ITAT Ahmedabad Deletes ₹9.65 Crore Addition On Demonetisation Cash Deposits Backed by Recorded Sales

The Ahmedabad Bench of the Income Tax Appellate Tribunal recently held that once purchases are accepted and stock is not disputed, sales cannot be treated as unexplained cash credits merely because the cash was deposited during the demonetisation period.

A bench of Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta deleted an addition of Rs.9,65,97,834 made under Section 68 of the Income Tax Act, holding, “Once the purchases are accepted and the stock is not disputed, the sales flowing out of such stock cannot be treated as non-genuine.”

The tribunal noted that the Revenue's case was built largely on suspicion arising from a spike in cash advances on three dates immediately preceding demonetisation.

It found that comparative data placed on record showed that cash sales during the relevant financial year were significantly lower than in the preceding year, including during the corresponding period.

The allegation of abnormal sales during demonetisation, the bench observed, was not supported by reliable material.

The appeal was filed by Bhaumik Jewellers Private Limited for Assessment Year 2017-18 against the order of the Commissioner of Income Tax (Appeals), NFAC. The Assessing Officer had recorded that Rs. 10.69 crore was deposited between November 9 and December 30, 2016. Out of this, Rs. 9,65,97,834 was treated as unexplained under Section 68.

The officer alleged that the assessee had manipulated its books by recording cash advances from 573 persons on November 5, 7 and 8, 2016, and rejected the books under Section 145(3).

The taxpayer, engaged in bullion and jewellery trading, maintained that the deposits were business receipts duly recorded in audited books and supported by stock registers, VAT returns and purchase details.

Before the Tribunal, the it submitted that no defect had been found in its books or stock records and that purchases were made through banking channels.

It argued that sufficient stock was available to support the sales and that the profit arising from those sales had already been offered to tax.

The Revenue contended that the pattern of advances was suspicious and that the taxpayer had failed to establish the identity and creditworthiness of the customers.

It also argued that acceptance of specified bank notes after the demonetisation announcement was in violation of RBI notifications.

Rejecting these contentions, the Tribunal observed, “The assessee has successfully explained the source of cash deposits as sales/advances which are duly recorded in the books of account. The suspicion of the AO regarding the genuineness of sales is not supported by any concrete evidence and is contradicted by the comparative sales data.”

It further held, “Even the violation of RBI notification, if any, does not attract the provisions of section 68 of the Act.” Concluding that the addition was not sustainable in law, the Tribunal deleted the addition and allowed the appeal