S. 145(3) of Income Tax Cannot Be Invoked Without Identifying Specific Defects in Books: ITAT [Read Order]
Considering the absence of specific defects in the books of accounts and the failure of tax authorities to verify transactions independently, the ITAT deleted the addition
![S. 145(3) of Income Tax Cannot Be Invoked Without Identifying Specific Defects in Books: ITAT [Read Order]](https://www.taxscan.in/wp-content/uploads/2025/02/Defects-in-Books-of-Account-1.jpg "S. 145(3) of Income Tax Cannot Be Invoked Without Identifying Specific Defects in Books: ITAT [Read Order]")
The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) ruled that Section 145(3) of the Income Tax Act, 1961, cannot be invoked without identifying specific defects in the books of accounts and that mere suspicion of increased cash sales is not sufficient to make an addition under Section 68 of the Income Tax Act, 1961. Shri Khandelwal Diamonds Pvt. Ltd., engaged in the trading...
The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) ruled that Section 145(3) of the Income Tax Act, 1961, cannot be invoked without identifying specific defects in the books of accounts and that mere suspicion of increased cash sales is not sufficient to make an addition under Section 68 of the Income Tax Act, 1961.
Shri Khandelwal Diamonds Pvt. Ltd., engaged in the trading of diamonds and gold jewelry, filed its return of income for Assessment Year 2017-18, declaring a total income of Rs. 1,98,84,120. During the demonetization period, the company deposited Rs. 1,51,32,000 in HDFC Bank and Punjab & Sind Bank, which became the subject of scrutiny. The case was selected for complete scrutiny under CASS.
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The AO observed a substantial surge in cash sales just before demonetization and questioned its authenticity. Comparing cash sales from previous years, the AO observed an increase of 1449.32% in October 2016 and 251.75% from November 1-8, 2016, which he considered highly unusual for the jewelry industry.
The AO rejected the books of accounts under Section 145(3), treating Rs. 80,00,000 as unexplained cash credit under Section 68, and taxed it under Section 115BBE at 60%. The Commissioner of Income Tax (Appeals) [CIT(A)] further increased the addition to Rs. 1,51,32,000, treating the entire deposit during demonetization as unexplained income.
Before the ITAT, the assessee argued that its books of accounts were properly audited and maintained as per the law. They also argued that sales were reported to GST authorities, and VAT records were accepted without any objections. The Assessing Officer (AO) did not find any issues in the stock register or purchase records.
The two-member bench comprising Gagan Goyal (Accountant Member) and Narinder Kumar (Judicial Member) found several flaws in the assessment and observed that the Assessing Officer (AO) did not conduct any independent verification or survey to substantiate his claims.
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The tribunal also observed that the rejection of books under Section 145(3) was unjustified, as no specific discrepancies were pointed out in the accounts and that cash sales cannot be treated as unexplained cash credits under Section 68 unless proven to be fictitious, which was not established in this case.
The tribunal ruled that the AO did not justify the rejection of books or the addition under Section 68, and the CIT(A) erred in increasing the assessment without proper reasoning. The tribunal deleted the entire addition and set aside the orders of the lower authorities. The appeal was allowed.
To Read the full text of the Order CLICK HERE
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