Rejection of books and unexplained demonetisation cash deposits sustained where purchases and source of funds were not proved.

Where an assessee fails to support purchases, stock records, and quantitative details with reliable evidence, the books of account may be rejected and profit estimated on the basis adopted by the tax authority. In this matter, the absence of bills, vouchers, purchase confirmations, stock register entries, and consistent balance-sheet support, together with unresponded supplier notices and unexplained cash withdrawals, rendered the books unreliable. Separately, cash deposits made during the demonetisation period were treated as unexplained income because the assessee did not establish a satisfactory source despite bank inquiry and notices. The additions based on estimated gross profit and unexplained cash deposits were therefore sustained.

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Issues: (i) Whether the rejection of books of account and estimation of gross profit at 9.96% on alleged bogus purchases was justified. (ii) Whether the addition of cash deposit as unexplained income during the demonetization period was sustainable.

Issue (i): Whether the rejection of books of account and estimation of gross profit at 9.96% on alleged bogus purchases was justified.

Analysis: The assessee did not produce supporting bills, vouchers, purchase confirmations, stock register, or reliable quantitative details. Notices issued to suppliers under section 133(6) did not receive compliance, and the record also disclosed discrepancies in the balance sheet, unsupported closing stock valuation, and substantial cash withdrawals without explanation. In these circumstances, the books were found unreliable and incomplete, justifying rejection and estimation of profit on the basis adopted by the assessing authority.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the addition of cash deposit as unexplained income during the demonetization period was sustainable.

Analysis: The assessee failed to respond to notices and did not furnish material to explain the source of cash deposited in the bank account during the demonetization period. The bank inquiry and surrounding record supported the deposit, but the source remained unsubstantiated. In the absence of proof of a satisfactory source, the addition as unexplained income was upheld.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The additions made on account of estimated gross profit and unexplained cash deposit were sustained, and both appeals failed.

Ratio Decidendi: Where the assessee fails to substantiate purchases, stock, and the source of cash with reliable evidence, the tax authority may reject the books of account, estimate income, and treat unexplained deposits as taxable income.

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