Case Law Details
Micky Fireworks Vs ACIT (ITAT Chennai)
Introduction: The Income Tax Appellate Tribunal (ITAT) in Chennai delivered a verdict in the case of Micky Fireworks Vs ACIT, shedding light on the implications of Section 68, particularly concerning unexplained cash during the controversial demonetization period in India.
Unraveling the Context:
- Backdrop: Micky Fireworks appealed against the decision of the Commissioner of Income Tax (Appeals), NFAC, Delhi for the Assessment Year (AY) 2017-18, particularly the confirmation of addition of Rs.118.23 Lacs under Section 68 during the demonetization period.
- Core Issues: The crux of the debate revolves around the cash deposits made by the assessee after the demonetization date (08/11/2016), which were treated as unexplained money under Section 68.
Detailed Analysis:
1. Grounds of Appeal: The assessee raised several objections against the CIT(A)’s order, pointing out multiple legal and procedural lapses. They cited specific cases to support their claims, challenging the treatment of their deposits as unexplained cash.
2. Proceedings before Lower Authorities: The primary bone of contention was the deposit of demonetization currency (Specified Bank Notes, SBN) post the cutoff date. The Assessing Officer, citing regulations, had claimed that any transaction involving SBN after the cutoff had no legal validation, which became a significant point of contention.
3. ITAT’s Observations: The Tribunal observed that the cash deposited was indeed from sales during the festival season, which were duly recorded in the books and audited. Furthermore, no irregularities were found in the books of accounts. Hence, the Tribunal questioned the application of Section 68, given that the source of cash had been adequately explained.
4. Referenced Judgments: The Tribunal referenced similar cases where additions under Section 68 were deleted. These cases, like the present one, demonstrated the source of cash deposits and hence were exempted from being treated as unexplained under Section 68.
Conclusion: The ITAT Chennai, after careful examination, sided with the assessee, Micky Fireworks. It was concluded that if the cash deposit’s source is adequately explained and evidenced, it should not be treated as unexplained money under Section 68. This verdict brings clarity to similar disputes arising from the demonetization phase, emphasizing the importance of maintaining proper records and accounting.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2017-18 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 28-12-2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 29-12-2019. The grounds taken by the assessee read as under:
“1. The Respectable Commissioner of Income Tax, Madurai-1 was not justified while passing the order u/s.250 of the Income Tax Act dated 28/12/2022 for the Assessment year 2017-18 dismissing the claim of appellant allowings SBN Rs.11823000/- after 08/11/2016 for exchange by the persons other than banking company.
2. The order of the learned CIT(A) is bad and erroneous in law and against the principles of natural justice.
3. The learned CIT (A) erred in not considering the replies filed by the appellant in proper perspective.
4. The learned CIT (A) failed to appreciate the fact that the cash deposits into the bank, made by the appellant after 08/11/2016 were out of the sale proceeds of fireworks and the appellant submitted list of all persons from whom cash received along with PAN i.e all are identifiable persons (for sales to them) and there is no unidentifiable persons and all were duly accounted in the books of accounts. Hence, the AO’s conclusion the of not accepting the cash deposits in assessee’s account by the customers is wrong.
5. The learned CIT(A) failed to appreciate the fact that the A.O. did not follow the standard operation procedure instruction.
6. The learned CIT (A) erred in not considering the fact that the Assessing Officer erred in making an addition of Rs.11823000/- treating it as unexplained money u/s.68 without any basis.
7. The learned CIT (A) erred in not considering the scope and effect of the specified bank Notes (cessation of liabilities) Act dated 28/02/2017 properly.
8. The Appellant relies on the decisions in the following cases:
i) Rahul Cold Storage, Gunderdehi Road, Vill-potiyadih, Dhamtari (C.G) 493773 (ITA.No. 1 23/RPR/2022)
ii) Manasa Medicals, JPN Road, Shivamogga. (ITA.No.552/Bang/2022)
iii) Mrs. Umamaheswari, D.No.12A, Perumal Konar Street, VPC Nagar, Coimbatore South, Coimbatore. (ITA No.527 /Chny/2022).
As is evident, the assessee is aggrieved by confirmation of addition of Rs.118.23 Lacs u/s 68 which represent cash deposited by assessee during demonetization period.
2. Supporting the case of the assessee, Ld. Ld. AR submitted that the assessee is engaged in fireworks and made substantial sales during festival season. The cash was collected from debtors during festival season which was deposited into bank accounts and therefore, impugned additions as made by lower authorities u/s 68 are unsustainable. Reliance has been placed on the decision of SMC Bench of this Tribunal in the case of Mrs. Umamaheswari Vs. ITO in ITA No.527/Chny/2022 dated 14-10-2022; the decision of SMC Raipur Bench in Rahul Cold Storage Vs. ITO in ITA No.123/RPR/2022 dated 29-11-2022 as well as another decision of co-ordinate Bench of Bengaluru Bench in ITO Vs M/s. Manasa Medicals in ITA No.552/Bang/2022 dated 31-10-2022. The copies of the orders have been placed on record. The Ld. Sr. DR, on the other hand, justified impugned addition. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
Proceedings before lower authorities
3.1 The assessee is a partnership firm and is stated to be engaged in manufacturing and wholesale of fireworks. The case was selected for scrutiny assessment for the reason that assessee deposited an amount of Rs.118.23 Lacs in the form of Specified Bank Notes (SBN) i.e., demonetization currency in its bank accounts after 08-11-2016. The same has been tabulated in para-3 of the assessment order. The deposits have been made throughout the months of November and December, 2016. The assessee claimed that SBN was received from debtors against recorded sales made by the assessee.
3.2 The Ld. AO observed that as per notification S.O.No.3407(E) dated 08-11-2016 as issued by the Govt. of India, it was notified that SBN shall cease to be legal tender to the extent specified. In the notification, it was mandated that SBN held by a person other than banking company may be exchanged at specified bank branches for the purpose of exchanging. The notification permit that SBN could be deposited in to third party bank accounts after specific authorization. Therefore, after 08-11-2016 any transaction done through SBN will not have any legal validation. As per notification, only transaction allowed in the form of SBN after 08-11-2016 would be for exchange of SBN by persons other than banking company. The transaction which is null and void legally would not be accepted as satisfactory explanation to explain the source of cash deposit. The assessee was prohibited to deal with SBN after 08-11-2016, other than for exchanging the same at banks. Accordingly, said deposits were added u/s.68 r.w.s 115BBE of the Act.
3.3 During appellate proceedings, the assessee submitted that Ld.AO did not follow standard operating procedure as specified vide Circular dated 09.09.2019 in F.No.225/145/2019-ITA.II wherein AO was specifically instructed to make comparative analysis of cash sales, cash deposited. The guidelines also suggested observance of special indicators for bogus sales or backdated sales. However, no such findings were rendered by the AO. The assessee had already submitted list of all persons from whom cash was received along with their PAN. There was no single unidentifiable person. The assessee also submitted sales made by it during AYs 201 5-16 to 2018-19 but Ld. AO did not analyze sales as per standard operating procedure. The Ld. AO also did not consider nature of sales of fireworks industry in which majority sales would be during Deepavali season. Further, Ld. AO did not find any bogus sales or back dated sales. The assessee also assailed applicability of Sec. 68 on the ground that the assessee was maintaining regular books of account for receipts and therefore, section 68 could not be invoked. However, Ld. CIT(A) merely chose to confirm impugned addition, against which the assessee is in further appeal before us.
Our findings and Adjudication
4. From the facts, the undisputed position that emerges is that the assessee has made sale of fireworks during festival season. The sales are duly accounted for by the assessee in the books of accounts. The accounts have duly been audited. The assessee has realized debtors out of such sale in SBN which have been deposited in the bank account of the assessee. The cash deposited by the assessee has duly been accounted for in the books of accounts. The Ld. AO has not alleged any bogus sales or back dated sales made by the assessee. No defect has been pointed in the books of accounts as maintained by the assessee.
5. It could also be seen that during the course of assessment proceedings, various notices were issued u/s 142(1) from time to time calling numerous details from the assessee. The assessee was required to file numerous details including monthly cash flow statement, inventory of closing stock, copy of sales tax assessment order, monthly cash deposits and credits for various periods, ledger account for purchase and other expenditure, monthly sales gross receipts, monthly purchases, details of old notes and new notes deposited during demonetization period, the day book, Cash book, ledger maintained for business, cash balance as per cash book etc. All these details were duly submitted by assessee vide reply dated 12-12-2019. The assessee also submitted month-wise cash deposits in all bank accounts, details of old notes deposited at the time of demonetization period. Pertinently, the assessee also furnished details of name, address and PAN of cash depositors who deposited cash during demonetization period. The same has been detailed on pages 24 to 35 of the paper book. Apparently, the same could not be faulted with by Ld. AO. There is no allegation of any irregularity in the books of accounts.
6. We find that the only reasoning to treat the said deposits as unexplained cash credit u/s 68 is that the assessee was debarred from dealing in SBN after 08-11-2016. However, in the present case, the cash so received by the assessee is backed by sales carried out by the assessee as recorded in the books of accounts. Therefore, the source of cash is duly explained. The provisions of Sec.68 could be invoked only in cases when there was unexplained cash credit in the books of accounts maintained by the assessee. However, the assessee has duly identified the debtors from whom the cash was received and the same could not be disputed by lower authorities. The PAN of respective debtors as well as quantum of cash realized from each of them has duly been detailed by the assessee before Ld. AO during assessment proceedings. No defect has been pointed out in the books of accounts. In such a case, the credit could not be held to be unexplained cash credit and the impugned additions are not sustainable in law.
7. The SMC bench of this Tribunal in Umamaheswari Vs. ITO (supra), on identical facts, deleted similar additions on the ground that the assessee had duly evidenced the source of cash deposit and therefore, addition could not be made u/s 68. Similar is another decision of SMC Raipur Bench in Rahul Cold Storage Vs. ITO (supra) wherein it has similarly been held that when the deposits were sourced out of business receipts duly recorded in the books of accounts, no such addition could be made u/s 68. The other cited decision of Bangalore Tribunal is also on similar lines.
8. Considering the facts and circumstances of the case, we find force in assessee’s case and therefore, delete the impugned addition as made u/s 68. We order so. The Ld. AO is directed to re-compute the income of the assessee.
9. The appeal stands allowed in terms of our above order.
Order pronounced on 26th July, 2023
