Cash deposits from recorded jewellery sales not taxable as unexplained income u/ss 68 and 115BBE during demonetisation

ITAT held that addition u/s 68 on cash deposited during demonetization was unjustified where the assessee was engaged in regular business and the cash deposits emanated from recorded business activities. It was observed that cash sales, including making charges embedded in the jewellery rate, were duly reflected in the books and subjected to tax. The mere inability to furnish buyers' addresses does not attract s.68, nor justify invoking s.115BBE, when sales are otherwise recorded and plausible. As the AO had rejected the books yet accepted ongoing business, the natural inference favored business receipts. ITAT directed deletion of the addition and allowed the assessee's appeal.

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Issues: (i) Whether the addition of Rs. 3,49,00,000 made under section 68 by treating cash deposits during the demonetisation period as unexplained income is sustainable where the assessee has recorded the amounts as cash sales in books, produced sales/purchase registers, stock records and paid tax on such sales.

Analysis: The Tribunal examined whether section 68 can be invoked to treat bank cash deposits as unexplained cash credits when the assessee had recorded the amounts as sales in its books of account, filed returns including those sales, furnished cash book, sales invoices, stock statements and audited accounts, and shown corresponding purchases. The Tribunal applied the legal principle that where books of account are relied upon and sales are reflected and taxed, the initial onus on the assessee to explain the nature and source of deposits stands discharged and the burden shifts to the revenue to prove that the deposits represent undisclosed income. The Tribunal also considered the effect of rejecting books under section 145(3) and the settled position that additions cannot be made by selectively relying on entries in books after rejecting them; similarly, where the evidence shows sufficient stock and corroborative documentation, deposits during demonetisation need not be treated as unexplained. Relevant precedents on demonetisation-period deposits, rejection of books, requirement to identify cash customers (PAN) and principles against double taxation were applied to the facts, including authorities holding that trade advances or cash sales subsequently recorded as sales are not amenable to section 68 treatment and that cash sales below statutory limits do not mandate PAN collection.

Conclusion: The Tribunal concluded that the assessee discharged the onus of proving that the cash deposits represented bona fide sales already recorded and taxed; the addition under section 68 (and consequential invocation of section 115BBE) is not sustainable. The appeal is allowed in favour of the assessee and the AO is directed to delete the addition.

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