Unexplained Cash Credits cannot be invoked where books and corroborative records sustain genuine cash sales; addition set aside.

The note addresses whether cash deposits recorded as sales during demonetization can be treated as unexplained cash credits and taxed at a special rate. It applies the principle that business receipts recorded in books, supported by purchases, quantitative stock records and sales registers, are not to be treated as unexplained credits unless transactions are shown to be sham; rejection of books is required to disregard accounts. Applying these standards, the impugned addition treating the deposits as unexplained credits and taxing them at a special rate was unsustainable and was set aside in favour of the taxpayer.

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Issues: (i) Whether cash deposits of Rs. 35,25,000/- recorded as sales in regular books of account can be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961 and subjected to tax u/s 115BBE for AY 2017-18.

Analysis: The assessee is an established diamond trading business with cash deposits during the demonetization period corresponding to recorded sales in audited books. Purchases, quantitative stock records and sales registers were produced and accepted by the Assessing Officer; there was no rejection of books of account under Section 145 of the Income-tax Act, 1961 and no material was brought on record to show that the sales were bogus or that the cash represented income from undisclosed sources. Established authorities hold that business receipts credited in books cannot be treated as unexplained cash credits under Section 68 merely because received in cash unless the transactions are shown to be sham. The Assessing Officer's action of treating the deposits as unexplained credits and taxing them under Section 115BBE is not supported where the books and corroborative records sustain the genuineness of sales and stock reconciliation.

Conclusion: The addition of Rs. 35,25,000/- under Section 68 of the Income-tax Act, 1961 is unsustainable and the appeal is allowed in favour of the assessee.

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