Unexplained cash deposits and book rejection leading to income additions and 40A(2) disallowance sustained.

When books of account are rejected and purchases, sales and stock are not proved, unexplained cash deposits may be treated as business income; the tribunal applied the doctrine of human probability to reject the assessee's claim that such deposits represented genuine cash sales and sustained the addition as unexplained income. Separately, payments to relatives were examined against fair market value and legitimate business needs; the tribunal found a portion excessive and confirmed a partial disallowance of Rs. 23,06,000 under related-party payment rules.

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Issues: (i) Whether the addition of Rs. 1,93,48,000/- made by the Assessing Officer under sections 68/69A/115BBE, by treating cash deposits during the demonetisation period as unexplained income after rejection of books under section 145(3), is sustainable; (ii) Whether the partial disallowance of Rs. 23,06,000/- made under section 40A(2)(b) in respect of salaries paid to specified relatives is sustainable.

Issue (i): Whether the cash deposits of Rs. 1,93,48,000/- represent unexplained income and the addition is warranted where books were rejected u/s 145(3) and assessee failed to prove genuineness of purchases, sales and stock.

Analysis: The Tribunal examined the assessment and appellate records including absence of cash books, lack of bills/vouchers, inconsistencies in bank deposits and claimed transactions during the demonetisation period, and the finding that claimed sales/purchases were not credibly supported. The AO's reliance on patterns of transactions, failure to explain opening balances and deposits, and rejection of books u/s 145(3) were considered. The Tribunal noted that whether claimed transactions are genuine is a question of fact and that precedents relied upon by the assessee had distinguishable factual matrices. The Tribunal applied principles concerning human probability and the consequences of rejected books in assessing the credibility of claimed sales and purchases.

Conclusion: Addition of Rs. 1,93,48,000/- is sustained and treated as unexplained income; issue decided against the assessee.

Issue (ii): Whether the Assessing Officer rightly disallowed Rs. 23,06,000/- under section 40A(2)(b) as excessive/unreasonable remuneration to specified relatives.

Analysis: The Tribunal considered that genuineness of payment was not in dispute but the quantum was. The AO made a factual determination that part of the salary payments to relatives was excessive having regard to fair market value and legitimate needs; the AO allowed a portion of the claim and disallowed the remainder. No material was produced to persuade the Tribunal that the amount allowed was inadequate. The Tribunal applied the statutory reasonableness test under section 40A(2).

Conclusion: Disallowance of Rs. 23,06,000/- under section 40A(2)(b) is confirmed; issue decided against the assessee.

Final Conclusion: The Tribunal found the revenue's case sustainable on facts for both the addition under sections 68/69A/115BBE after rejection of books and the partial disallowance under section 40A(2)(b), and dismissed the assessee's appeal.

Ratio Decidendi: Where books are rejected under section 145(3) and claimed sales/purchases, stock and supporting evidence are not credibly established, cash deposits during the demonetisation period can be treated as unexplained income under sections 68/69A/115BBE; separately, under section 40A(2) the quantum of payments to specified relatives may be partly disallowed if found excessive or unreasonable in view of fair market value and legitimate needs.

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