Rejection of books and partial relief on unexplained cash deposits upheld, with section 115BBE applying to the sustained addition.

ITAT Ahmedabad upheld rejection of books under section 145(3) where cash sales, cash on hand and cash deposits rose abnormally during demonetisation and the supporting invoices and records did not establish a reliable business pattern. On section 68, the tribunal accepted that opening cash balance and bank cash withdrawals provided available s for part of the deposits, so only the unexplained balance remained taxable and the addition was reduced pro tanto. It also upheld application of the special tax rate under section 115BBE to the addition sustained. The appeal therefore succeeded only in part, with partial relief confined to the quantum of unexplained deposits.

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Issues: (i) Whether the rejection of books of account under section 145(3) was justified on account of abnormal cash sales, cash in hand, and cash deposits during the demonetization period; (ii) Whether the addition under section 68 for unexplained cash deposits was sustainable in full; (iii) Whether the addition confirmed was chargeable to tax at the rate prescribed under section 115BBE.

Issue (i): Whether the rejection of books of account under section 145(3) was justified on account of abnormal cash sales, cash in hand, and cash deposits during the demonetization period.

Analysis: The cash sales, cash in hand, and cash deposits showed a steep and abnormal increase during the relevant period as compared with the preceding year. The explanation that the cash deposits represented genuine sales receipts was found unsubstantiated because the invoices and supporting records lacked proper particulars and did not establish a reliable business pattern. The surrounding circumstances supported the view that the books did not reflect a true and correct picture of the business.

Conclusion: The rejection of the books of account was upheld and the issue was decided against the assessee.

Issue (ii): Whether the addition under section 68 for unexplained cash deposits was sustainable in full.

Analysis: The explanation relating to cash sales was rejected, but the record showed opening cash balance and cash withdrawals from bank during the relevant period which were not found to be tainted by any specific anomaly. Those amounts were treated as available sources for part of the deposits. Only the balance amount, after giving credit for the opening cash and withdrawals, remained unexplained.

Conclusion: The addition was sustained only to the extent of the unexplained balance and was deleted pro tanto; the issue was partly in favour of the assessee.

Issue (iii): Whether the addition confirmed was chargeable to tax at the rate prescribed under section 115BBE.

Analysis: The enhanced rate under section 115BBE applied to the assessment year in question, and the addition sustained under section 68 attracted that special rate.

Conclusion: The applicability of section 115BBE was upheld against the assessee.

Final Conclusion: The appeal succeeded only in part, with partial relief granted on the quantum of addition while the rejection of books and the special rate of tax were sustained.

Ratio Decidendi: Abnormal and unsupported cash sales, coupled with unexplained spikes in cash holding and deposits, justify rejection of books of account; however, where part of the deposited cash is traceable to opening balance or proved withdrawals, only the unexplained balance can be brought to tax, and the sustained addition attracts the applicable special rate of tax.

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