Recorded sales and proven loan transactions cannot be taxed as unexplained cash credits when books and banking evidence support them.
Recorded cash sales deposited during the demonetisation period were not liable to separate addition as unexplained cash credit where they formed part of disclosed turnover, were reflected in the audited accounts and return, and were supported by stock records and cashbook entries; treating the same receipt again under section 68 would amount to double addition. Unsecured loan additions likewise failed where identity, creditworthiness and genuineness were shown through banking-channel transactions and the lender's records, or where no fresh loan receipt arose during the year. On the same footing, related interest disallowance was not justified absent proof that borrowed funds were used for non-business purposes.
Issues: (i) whether cash sales deposited during the demonetisation period could be treated as unexplained cash credit and taxed under section 68 of the Income-tax Act, 1961 for assessment year 2017-18; (ii) whether the addition of unsecured loans and the related disallowance of interest were sustainable under section 68 and section 36(1)(iii) of the Income-tax Act, 1961 for assessment year 2018-19.
Issue (i): Whether cash sales deposited during the demonetisation period could be treated as unexplained cash credit and taxed under section 68 of the Income-tax Act, 1961 for assessment year 2017-18.
Analysis: The cash sales formed part of the disclosed turnover and were reflected in the audited profit and loss account and return of income. The purchases and total sales were not doubted, stock was sufficient to support the sales, corresponding stock reduction was made, and the cashbook and month-wise details were produced. The deposit of cash was traced to recorded sales and books of account, and the same sum had already been included in income. Separate addition on the deposit would therefore amount to double addition.
Conclusion: The addition on account of cash deposits was not sustainable and was deleted in favour of the assessee.
Issue (ii): Whether the addition of unsecured loans and the related disallowance of interest were sustainable under section 68 and section 36(1)(iii) of the Income-tax Act, 1961 for assessment year 2018-19.
Analysis: For the principal lender, the record showed running account transactions, banking-channel movement, disclosure in the lender's books, sufficient shareholder funds, and proof of identity, creditworthiness and genuineness. A large sum received back during the year represented return of a short-term deposit and not an unexplained loan receipt. For the remaining lenders, the record showed no fresh loan receipts during the year and only interest entries on existing balances, so section 68 was inapplicable. Since the borrowings were through regular banking channels and the revenue did not establish diversion for non-business purposes, the interest expenditure was also allowable.
Conclusion: The additions under section 68 and the disallowance of interest were not sustainable and were deleted in favour of the assessee.
Final Conclusion: The assessee succeeded on both assessment years, and the challenged additions and disallowances were set aside.
Ratio Decidendi: Where recorded sales, supported by books and stock records, explain cash deposits, section 68 cannot be invoked to make a separate addition that results in double taxation; similarly, unsecured loan additions fail when identity, creditworthiness and genuineness are established or when no fresh credit arises during the year, and related interest is allowable absent proof of non-business use.