Books rejected u/s 145(3); bogus jewellery sales, cash deposits taxed u/s 68 as unexplained income

ITAT Ahmedabad (AT) upheld rejection of assessee's books u/s 145(3) due to absence of quantitative stock records, unverifiable valuation, abnormal demonetisation-period sales, and unsubstantiated cash transactions. Addition u/s 68 on cash deposits was sustained, the Tribunal holding that alleged jewellery sales were fictitious, relying inter alia on an FIR showing only a fraction of declared stock existed and no payment made to the purported supplier, indicating fabricated purchases and stock. While the addition relating to opening stock stood deleted on legal grounds by CIT(A), ITAT held this did not affect the validity of other additions. Estimation of gross profit at the prior year's rate was affirmed. All assessee's grounds were dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether rejection of books of account under section 145(3) was justified in view of defects in stock records, sales pattern, and gross profit rate.

1.2 Whether cash deposits of Rs. 59,90,000/- during the demonetisation period were rightly treated as unexplained cash credits under section 68.

1.3 Whether and to what extent the alleged opening stock, including purchases from a tainted supplier, could be treated as non-genuine and brought to tax, and the effect of the legal position that section 68 does not apply to opening stock.

1.4 Whether estimation of gross profit at 26.14% (same as preceding year) after rejection of books was legally sustainable.

1.5 Whether filing of VAT returns and acceptance of turnover in the books precluded the tax authorities from treating the cash deposits and related sales/purchases as non-genuine.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Rejection of books of account under section 145(3)

Legal framework (as discussed)

2.1 The Court noted the settled position, supported by precedents cited by the appellate authority (including Kachwala Gems v. JCIT and other High Court and Tribunal decisions), that books of account can be rejected under section 145(3) where stock registers are not maintained, quantitative records are unreliable, or accounts do not present a true and correct state of affairs.

Interpretation and reasoning

2.2 The Assessing Officer identified multiple discrepancies: absence of a quantitative stock register, unverifiable stock valuation, abnormal and sudden surge in cash sales during the demonetisation window, sales to about 60 customers in a short period with almost all invoices below Rs. 2,00,000/- and without identity details, and mismatch of gross profit rate with prior years.

2.3 These findings were affirmed by the appellate authority, which relied on judicial precedents to uphold that such defects justify rejection of books under section 145(3).

2.4 The Court observed that the assessee did not produce any fresh material to rebut the factual defects or to show that the accounts reflected a true and correct picture.

Conclusions

2.5 Rejection of the books of account under section 145(3) was held to be justified and stands confirmed.

Issue 2: Addition of Rs. 59,90,000/- as unexplained cash credits under section 68 in respect of demonetisation-period deposits

Legal framework (as discussed)

2.6 The Court proceeded on the basis that the onus under section 68 lies on the assessee to satisfactorily explain the nature and source of cash credits; failure to do so permits the addition as unexplained cash credit.

Interpretation and reasoning

2.7 The assessee claimed that cash deposits of Rs. 59,90,000/- comprised sale proceeds of gold jewellery, supported by sales bills, stock records and VAT returns, contending that invoices below Rs. 2,00,000/- did not require customer details.

2.8 The Assessing Officer had found the sale pattern inconsistent with past trading behaviour, noting a sudden spike in cash sales just prior to and during demonetisation, all to numerous small customers with no identification particulars, and linked these sales mainly to opening stock allegedly purchased from a single party without payment.

2.9 The Court considered the FIR against M/s Hari Darshan Jewellers, the main alleged supplier from whom about 70% of stock was claimed to have been purchased. The FIR recorded large-scale bank fraud, use of fabricated stock statements, diversion of funds, disappearance of stock, and absence of genuine business activity, with only about 25% of declared stock actually found.

2.10 The Court treated these FIR findings as corroborative evidence undermining the assessee's claim of genuine purchases and existent stock from this supplier, especially since no payment was made to the supplier during the year for the alleged bulk purchase.

2.11 On this material, the Court held that the assessee failed to establish that the stock actually existed, that purchases were genuine, or that the alleged jewellery sales took place as claimed; the explanation regarding the nature and source of the deposits was found unsatisfactory and implausible.

Conclusions

2.12 The cash deposits of Rs. 59,90,000/- were rightly treated as unexplained cash credits under section 68 and the addition was confirmed.

Issue 3: Treatment of opening stock and alleged non-genuine purchases, and applicability of section 68

Legal framework (as discussed)

2.13 The appellate authority had held, and the Court noted, that opening stock does not constitute a "credit" in the books so as to attract section 68, and further, that once books are rejected, additions cannot be made by relying upon figures in those very books (relying inter alia on Indwell Constructions).

Interpretation and reasoning

2.14 The Assessing Officer had treated a portion of opening stock (linked to the disputed purchases) as non-genuine and made an addition under section 68, reasoning that the opening stock was inflated to support the alleged cash sales.

2.15 The appellate authority deleted the specific addition under section 68 on the technical legal grounds that opening stock cannot be so taxed and that, post-rejection of books, such additions on book figures were impermissible.

2.16 The Court, while noting that the deletion of the specific stock addition had been granted, emphasised that the underlying factual findings remained: absence of reliable stock records, unverifiable purchases, and the tainted nature of the transactions with M/s Hari Darshan Jewellers as evidenced by the FIR.

2.17 The Court held that these defects continued to support the other additions (especially the section 68 addition for cash deposits) independently of the technical deletion of the opening stock addition.

Conclusions

2.18 The separate addition on opening stock stood deleted on legal/technical grounds by the appellate authority; the Court accepted that this deletion did not affect the sustainability of the remaining additions, since the genuineness of stock and purchases remained unproved and continued to justify the other additions.

Issue 4: Estimation of gross profit after rejection of books

Legal framework (as discussed)

2.19 The Court referred to the settled law (including CIT v. McMillan & Co. and CIT v. A. Krishnaswamy Mudaliar) that once books are rejected, the Assessing Officer is empowered to estimate profits on a reasonable basis having regard to past results and relevant material.

Interpretation and reasoning

2.20 Post-rejection of books, the Assessing Officer adopted the gross profit rate of 26.14% (as shown in the immediately preceding year) and, comparing it with the lower rate of 8.26% in the year under consideration, made an addition of Rs. 6,17,750/- on gross profit.

2.21 The appellate authority had upheld this estimation, holding that income had to be estimated on turnover, and the rate adopted was based on the assessee's own history.

2.22 The Court found that the assessee brought no cogent material to show that the GP rate of the preceding year could not reasonably be applied to this year or that the estimation was arbitrary or excessive.

Conclusions

2.23 The estimation of gross profit at 26.14% and the resultant addition of Rs. 6,17,750/- were held to be reasonable and were sustained.

Issue 5: Effect of VAT returns and acceptance of turnover on genuineness of transactions and cash deposits

Legal framework (as discussed)

2.24 The Court relied on the principle laid down in Durga Prasad More v. CIT that taxing authorities are entitled to look beyond documentary form and examine the real nature and substance of transactions, and are not bound to accept entries or returns at face value if surrounding circumstances indicate otherwise.

Interpretation and reasoning

2.25 The assessee argued that since VAT returns were filed, stock summaries were furnished, and the sales were reflected in turnover, the Department should not treat the cash deposits and related sales as non-genuine.

2.26 The Court held that mere reflection of figures in books or VAT returns does not establish genuineness where the underlying stock is unverifiable, purchases from the main supplier are themselves doubtful in light of an FIR indicating fabricated stock and absence of genuine business, and the sale pattern is abnormal and uncorroborated.

2.27 The Court viewed the cash deposits and alleged sales as part of a pattern of manipulation designed to justify large cash deposits during the demonetisation period, and thus not protected merely by their appearance in statutory returns.

Conclusions

2.28 Filing of VAT returns and recording of turnover in the books did not preclude the Department from treating the related cash deposits and transactions as non-genuine; these documents were insufficient to discharge the assessee's onus in the face of contrary evidence and circumstances.

2.29 On an overall appraisal, the Court held that the assessee failed to discharge the onus under the Act; all grounds challenging the additions and rejection of books were devoid of merit and were dismissed, and the appeal stood rejected.

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