Cash Sales During Demonetisation Can't Alone Justify Addition At Higher Tax Rate: Gujarat High Court

The Gujarat High Court has held that cash sales recorded during demonetisation cannot, by themselves, justify an addition under Section 68 of the Income-tax Act, 1961, by shifting the burden of proof onto a taxpayer when the sales have already been offered to tax as business income.

A Bench comprising Justices Bhargav D. Karia and Nirzar S. Desai dismissed the Revenue's appeal against the deletion of a Rs. 7.88 crore addition made against Zinzuwadia and Sons, a jewellery firm, for alleged bogus sales during demonetisation. The judges held:

“Only on the ground that the assessee has shown the cash sales due to demonetization, cannot be considered as a factor to shift the onus on the assessee for making addition under Section 68 of the Act so as to tax the assessee at a higher rate of tax under Section 115BBE of the Act, inasmuch as the assessee has already offered the entire sales for tax by including the same under the sales income.”

The case arose from a search at the residence of a partner of Zinzuwadia and Sons and a simultaneous survey at the firm's business premises on 24 January 2017. During the survey, the Department impounded a digital device and conducted a forensic analysis of its data. The Assessing Officer alleged that sales entries aggregating Rs. 7,88,85,082 had been backdated to account for cash deposits during demonetisation.

The Assessing Officer treated the sales as bogus and made an addition of Rs. 7.88 crore under Section 68. The officer relied on the forensic report, the sharp increase in cash sales during October and November 2016, and the allegation that the firm could not have served 223 customers between 8 pm and midnight on 8 November 2016. The officer also made additions under Section 69B towards unexplained stock and cash.

The Commissioner of Income Tax (Appeals) deleted the addition of Rs. 7.88 crore towards alleged bogus sales but retained an addition of Rs. 96 lakh towards gross profit after rejecting the books of accounts.

The CIT(A) also restricted the addition towards unexplained stock to Rs. 95,41,057 and deleted the addition of Rs. 13,33,961 towards excess cash. The Income Tax Appellate Tribunal upheld these findings and dismissed the cross-appeals filed by the firm and the Revenue.

The High Court noted that the allegation of bogus sales rested substantially on circumstantial evidence, including the unusual volume of cash sales and the forensic report indicating non-sequential entries in the accounting software. However, the authorities had not found corresponding bogus purchases, negative stock or excess physical stock commensurate with the alleged bogus sales.

It also noted that the firm maintained books of accounts, stock registers, purchase and sales registers, and other records. The Assessing Officer had accepted the purchases recorded in the books and had not identified any corresponding stock discrepancy to establish that the sales were fictitious.

On the allegation that 223 customers could not have been served within four hours, the Bench considered the firm's explanation that it had anticipated an unprecedented rush following the demonetisation announcement, kept its showroom open until midnight and streamlined sales through pre-prepared jewellery packets and barcode-based billing. The CIT(A) had found this explanation plausible, and the Tribunal had concurred with that finding.

Further, it noted that the firm's retail business had commenced only in July 2016, making a direct comparison with the corresponding sales figures of the previous year inappropriate. It also considered the reported public rush to purchase gold and jewellery following the demonetisation announcement. It observed:

“It is not in dispute that there was a sufficient stock available in the physical form as well as on record of the assessee to justify the sales made during the 240 minutes available on 08.11.2016. Therefore, the theory of backdated entries based upon the forensic report referred to and relied upon by the Assessing Officer is rightly not accepted by the CIT(Appeals) and the Tribunal.”

The judges rejected the Revenue's attempt to correlate the alleged bogus sales with the excess stock found during the survey, holding that the appellate authorities had rightly examined the two issues separately. They noted that the Rs. 96 lakh gross-profit addition had been retained following the rejection of the books of accounts and that the firm had not challenged this finding further.

They also held that rejection of the books of accounts did not, by itself, render the stock register irrelevant, particularly when the appellate authorities had relied on the stock reconciliation furnished by the firm. It found no material demonstrating perversity in the concurrent findings on the unexplained stock addition and the deletion of the excess cash addition.

Accordingly, the High Court found no legal infirmity in the Tribunal's order and dismissed the Revenue's appeal, holding that no question of law arose.

Counsel for Appellant: Varun K. Patel, Senior Standing Counsel

Counsel for Respondent: B.S. Soparkar, Advocate