Demonetisation Cash Sales Supported by Books and VAT Returns Cannot Be Treated as Unexplained Income: ITAT Delhi

The New Delhi Income Tax Appellate Tribunal (ITAT) has held that cash sales recorded during the demonetisation period cannot be treated as unexplained income merely on the basis of suspicion or human probabilities, when such sales are duly reflected in audited books of account and supported by stock records, invoices, and VAT returns.

The bench consisting of Judicial Member Anubhav Sharma and Accountant Member Manish Agarwal, was dealing with an appeal filed by M/s KP Diamonds (P) Ltd., a trader in diamonds and gold jewellery, for the assessment year 2017–18.

The case was selected for scrutiny after the assessee deposited Rs. 3,58,29,000 in old currency notes during the demonetisation period in November–December 2016.

The assessing officer alleged that the assessee had introduced unaccounted money in the garb of cash sales, noting that a large number of cash sales were recorded between 1 November and 8 November 2016, while there were negligible cash sales before and after this period.

On this basis, the cash deposits were treated as unexplained credit under Section 68 of the Income Tax Act, an approach later sustained by the first appellate authority, which held that the corresponding cash credits in the books were liable to be assessed under Section 68.

Before the Tribunal, the assessee pointed out that all cash sales were duly entered in the regular books of account, supported by sales invoices, stock registers, VAT returns, and audited financial statements.

The Tribunal noted that the assessee had produced extensive documentary evidence to substantiate the cash sales and that these sales were reflected consistently in the books, stock records, and VAT returns.

The bench stated that,

"It is undisputed that sales as made by the appellant are duly reflected in the sale register and stock register maintained by the appellant. It is also undisputed that aforesaid cash sales are supported by sale bills issued by the appellant."

It observed that once sales are supported by stock registers, sale bills, and statutory returns accepted by the VAT authorities, the cash generated from such sales cannot be treated as unexplained.

The bench opined that,

"It is further not denied that appellant has maintained all records as an appellant is obliged to maintain in accordance with law. It is also matter of record and not disputed that books of accounts as maintained are duly audited under section 44AB of the Act. In such circumstances, it is not just to hold that cash generated out of cash sales as reflected in the books of accounts and audited financial results are unaccounted cash."

The Tribunal opined that once the sales made by the appellant are supported by stock registers, sale bills and sales duly disclosed in VAT returns verified and accepted by the VAT department, no addition can be made.

"In the absence of any defect in the books of accounts maintained in accordance with law which are duly auditedunder section 44AB of the Act, it would be highly unjustified to allege that cash generated by the appellant out of cash sales in the ordinary course of business is unaccounted cash and therefore, taxable under section 68 of the Act", added the bench.

Holding that documentary evidence cannot be brushed aside solely on the basis of human probabilities, especially when the books are audited and regularly maintained, the Tribunal set aside the addition and allowed the appeal.

For Appellant: CA, Lalit Mohan and Advocate, Ankit Kumar

For Respondent: Sr. DR, Ajay Kumar Arora