Khandelwal Diamonds Pvt. Ltd. Vs ACIT (ITAT Jaipur)
Conclusion: Section 145(3) couldn’t be invoked without identifying specific defects in the books of accounts and that mere suspicion of increased cash sales was not sufficient to make an addition under Section 68.
Held: Assessee-company was 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. AO observed a substantial surge in cash sales just before demonetization and questioned its authenticity. Comparing cash sales from previous years, 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. 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%. CIT(A) further increased the addition to Rs. 1,51,32,000, treating the entire deposit during demonetization as unexplained income. On appeal before ITAT, 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. AO did not find any issues in the stock register or purchase records. It was held that without pointing out any specific defect in the books of accounts, provisions of section 145(3) of the Act could’t be applied. Even if applied then, AO was duty bound to calculate the profits afresh based on material available on records, by brushing aside the results declared by assessee and then only he could move further to make specific additions like addition u/s. 68/69/69A etc. Here, in this case, the provisions of section 145(3) had been applied so abruptly without adhering to the procedure laid down in the statute and duly pronounced by the Hon’ble Higher Courts including the Hon’ble Apex Court time to time. As far as the order of CIT (A) was concerned, the same was also in the same direction and simply a cut and paste of the order of the AO without application of mind. Moreover, until unless it was established that the transaction entered into by the assessee was not of sales, same couldn’t be considered for the purposes of section 68.
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