposits representing recorded sales, already credited to the profit and loss account and accepted in assessment, results in impermissible double addition of the same income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of addition under section 68 read with section 115BBE on cash deposits in SBNs

Legal framework (as discussed)

2.1 The assessment involved an addition of Rs. 12,20,50,000 under section 68 read with section 115BBE in respect of cash deposited in specified bank notes during demonetization, treating it as unexplained cash credit. The Tribunal and the first appellate authority examined the applicability of section 68 when the corresponding receipts were already recorded as sales in the regular books.

Interpretation and reasoning

2.2 The Tribunal noted that the assessee had produced complete documentary evidences: tax/sale invoices, purchase invoices, quantity-wise and amount-wise details of opening stock, purchases, sales and closing stock, confirmations from purchase parties, VAT returns and stock register. No discrepancy in these documents was pointed out by the Assessing Officer.

2.3 The books of account, including cash book, bank book, purchase book, sales book, stock register, ledger and party accounts, were duly audited and not rejected. The Assessing Officer did not identify any specific manipulation in sales/purchases or any defect in stock records and did not alter figures of total sales, opening or closing stock, or cash in hand.

2.4 A survey under section 133A (described by the Assessing Officer as search under section 132) was conducted. No discrepancy was found in stock or cash in hand; no incriminating material was found to doubt sales or cash deposits. Impounded books and documents, including bills and stock records, did not yield any adverse inference.

2.5 The first appellate authority recorded that as per the assessee's books, the total sales for 01.11.2016 to 08.11.2016 were Rs. 28,11,34,999, opening cash in hand on 01.11.2016 was Rs. 5,15,15,711 and closing cash in hand on 08.11.2016 was Rs. 14,61,68,135. These figures, including cash in hand as on 31.10.2016 and 08.11.2016, were not disturbed by the Assessing Officer.

2.6 The Assessing Officer's basis for the addition was that the assessee generally deposited cash on the next day of sale, and that average cash deposits from 01.11.2016 to 08.11.2016 were Rs. 2,32,50,000 per day. He treated only one day's average amount as explained and the balance Rs. 12,20,50,000 as unexplained under section 68. The appellate authority and Tribunal found that this was based solely on presumption and average-working, without any documentary evidence showing that the assessee could not or did not effect the recorded sales.

2.7 It was emphasised that purchases had been accepted as genuine and that no discrepancy in stock was found at survey. Since every purchase increases stock and every sale reduces stock, and stock records tallied with purchases and sales, there was no basis to disbelieve the sales. If the reported sales had not actually occurred, excess stock would have been detected at survey, which was not the case.

2.8 The authorities also noted that all sales were reflected in VAT returns and that indirect tax (VAT and excise duty) on these products was high (effective indirect tax incidence exceeding 50%), with taxes duly paid. This further supported the genuineness of sales.

2.9 Monthly cash deposit patterns showed that cash deposits during November 2016 (both before and after 08.11.2016) were broadly consistent with deposits in other months of the year, and that during the demonetization window total cash deposits were Rs. 83.61 crore, of which only Rs. 14.53 crore (about 17%) were in SBNs, the balance being in non-SBN legal tender. The Tribunal considered that cash depositing was a normal feature of this business and that the SBN deposits were not abnormally high relative to the scale of operations.

2.10 A bank certificate from IDBI Bank explained that the bank could not accept the full cash tendered on account of operational constraints and public rush, causing temporary accumulation of cash with the assessee. This was accepted as explaining the timing of deposits and negativing the inference that cash on hand as on 08.11.2016 was necessarily inconsistent with the assessee's normal practice.

2.11 Relying on the principle reiterated by the jurisdictional High Court in Paradise Holidays that regularly maintained and audited books should be accepted unless shown to be incorrect or incomplete, and that the burden is on the Revenue to demonstrate unreliability of such books, the Tribunal held that the Assessing Officer had not discharged that burden.

2.12 The Tribunal further referred to coordinate bench authority (Surana Traders) that once purchases are accepted and quantitative tallies are furnished, sales cannot be arbitrarily treated as non-genuine in the absence of contrary evidence.

Conclusions

2.13 The Tribunal concluded that the books of account were accepted, no defect in sales, purchases, stock or cash was established, and the search/survey had not yielded any material to discredit the recorded transactions. Consequently, the cash deposits in SBNs were held to be explained by recorded cash sales and existing cash balances, and the conditions for invoking section 68 read with section 115BBE were not satisfied.

2.14 The addition of Rs. 12,20,50,000 under section 68 read with section 115BBE was held unsustainable and rightly deleted.

Issue 2 - Justification for disbelieving cash sales for 01.11.2016 to 08.11.2016 and recasting cash availability

Interpretation and reasoning

2.15 The Assessing Officer treated the high level of sales and cash deposits in early November 2016 and the alleged deviation from the pattern of next-day deposits as indicators of manipulated books and inflated sales. He recomputed the cash sales for 08.11.2016 using an average of earlier cash deposits and, on that basis, reduced the explained portion of SBN deposits.

2.16 The appellate authority and the Tribunal observed that the Assessing Officer did not:

(i) reject the books of account,

(ii) reduce the declared sales for 01.11.2016 to 08.11.2016,

(iii) alter opening or closing stock figures, or

(iv) point out any instance of backdated purchases, negative stock or mismatch in quantitative records.

2.17 It was specifically noted that the reasons for increased sales in November, including introduction of a new trading product ("Tansen"), were placed on record and were not controverted by the Assessing Officer. The pattern of higher sales and cash deposits continued even after 08.11.2016, corroborating that higher activity was not limited to the pre-demonetization window alone.

2.18 The Tribunal held that mere higher sales or higher cash deposits, without identification of concrete defects in books or stock, cannot justify treating recorded sales as bogus or inflated. Suspicion, however strong, cannot substitute evidence, particularly in light of the principle in Dhakeshwari Cotton Mills Ltd. that assessments cannot be based solely on conjectures and surmises.

2.19 The Tribunal also highlighted that this was a search/survey case in which the department had full access to and had impounded the assessee's books and primary records. No discrepancy in purchase, sale or stock was found or relied upon in the assessment. Against this backdrop, it was held inappropriate for the Assessing Officer to selectively doubt the cash sales for 01.11.2016 to 08.11.2016 on a purely presumptive basis.

Conclusions

2.20 The Tribunal concluded that the Assessing Officer's approach of reworking cash sales and cash availability using average cash deposits, without rejecting the books or pointing out specific defects, was arbitrary and not supported by evidence. The recorded cash sales for 01.11.2016 to 08.11.2016, and the resultant cash in hand on 08.11.2016, were to be accepted as genuine.

Issue 3 - Whether section 68 addition over amounts already credited as sales amounts to double addition

Legal framework (as discussed)

2.21 The Tribunal considered whether, on the admitted facts that the cash deposits in SBNs represented cash sales already credited to the sales account and forming part of returned income, a further addition under section 68 would lead to double taxation of the same income.

2.22 Reliance was placed on:

- Jurisdictional High Court decision in Kailash Jewellery House, wherein cash sales credited to the sales account and accepted in assessment could not again be taxed as undisclosed income.

- Gujarat High Court decision in Vishal Exports Overseas Limited, which held that when sale realisations had already been offered and accepted as income, a further addition under section 68 for the same amount would result in double taxation.

Interpretation and reasoning

2.23 In the present case, the sum of Rs. 12,20,50,000 treated by the Assessing Officer as unexplained cash credit was already included in the sales credited to the profit and loss account. The Assessing Officer accepted the overall sales, did not reduce the allegedly inflated sales from the sales figure, and did not correspondingly increase closing stock or otherwise adjust business income.

2.24 The Tribunal observed that if the deposits in SBNs were to be treated as unexplained under section 68, consistency would require reducing the corresponding sales and adjusting stock; failing to do so resulted in the same amount being taxed once as part of business income (through sales) and again as unexplained cash credit.

2.25 It was noted that the Assessing Officer had used the same profit figure, based on accepted sales and purchases, to compute total income, thereby tacitly accepting that the cash receipts were business receipts. Having done so, he could not re-characterise the same receipts as unexplained credits without adjustment in the trading account, as this would lead to double addition.

2.26 The Tribunal reiterated the principle that where cash sales have been booked, stock is found in order, books are accepted, and the cash receipts form part of disclosed turnover, the same cannot again be treated as undisclosed income merely because they were deposited in cash in a period of higher scrutiny (such as demonetization).

Conclusions

2.27 The Tribunal held that the impugned sum already stood taxed as part of disclosed sales and business profits; a further addition under section 68 would amount to taxing the same income twice. On this independent ground also, the section 68 addition of Rs. 12,20,50,000 was unsustainable.

2.28 In view of the accepted books, absence of defects, genuineness of purchases and stock, inclusion of the cash receipts in sales, and the legal bar against double taxation of the same income, the Tribunal upheld the deletion of the entire addition and dismissed the Revenue's appeal.

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