Proceeds of Sales Already Accounted Cannot be Added as Unexplained Cash Credit: ITAT Deletes Addition [Read Order]

before the Commissioner of Income Tax (appeals) [CIT(A)]. The Jaipur Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted an addition of ₹44,61,000 and held that since the turnover and sales were not doubted by the Assessing Officer (AO), the cash deposits, which were the proceeds of sales and duly recorded in the books, could not be added again as unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Alka Khandaka (assessee) an individual engaged in the trading business of gold jewellery under her proprietorship concern Alka Gems, and also a partner in two other firms, filed return for the Assessment Year (A.Y.) 2017-18 under the presumptive taxation scheme of Section 44AD of the Act. The assessee declared total sales of ₹80,54,292 and a net profit of ₹10,03,660.

During the scrutiny assessment proceedings, the AO noted that the assessee had deposited ₹44,61,000 in her bank account between November 9, 2016, and December 30, 2016, a period corresponding to demonetization.

The assessee explained that the source of the cash deposits was out of sales proceeds, supported by her cash book, purchase and sales bills, and Value Added Tax (VAT) returns.

The AO rejected the explanation and made the entire addition of ₹44,61,000 under Section 68 read with Section 115BBE of the Income Tax Act. The AO concluded that the cash deposit was the assessee's unaccounted income camouflaged as sales proceeds.

The primary basis for this conclusion was the finding that the assessee's alleged purchases from three suppliers Parijat International, Pragati Gems & Jewels, and K S Jewels were bogus. Specifically, the proprietor of Parijat International, Ram Babu Sambharia, whose statement was recorded, denied dealing in jewellery and stated he was a delivery man.

Further, Commercial Tax Department reports showed that Parijat International was closed in 2013 and K S Jewels registration was cancelled in 2014. Aggrieved by the AO’s order, the assessee filed an appeal

The CIT(A) confirmed the addition, concurring with the AO's view that the purchases were bogus and the huge cash sales during the demonetization period were only a "sham" transaction to introduce unaccounted cash.

The two-member bench comprising Dr. S. Seethalakshmi (Judicial Member) and RathodKamlesh Jayantbhai (Accountant Member) noted that the entire addition was based on the fact that the purchases were doubted/tainted.

The Tribunal observed that the AO and CIT(A) had, in effect, not doubted the sales made by the assessee. Furthermore, the turnover was already accepted by the AO.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

The bench noted the fundamental principle, supported by several judicial precedents from the Jaipur ITAT Bench, that once the assessee declared a cash deposit by way of sale, and the sale is recorded in the books and VAT records, the cash cannot be added again as unexplained credit under Section 68 of the Income Tax Act.

Section 68 reads as, Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

The tribunal observed that adding the entire sales proceeds would lead to double taxation. In view of these observations, the tribunal deleted the addition of ₹44,61,000 under Section 68 and substituted it with an estimated profit of 15% on the sales already disclosed in the return. The appeal of the assessee was partly allowed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates