Cash deposits during demonetisation and gross profit margin comparisons - tribunal deletes additions and upholds books

Lower authorities treated cash balances shown at the demonetisation cut off as fictitious and sought to add subsequent bank deposits as unexplained income; the tribunal found the assessee had recorded those deposits as sales in the profit and loss account and, absent contrary proof or any suggestion that recorded expenditures were bogus, directed deletion of the addition. On the claimed shortfall in gross profit measured against an external margin benchmark, the tribunal held that books of account cannot be rejected without a latent, patent or glaring defect and that mere margin comparison does not justify an addition; the addition was overturned.

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Issues: (i) Whether the addition of cash deposits of Rs. 33,20,000 treated as unexplained and taxed under Section 68 read with Section 115BBE of the Income-tax Act, 1961 is sustainable; (ii) Whether the addition of Rs. 94,903 by computing a higher gross profit on the basis of an alleged standard margin is sustainable.

Issue (i): Whether the cash deposit of Rs. 33,20,000 in Specified Bank Notes during demonetisation can be treated as unexplained and brought to tax under Section 68 and taxed under Section 115BBE.

Analysis: The facts establish pre-demonetisation cash balances in the business books sufficient to account for the deposited Specified Bank Notes. The books of account recording cash on hand prior to demonetisation are undisputed by the lower authorities. The deposits were also offered as sales in the profit and loss account and there is no finding that expenditure entries in the books are bogus or that the books suffer from any patent or latent defect. In absence of proof that the pre-existing cash balances shown in the books were fictitious, the subsequent deposits in bank of Specified Bank Notes cannot be characterized as unexplained receipts for the purposes of Section 68.

Conclusion: Issue (i) answered in favour of the assessee; the addition of Rs. 33,20,000 is deleted.

Issue (ii): Whether the addition of Rs. 94,903 by applying a presumed 10% margin is sustainable when the assessee's audited books show a gross profit rate of 9.48% and no defect in books is demonstrated.

Analysis: The assessee's books are audited and subject to stock control; no evidence was produced to show that the books suffer from any defect or that the comparator margin and its components (such as storage or handling charges) are applicable as a basis to reject the books. Rejection of book results requires a finding of a glaring or demonstrable defect. Absent such a finding, a mere comparison with an alleged standard margin is insufficient to make an addition.

Conclusion: Issue (ii) answered in favour of the assessee; the addition of Rs. 94,903 is deleted.

Final Conclusion: The appeal is partly allowed by deleting the additions of Rs. 33,20,000 (treated under Section 68 and taxed under Section 115BBE) and Rs. 94,903 (gross profit adjustment), while other general grounds are dismissed.

Ratio Decidendi: Where undisputed, audited books of account show pre-existing cash balances sufficient to account for deposits of Specified Bank Notes and there is no proof that such books are fictitious or suffer from patent or latent defects, cash deposited during demonetisation cannot be treated as unexplained under Section 68; similarly, books of account cannot be rejected and additions made solely by comparing with an alleged standard margin without evidence of defect or inappropriate accounting.

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