Lucknow ITAT: Section 68 Addition or Estimated Profit Not Justified by Demonetisation Sales Spike Alone

Lala Kashi Nath Seth Jewellers Private Limited Vs ACIT (ITAT Lucknow)

Lucknow ITAT: Abnormal Spike in Demonetisation Sales Alone Cannot Justify Section 68 Addition or Estimated Extra Profit Without Evidence

The Lucknow ITAT allowed the assessee’s appeal and held that an abnormal increase in cash sales during the demonetisation period, by itself, cannot justify an addition under Section 68 or an estimated addition towards extra profit when the books of account are audited, stock is available, purchases are accepted, and no defect is found in the records. The Tribunal deleted additions aggregating to ₹18.81 crore made on account of alleged unexplained cash deposits and estimated extra profit.

The Assessing Officer treated ₹15.87 crore deposited during the demonetisation period as unexplained cash credit under Section 68 on the premise that cash sales immediately before demonetisation were abnormally high and beyond human probability. He also estimated an additional ₹2.94 crore as extra profit by assuming that jewellers were earning a gross profit of 20% on sales made on 8 November 2016, instead of the declared 6.65%.

The Tribunal found that the assessee had maintained duly audited books of account, established the availability of sufficient cash in hand, and correlated the cash deposits with recorded cash sales. The Assessing Officer himself had accepted that sufficient stock was available and that purchases were properly recorded, yet rejected the explanation solely on the basis of an abnormal increase in sales. The Tribunal held that suspicion, human probabilities and surmises cannot replace evidence, particularly when no defect is found in the books, stock or purchases.

The Tribunal further held that Section 68 was inapplicable because the impugned cash represented recorded sales already credited to the Profit & Loss Account and offered to tax. Taxing the same amount again as unexplained cash credit would amount to double taxation. It also relied on the principle that where purchases, stock and sales are interlinked and remain undisputed, the Revenue cannot reject sales merely because of a sudden increase in volume during demonetisation without bringing any contrary evidence on record.

The Tribunal also deleted the addition towards extra profit, observing that the assumption that jewellers earned 20-22% profit during demonetisation was unsupported by any evidence and was based purely on conjecture. Accordingly, it directed deletion of both the Section 68 addition of ₹15.87 crore and the estimated extra profit addition of ₹2.94 crore, allowing the assessee’s appeal in full.

Cases Discussed

• ACIT vs. Hira Panna Jewellers (ITAT Visakhapatnam), (2021) 189 ITD 608
• Dhakeshwari Cotton Mills Ltd vs. CIT (SC), (1954) 26 ITR 775 (SC)
• Seth Gurmukh Singh v. CIT, [1944] 12 ITR 393

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

This appeal has been preferred by the Assessee against the order dated 23.12.2024, passed by the National Faceless Appeal Centre, Delhi (NFAC) for Assessment Year 2017-18.

2.0 The brief facts of the case are that the assessee-company (M/s Lala Kashi Nath Seth Jewellers Private Limited) was engaged in trading of Gold, Silver and Diamond Ornaments. The assessee e-filed its return of income for the year under consideration in ITR-6 on 31.10.2017 declaring a total income of Rs.2,51,40,830/-, which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) by the Centralized Processing Centre (CPC), Bangalore. Subsequently, the case of the assessee was selected for scrutiny under Computer-Assisted Scrutiny Selection (CASS) on account of cash deposits during demonetization period and accordingly, notice under section 143(2) of the Act, dated 24.09.2018 was issued to the assessee.

2.1 During the course of assessment proceedings, the assessee was required to furnish details of cash as per the format enclosed with notice under section 142(1) of the Act, dated 16.09.2019, in response to which, the assessee submitted a chart showing the cash deposits made by it. After going through the reply filed by the assessee, The AO required the assessee to file documentary evidences relating to cash deposits of Rs.43,41,11,750/- during the demonetization period. The assessee, vide its reply dated 25.12.2019, made its submissions along with documentary evidences. On considering the submissions made by the assessee, the AO inferred that the details filed by the assessee showed huge disproportionate figures of sales and cash deposits in bank for the year under consideration compared to the preceding year, particularly in the pre-demonetization period (1.10.2016 to 8.11.2016). The AO noted that the cash sales for the year under consideration were reported at Rs.18,12,65,800/- as against Rs.8,93,30,414/- in the preceding year, i.e., there was a jump of over 25%.

2.2 The AO further noticed that the assessee had deposited total cash in Specified Bank Notes (SBNs) of Rs.40,98,37,000/-in the bank account during the demonetization period and further on perusal of the daily cash summary, it was noticed that the opening cash in hand was Rs.86,67,788/- as on 01.10.2016 and the closing cash in hand was Rs.41,38,44,033/- as on 31.10.2016 and the closing cash in hand as on 08.11.2016 was Rs.11,78,94,256/-. The AO noted that festivals of Dhanteras and Diwali were in the month of October that year (October 28 to 30), which was admittedly the peak season for sale of gold jewellery but, it was only in the post Diwali days and just prior to the announcement of demonetization, that the assessee had shown higher cash sales, which was inexplicable.

2.3 As per the AO, the assessee had shown sale of Gold jewellery/Silver ornaments of Rs.23,59,60,002/- in the first seven days of November, 2016. The AO worked out the average sale of October, 2016 at Rs.1,11,71,051/- and by taking the average sale of October, 2016, he worked out the sale in the first seven days of November at Rs.7,81,97,357/- (Rs.1,11,71,051 X 7). The AO treated the cash deposit of Rs.15,87,62,645/- being the receipts from sales for the period 1.11.2016 to 07.11.2016, as unexplained money of the assessee and added the same to its income under section 68 of the Act.

2.4 The AO also calculated the extra profit on sales reported on 08.11.2016 as under:

2.5 The extra profit of Rs.2,94,14,977/- worked out by the AO was also added to the total income of the assessee.

2.6 The AO completed the assessment under section 143(3) of computing the income of the assessee as under:

2.7 Aggrieved, the Assessee preferred an appeal before the NFAC, which dismissed the appeal of the assessee and confirmed the order of the AO.

2.8 Now the assessee has approached this Tribunal challenging the order of the NFAC, by raising the following grounds of appeal:

1. That the learned CIT (Appeals) has erred both in law and on facts in confirming the addition of extra income of the appellant company at Rs.2,94,14,977/- as against declared income at Rs.2,51,40,830.

2. That the CIT (Appeals) erred on facts and in law in confirming the addition of Rs.15,87,62,645/- representing cash sales and erroneously held to be unexplained credit u/s 68 of the Income Tax Act, 1961.

3. That the learned CIT (Appeals) has failed to appreciate that the approach adopted to assume and hold that the sales as of 08.11.2016 are abnormal sales and therefore assumption and presumption that sales of Rs. 15,87,62,462/- represent unexplained money is illegal, invalid and untenable.

4. That the Id. CIT(A) has erred both in law and on facts in confirming the addition u/s 68 of the Income Tax Act, 1961 in the case of the appellant company without appreciating that the provisions of Section 68 of the Income Tax Act, 1961 are not applicable in the present facts of the case since the appellant company had already accounted for income represented by cash deposited in the bank and therefore, the same cannot be considered to be undisclosed income as per provisions of Section 68 of the Income Tax Act, 1961 resulting into double addition/ taxation as the amount of cash deposits by way of sales had been shown in Profit and Loss Account for the year ended 31.03.2017, which had been accordingly shown in return of income as well as accepted by the VAT authorities.

5. That the Id CIT(A), NFAC has erred of facts and in law in taking wrong figures as per VAT order but correct facts is that there was no error in respect of the purchases and sales which were duly disclosed in VAT returns.

6. That the Id. CIT(A) has erred both in law and on facts in arbitrary applying the rate of profit of 20% on declared sales of the appellant on 08-01-2016 and computed difference between declared Gross Profit at 6.65% and assumed the Gross Profit at 20%.

7. That the Id. CIT(A) agreed with the Id. Assistant Commissioner of the Income Tax and erred in law and on facts in invoking the provisions contained in section 145(3) of the Act to make the instant addition.

9. That the CIT(A) erred on the facts in confirming the addition without rejecting books of account maintain by the appellant company which is duly audited its books of account, the profit arrived from entire sales disclosed had already been assessed/computed and further addition of Rs.9,24,71,130/- u/s 68 of the Income Tax Act, 1961 is double addition as profit on the sales had already been shown in the audited financial statement, which had been also accepted by the Id. A.O. That the sales being trading receipts cannot be added u/s 68 of the Income Tax Act, 1961.

10. That the Id. ACIT-1, Bareilly has failed to appreciate that mere fact that in his subjective opinion, sales were exceptionally high on 08-11-2016 could not be a ground to assume that appellant had earned profit over and above the declared profit in the instant assessment year more particularly when no defect has been pointed out in the books of accounts maintained by the appellant for the instant assessment year.

11. That once the Id. ACIT-1, Bareilly has not disputed that the purchase and sales were genuine which was duly disclosed in VAT return and also in books of account maintained by the appellant audited under Companies Act, 2013 and also u/s 44AB of the Income Tax Act, 1961, no adverse inference could be drawn in respect of the declared profit by the appellant company in spite of admitting that the sales are out of explained stock-in-hand.

12. That the Id. ACIT-1, Bareilly has also erred both in law and on facts in not appreciating that once the purchases declared in the books of accounts were duly accepted then no subjective assumption and presumption could be made a basis to assume, allege and conclude that there was extra profit earned by the appellant in the instant assessment year.

13. That the learned CIT (Appeals) erred on facts and in law in confirming the levy of interest of Rs.2,36,06,055/- u/s 234B of the Act, which are not leviable on the facts of the instant case.

14. The appellant reserves a right to add/alter/amend any ground of appeal at the time of its hearing.

3.0 The Ld. A.R. submitted that the assessee-company was carrying on the business of Jewellery. It was further submitted that in the year under consideration, the assessee-company had declared total sales of about Rs.141.78 crores on which profit of about Rs.2.51 crores were earned. The Ld. A.R. submitted that the major point of dispute in this appeal, on which addition was made in the assessment order, pertains to cash amounting to Rs.15,87,62,645/-, deposited by the assessee in its bank account during the demonetization period. It was submitted that the books of account were duly maintained by the assessee-company in the regular course of its business and that they were also produced during the course of assessment proceedings. It was further submitted that the books of account show that the assessee-company had cash in hand to the tune of Rs.41,38,40,033/- as on 08.11.2016, out of which a sum of Rs.15,87,62,645/- was deposited in its Bank account. The submission of the Ld. A.R. was that the AO did not find any error or omission in the books of account in any manner and in particular with respect to availability of cash as on 08.11.2016, and that merely on suspicion, the AO had held that the assessee was in possession of unaccounted cash in Specified Bank Notes (‘SBNs’) before 08.11.2016, which was later on shown as sale proceeds of ornaments to various customers in the months of October and November, 2016.

3.1 It was submitted that the assessee had duly submitted a comparative chart of month-wise sales and purchases during the year as well as that of the previous year along with the details of cash deposited, before the AO. It was further submitted that the books of account of the assessee were duly audited and no discrepancy either in the books of account or in the stock was pointed out by the AO either during the course of assessment proceedings or in the assessment order. The Ld. A.R. further submitted that the books of account were rejected by the AO only on the reasoning that there was an abnormal increase in the sales which was beyond human probability and circumstantial evidence. It was argued by the Ld. AR that in absence of any specific adverse material being brought on record by the revenue to disprove assessee’s explanation, addition made solely on the basis of volume of cash deposits in bank accounts was unsustainable.

3.2 It was further submitted that the assessee had duly filed the VAT Returns in time and even the VAT Department had not pointed out any discrepancy in the VAT Returns except for that a minor VAT Demand of Rs.11,565/- was raised in the Annual Assessment under VAT. Our attention was drawn to the copy of VAT Return for the year under consideration, placed at pages 165 and 172 of the paper book, and it was pointed out that this Return had been filed within the due date of filing of the Return, which would demonstrate that the bona fide of the assessee was not in doubt.

3.3 The Ld. A.R. also invited our attention to the Charts appearing at page 12 of the assessment order and pointed out that the opening cash in hand as on 01.04.2016 was Rs.52,86,802.74 whereas as on 01.10.2016, it stood at Rs.86,67,788.74. It was submitted that the assessee had duly submitted the cash-in-hand position during the year under consideration as well as during the previous year, which has been reproduced by the AO in his order and a perusal of the same would show that it is not the case of the Department that the assessee did not use to have substantial cash-in-hand in his books of account. It was argued that the entire exercise undertaken by the AO, i.e. estimating the average sales and treating a major portion of the same as alleged undisclosed income and also calculating the alleged extra profit earned was entirely based on surmises without being backed by any sound logic or reasoning but rather on some sort of suspicion which was not legally permissible. It was submitted that the AO has observed in Para 18 of the assessment order that he was not satisfied with the correctness of books of accounts but has not indicated any cogent reason for arriving at such conclusion except for stating that there was an abnormal increase in sales. The Ld. AR submitted that the assessee has five (5) retail outlets and has the staff and the infrastructure to handle huge volumes of sales, a fact which was completely ignored by the AO.

3.4 It was also submitted that complete details of stock were available before the AO and no deficiency in the inventory was pointed out by the AO. Our attention was drawn to Para 22.1 of the order of assessment wherein the AO has himself stated that as was apparent from the final accounts and other documents filed by the assessee, stock was available with it and purchases were properly recorded in the books of account. The Ld. AR submitted that, thus, the AO himself had accepted categorically that the stock details were in order and that the purchases also were properly recorded and, therefore, there was no justifiable reason for the AO to have simply disbelieved the quantum of sales just because of the high volume and, therefore, the allegation of inflated sales for the purpose of depositing cash was ill-founded.

3.5 The Ld. A.R. further submitted that the amount of sales had already been included in the books of account and, therefore, making an addition again of the same under section 68 of the Act would tantamount to double taxation, which would be against the very fabric of the Income Tax Act and was not legally permissible. It was argued that section 68 of the Act does not apply to a sum which has already been disclosed as income. It was submitted that once an amount has already been offered as income as part of sales, the same cannot be taxed again under section 68 of the Act. The Ld. AR relied on a plethora of judicial precedents in this regard.

3.6 With regard to the action of the AO with respect to the addition on account of earning of alleged extra profit, it was submitted that here again, the AO had proceeded to estimate the alleged extra profit based on some guesswork that at the time of demonetization, people were purchasing gold and ornaments by paying a higher margin of 20-22% on such purchases, which again has no specific recording of finding against the assessee but was entirely based on surmises and conjectures.

3.7 Assailing, the impugned order, the Ld. AR submitted that the Ld. First Appellate Authority had simply dittoed the order of assessment and had not judiciously considered the submissions of assessee and had simply referred to the Final Assessment Order of VAT referring to which it was observed that a tax demand of Rs.50,11,565/- had been created by the VAT Department (at page 35 of the impugned order) which was factually incorrect. Drawing our attention to the said assessment order of VAT, placed in the paper book, it was pointed out that the tax demanded was only Rs.11,565/- and not Rs.50,11,565/-. The Ld. AR fairly accepted that although the Annual Return was filed belatedly, the monthly return of VAT for November 2016 had been filed within time and the same was evident from the copy thereof in the paper book. The Ld. AR submitted that the assessee had admittedly, due to some accounting error, omitted to show purchases of Rs.49,14,405/- in the Annual Return, and the explanation of the assessee in this regard had been duly accepted by the VAT Department in the Assessment Order and no adverse inference against the assessee had been drawn by the VAT Department in this regard but here again the Ld. First Appellate Authority had held this against the assessee and had misquoted the figure of omitted purchases at Rs.10,49,14,405/-at page 35 of the impugned order and had, thereafter, proceeded to dismiss the appeal of the assessee on misconception of facts and figures thereby making the impugned order perverse and unsustainable.

3.8 It was further submitted that the Ld. First Appellate Authority had dismissed the appeal of the assessee also on the ground that the unregistered purchases during the demonetization period were almost 82% of the unregistered purchases during the assessment year which as per the Ld. First Appellate Authority was very unusual. It was argued that the books of accounts had been duly audited and further there was nothing in the Statute which prohibited the assessee to make unregistered purchases. Our attention was again drawn to the observation of the AO in Para 22.1 of the assessment order that the purchases were in order and so was the inventory. It was submitted that, therefore, the observation of the Ld. First Appellate Authority that the assessee was trying to bring its unexplained money into books through sales and purchases was factually incorrect. Referring to the observation of the Ld. First Appellate Authority that no details of unregistered purchases were submitted, our attention was drawn to pages 177 to 183 of the paper book and it was submitted that complete details had been furnished in this regard including details of any outstanding balance/s at the end of the year. It was also emphasized that all these purchases had been duly paid for only through banking channels and that there was no cash purchase at all. The Ld. AR submitted that the entire assessment was framed on surmises and the Ld. First Appellate Authority had also sustained the addition completely ignoring the documents submitted and without controverting the explanation of the assessee with some evidence to the contrary.

3.9 The Ld. AR prayed that the appeal of the assessee be allowed.

4.0 The Ld. CIT (DR) submitted that the order passed by the NFAC, confirming the assessment order passed by the AO under Section 143(3) of the Act, is factually correct, legally sound, and suffers from no infirmity. It was further submitted that the assessee, engaged in the business of jewellery, deposited substantial amounts of Specified Bank Notes (SBNs) in its bank account during the demonetization period (post-November 8, 2016). The Ld. CIT (DR) submitted that the assessee’s claim that these deposits originated from genuine cash sales made immediately preceding or during the demonetization period was properly evaluated by the AO and NFAC and was rightly rejected due to an absence of cogent, verifiable, and corroborative evidence and therefore, no interference was called for in the order of the NFAC who has rightly confirmed the order of the AO. He emphasized that the rejection of books of account by the AO had been upheld on appeal by the Ld. First Appellate Authority. It was submitted that the AO had made a detailed analysis of the pre and post demonetization sales and the phenomenal jump in sales was not justifiable, especially in view of the fact that the entire sales and purchases were not verifiable. The Ld. CIT (DR) also read out extensively from the order of the Ld. First Appellate Authority and placed extensive reliance on the same.

4.1 The Ld. CIT (DR) prayed that the appeal of the assessee be dismissed.

5.0 We have heard the rival submissions and have also perused the record. We have also given a thoughtful consideration to the orders of both the lower authorities. The facts in this case are undisputed. The Assessing Officer (AO) has made an addition of Rs.15,87,62,645/- being cash deposited in its bank account during the demonetization period. The Ld. AR has submitted that the cash was deposited out of the cash available in the cash book of the assessee as on 08.11.2016. It has been explained by the Ld. AR that the assessee is in the business of Jewellery and most of the customers generally make payment in cash against purchase of jewellery. It has been further argued that the impugned cash deposits during the demonetization period had become a necessity in view of the demonetization announced by the Government of India on 08.11.2016. The assessee had offered a similar explanation before the AO had also submitted month-wise details of opening cash in hand, cash sales and cash deposit (as reproduced by the AO at Page 4 of the assessment order). A perusal of the above would show that the assessee had sufficient cash in hand in its books on 08.11.2016 which was deposited during the demonetization period. Further, as the records show, the AO has not at all disputed the availability of stock to make the sales. The AO has also observed that the purchases by the assessee were in order. The AO, however, was of the view that there was an abnormal increase in sales which was beyond human probability and that the circumstantial evidence also would be against the assessee in this regard. The AO has, however, not doubted that cash was available in the books of the assessee on 08.11.2016.

5.1 It is seen that the AO has simply brushed aside the explanation offered by the assessee on the ground that the high volume of sales, as declared by the assessee, was beyond human probability. In this regard, the assessee had explained before the AO that there were five retail business outlets and the assessee was equipped with proper manpower and infrastructure to effect the huge volume of sales but this explanation also did not find favour with the AO. This, in our considered view, cannot be upheld. On a factual matrix, we are of the considered view that the assessee has duly explained the source of cash before the AO and it is evident that the AO has just proceeded to make the impugned addition only on surmises and conjectures. The books of account of the assessee are duly audited and the AO has not pointed out a single defect in the said books. Thus, the AO has completely disregarded the voluminous evidences filed by the assessee and has proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. Thus, the entire addition has been made by the AO on presumption and on ‘preponderance of probability’ and not on any concrete evidence. It is our considered view that where the assessee has furnished audited books of accounts wherein opening stock, sales and closing stock had been duly disclosed and duly accepted in audit, rejecting the assessee’s books only qua substantial increase in sales during the demonetization year, without any adverse evidence being brought on record by the Income Tax Department was not justified. It is our considered view that the impugned additions have been made on a very general basis and hypothesis of human probability which cannot stand the test of reasoning and logic. In our considered view, abnormal growth in sales is a vague ground to make addition where the assessee has demonstrated that there was a direct co-relation between the cash inflow (sales) and cash outflow (deposit in bank). Further, the outflow of stock has not been doubted by the AO and, in fact, the AO has himself observed in Para 22.1 of the impugned order that the assessee had sufficient stock.

5.2 It is further seen that the AO has even commented in Para 22.1 of the assessment order that the purchases were in order. However, the Ld. First Appellate Authority raised some doubts about the veracity of unregistered purchases by observing that the quantum of unregistered purchases during the demonetization period was almost 82% of the entire unregistered purchases, this in our view cannot be a sound reason for not accepting the quantum of sales/purchases especially when the complete list of purchases, including unregistered purchases, were furnished and when it was also submitted by the assessee that the all the purchases were paid for through the banking channels without bringing any evidence on record which would disprove the claim of the assessee. It is also seen that the Ld. First Appellate Authority has also referred to the Assessment Order passed under VAT and has observed that huge VAT liability had been created against the assessee due to difference in the figures reported against unregistered purchases in the Annual VAT Return filed by the assessee. However, the fact of the matter is that VAT demand of Rs. 11,565/- only was raised while passing the VAT assessment order and the explanation of the assessee with respect to the difference in the purchases from unregistered sources was duly accepted by the VAT Department and, therefore, this does not, in our considered view, give rise to any logical reason to discard the purchases/sales. Further, a comparison between the figures relating to differences in VAT figures as per VAT Assessment Order and as stated in the order of the Ld. First Appellate Authority would show that the figures stated in the order of the Ld. First Appellate Authority are not correct and have been reproduced in the impugned order without proper verification. As the Ld. AR has rightly pointed out, that the VAT demand raised at the time of VAT assessment was only 11,565/- and not Rs. 50,11,565/- as stated by the Ld. First Appellate Authority. Similarly, as has been rightly pointed out by the Ld. AR, the Ld. First Appellate Authority has misquoted the figure of purchases omitted to have been included in the VAT Annual Return at Rs. 10,49,14,405/- whereas the correct figure was Rs. 49,14,405/- only. Therefore, any sustenance of addition based on such incorrect figures cannot be upheld by us.

5.3 In view of our observations in the preceding paragraphs, it emerges that the AO has completely disregarded the voluminous evidences filed by the assessee and has proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. Thus, the entire addition has been made by the AO on presumption and on ‘preponderance of probability’ and not on concrete evidence. Further, even the calculation of alleged unexplained cash credit of Rs.15,87,62,645/- added u/s 68 of the Act has no logical basis as the same has been calculated by taking only average sales for seven days in October, 2016 and treating the rest as unexplained. This working by the AO has no sound basis and is again based on presumption, surmises only human probability. Though preponderance of probability is an accepted principle to judge reliability of evidences as held by the various Hon’ble Courts in plethora of cases but its application in judging the quality of evidences should be done in a reasonable manner. The action of the AO is not reasonable in as much as he proceeded to disbelieve the quantum of sales only for the reason of their sheer volume without pointing any defect in the books of account of the assessee. When as per the submission of the assessee, cash in hand was the source of the impugned cash deposit, then some further enquiries ought to have been made by the AO before rejecting the Assessee’s explanation outright on the ground of high volume of sales. It will not be out of place at this juncture to refer to the judgment of the Hon’ble Apex Court in the case of Dhakeshwari Cotton Mills Ltd vs. CIT (1954) 26 ITR 775 (SC) on the issue of suspicion vs. proof. The Hon’ble Apex Court held as under:

“As regards the second contention, although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23(3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT [1944] 12 393. In the instant case, the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the assessee to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by the ITO and the Tribunal, was based on surmises, suspicions and conjectures. The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills but did not show that statement to the assessee did not give him a opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It was not known whether the mills which had disclosed these rates were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the assessee, but it refused even to look at books and papers which assessee’s representative produced before the Accountant Member in his chamber. The assessment in this case and in the connected appeal, was above the figure of Rs. 55 lakhs and it was just and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer. Thus both the ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It was thus a fit case for the exercise of power under Article 136.

In the result, the appeal was to be allowed and the order of the Tribunal was to be set aside and the case was to be remanded to it with direction that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the ITO if it is intended to make the estimate on the foot of those enquiries.”

5.4 Further, the addition of Rs. 2,94,14,977/- on allegation of extra profit having been earned is again based on an assumption that during the period of demonetization, jewellers were making extra profit of 20% to 22% over and above the regular profit margins. However, in this regard too, the lower authorities have not brought any evidence on record to prove that the assessee was in fact earning this kind of extra profit. Thus, it is very much apparent that this addition too is devoid of any merit as the same is based only on an assumption and lacks any sound evidentiary basis and, therefore, in our considered view, cannot be upheld.

5.5.0 The Ld. AR has also submitted that the impugned addition of Rs. 15,87,62,645/- could not have been made u/s 68 Act as the same would amount to double taxation and has cited numerous judicial precedents in support of this contention. We are in agreement with the arguments of the Ld. AR in this regard in as much as once the sales (source of cash deposited) declared by the assessee have been included in the profit/loss account and have been reflected in the returned income, they cannot be considered as being ‘unexplained’ within the meaning of section 68 of the Act. As per the provisions of section 68 where any sum is found credited in the books of account for which the assessee offers no explanation about the nature and source thereof or the explanation thereof is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income tax as the income of the assessee for that previous year meaning thereby that where assessee offers no explanation or provides unsatisfactory explanation with respect to the sum so found credited in the books of accounts, can such a sum be added to the income of the assessee in terms of section 68 of the Act. However, it is undisputed that in the present appeal, the assessee has already disclosed the amount as having been received from sales of jewellery etc and has accepted the same as revenue receipts and to disbelieve the sales either the assessee should not have sufficient stocks or there should be defects in the stock register. However, the AO has himself observed in Para 22.1 of the Assessment Order, the assessee had sufficient stock and has proceeded to reject the assessee’s explanation regarding cash having been generated through sales on the ground of abnormal increase in sales, a reason, which in our considered view, does not empower the AO to reject the books of account without bringing on record any evidence to the contrary and, therefore, we are not in agreement with the action of the AO in invoking provisions of section 68 in this regard.

5.5.1 The Visakhapatnam Bench of this Tribunal, in the case of ACIT vs. Hira Panna Jewellers reported in (2021) 189 ITD 608 had held that purchases, sales and stock are interlinked and inseparable. Every purchase increases the stock and every sale decreases the stock. Once there is no defect in the purchases and sales and the same are matching with inflow and outflow of stock, there is no reason to disbelieve the sales. Where the AO has not disturbed the closing stock, which has direct nexus with the sales and where no defects were found in the books of account, suspicion howsoever strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence. Therefore, in our considered view, the abnormal increase in cash sale and their deposit in the bank account consequent to demonetization could not be the basis for rejection of accounts and addition u/s 68 of the Act without there being any contrary evidence having been brought on record by the Income Tax Department.

5.6 Therefore, in view of our observations and findings in the preceding paragraphs and on facts of this case, we set aside the order of the Ld. First Appellate Authority and direct the AO to delete both the impugned additions viz. (i) the addition of Rs.15,87,62,645/- made by the under section 68 of the Act and; (ii) the addition of Rs.2,94,14,977/- being the addition on account of alleged extra profit.

6.0 In the final result, the appeal of the assessee stands allowed.

Order pronounced in accordance with Rule 34(4) of the ITAT Rules, 1963, by putting on Notice Board on 05.08.2026.