AO cannot Simultaneously Reject & Rely Audited Books & Make Additions

Nilkantha Saha Vs ITO (ITAT Kolkata)

AO Cannot Simultaneously Reject and Rely Audited Books And Make Additions Under Section 68 For Cash Deposit During Demonetisation Period Out Of Cash Sales

From a perusal of the cash deposits/ banking transactions, the Ld. A.R drew our attention to the fact that as per the audited books, especially the trading accounts it can be noted that assessee’s sales (total) in this year was to the tune of Rs. 4,76,78, 990/-(Rs. 4.76 crores) and the bank deposits tally i.e. Rs. 4,76,78,990/- in three (3) bank accounts. It was brought to my notice that before November, 2016 (demonetization on 08.11.2016) i.e. from April to October, 2016, the assessee had deposited Rs. 2,37,84,953/- and from November to March, 2017, the assessee had deposited Rs. 2,38,94,037/-. And out of which only Rs. 12,41,704/- was added by the AO since it were invalid currencies. So looking at the volume of business according to Ld. A.R this amount Rs. 12,41,704/- cannot be termed as from any tainted source and it is probable that this amount is from genuine business transaction. It has been brought to my notice by the Ld. A.R that assessee is into dry fish business and his accounts are audited for the last seven (7) years. From a perusal of the trading account it is revealed that assessee has shown total sales in this year for a sum of Rs. 4,76,78,990/- and closing stock of Rs. 71,93,896/- and Gross profit to the tune of Rs. 16,83,317/- and net profit declared is shown at Rs. 6,00,240/-. The AO has not disturbed the returned income of Rs. 7,42,118/- so, it can be safely inferred that the profit embedded in sales of Rs. 4,76,78,990/- has been accepted by the AO, so, question is whether separate addition of Rs. 12,41,704/- is justified and whether this action of AO amounts to double addition of the same trading receipt.

No doubt in such a factual scenario, it amounts to double addition. When the justifiability of separate addition of Rs. 12,41,704/- is to be examined, it should be borne in mind that the AO is making a ‘guess’ about the source of demonetized currency. And the assessee is assailing the ‘guess work’ with an explanation which should be tested; and if the explanation given by the assessee is a plausible/probable from a traders/business man’s/prudent man’s angle/view, then that cannot be brushed aside by the AO, without disproving the explanation / facts or by giving cogent reasons. So the explanation of assessee in respect of receipt of invalid currencies to the tune of Rs. 12,41,704/- need to be tested as discussed. The explanation of assessee is that other than the cash credit of Rs. 11,08,796/- in the books as on 08.11.2016 (which has been accepted by the AO) the assessee had received Rs. 12,41,704/-during the demonetization period, which represents the amount collected from sundry debtors, which formed part of his sales credited to the P & L account during pre-demonetization period (i.e. before 8th November, 2016). So according to assessee, when the AO has accepted the cash credit of Rs. 11,08,796/- as on 08.11.2016, the sundry debtors as on 08.11.2016 should be accepted to the extend received by the assessee even if it is by way of invalid currencies. Explaining further on this point the Ld. A.R submitted that the assessee being a local dry fish dealer, had sold dry fish on credit to several sub-dealers/traders (before 8th November, 2016), who had deposited in the assessee’s account (Post-demonetization i.e. after 8th November, 2016) the earlier payments/debts of the dry fish sold on credit (i.e. pre-demonetization) which included currencies which were no longer valid. According to the assessee, he had no control over the sundry debtors depositing the trade debts as afore-stated in his bank account and so such sale consideration cannot be separately taxed as unexplained cash credit, particularly when it was credited by way of sales in the books which was duly audited and accepted by the AO. Therefore, the plea of the Ld. A.R is that taking into consideration the peculiar facts of the case, separate addition Rs. 12,41,704/- was not warranted. In this backdrop when I examined the statement of bank accounts of assessee (3 bank accounts) it is noted that assessee has deposited in his three bank account (pre-demonetization) an amount to the tune of Rs. 2,38,94,037/- and during (Post-demonetization period) the assessee had deposited to the tune of Rs. 2,38,94,037/- and it is found that the total bank deposit tallys with the figure shown in trading account i.e., Rs. 4,76,78,990/- (Rs. 4.76 crores). So taking into account all these facts and circumstances and demonetization being declared on the night of 8/9th November, 2016, it is noted that AO has accepted the invalid currencies to the tune of Rs. 11,08,796/- because it was shown by the assessee in his regular books maintained as on 08.11.2016. The assessee’s explanation in respect of Rs. 12,41,704/- is that it is the amount which has been deposited by the sundry debtors as on 08.11.2016 which is found to be correct for the reason that the sundry debtors as on 08.11.2016 was to the tune of Rs. 14,93,120/-.

So on the same reasoning as adopted by the AO to have accepted Rs. 11,08,796/-(invalid currency notes) as genuine (trade receipt), I find no reason not to accept the explanation of assessee that Rs. 12,41,704/- was deposited by the sundry debtors reflected in the books as on 08.11.2016. And since the AO has accepted the sales/turnover of the assessee which were reflected in the audited books of accounts, as well as the explanation of assessee is supported by material on record, the AO/Ld. CIT(A)’s action of addition of Rs. 12,41,704/- cannot be countenanced. So on this factual finding the assessee’s explanation regarding Rs. 12,41,704/- is plausible. And it is noted that the AO / Ld. CIT(A) / Ld. D.R could not disprove or controvert this fact and so it is accepted. In the aforesaid facts and circumstances, the assessee depositing invalid notes to the tune of Rs. 12,41,704/- cannot be dis-believed as from any tainted source or termed as black money. So taking into consideration the peculiar over all facts and circumstances discussed supra, it is directed that the addition of Rs. 12,41,704/- be deleted.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal preferred by the assessee against the order of Ld. CIT(A)-Guwahati-1, dated 02.03.2020 for A.Y. 2017-18.

2. The sole ground of the assessee is against the action of Ld. CIT(A) in confirming the addition of Rs. 12,41,704/- made by the AO U/S 68 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) as unexplained cash credit.

3. Brief facts of the case as noted by the AO is that the assessee has filed his return of income showing total income of Rs. 7,42,118/-. The case was selected for scrutiny through CASS and the reasons for scrutiny selection was “cash deposited during the demonetization period”. The AO notes that the assessee had deposited after demonetization the invalid currency notes of Rs.500/- after 8/9lh November, 2016 to the tune of Rs. 23,50,500/-. However, the AO acknowledges that the assessee has filed audited accounts and produced copy of the ledger of the sales and purchases along with copy of the books related to the purchase and sales made by the assessee without supporting bills and invoices. The AO notes that the assessee has stated that the cash deposit in the bank account during the year was out of sale of dry fish. The AO noted that the cash as per the books of the assessee as on 08.11.2016 was to the tune of Rs. 11,08,796/-, therefore, he accepted the genuinity of the cash deposit to the tune of Rs.11,08,796/- and the remaining amount of Rs. 12,41,700/- has been brought to tax u/s 68 of the Act.

4. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who confirmed the same and also expressed his doubts with regard to the genuineness of the claim of business conducted by the assessee.

5. Aggrieved the assessee is before me.

6. I have heard Ld. AR Shri Akkal Dudhewala for assessee and Ld. DR Shri Arup Chatterjee for Revenue and perused the records. It is noted at the out-set that the Ld. CIT(A) has made an adverse observation wherein he expresses his doubts about the assessee’s claim to be in the business of selling/trading in dry fish which fact is per- se erroneous. Before me, the assessee has produced the survey done u/s. 133 A of the Act by the ITO, Ward-Morigaon at the business premise of assessee i.e. Dry Fish Market, Station Road, Jagi Road, Dist. Morigaon, Assam- 782410 on 24.01.2020 wherein the survey party has listed out the stock of dry fish (14 items valued at Rs.l,89,570/-) [refer page 22 of paper book]. And the assessee had filed the bank statement of credit facility provided by Canara Bank under the Laghu Udhyani Credit Scheme and also the license issued by the concerned Gram Panchayat (refer page 23 PB). Moreover, it is noted that in the first place the AO has not doubted the business of the assessee, so there was no material before the Ld. CIT(A) to have doubted the business of assessee in the dry fish trading. So, the impugned observation of Ld. CIT(A) is perverse in the light of the evidences produced as discussed, therefore it is directed to be ignored.

7. Coming back to the case, it is noted from the audited accounts of the assessee that he had shown aggregate sales to the tune of Rs.4,76,79,000/- in this assessment year. The tax audit report has been filed along with stock details. The AO has not disturbed the returned income of Rs. 7,42,118/-. However, he has not accepted the cash (invalid currency) of Rs. 12,41,704/-. According to Ld. A.R since the AO has accepted the amount as shown by the assessee in its return of income to the tune of Rs. 7,42,118/- which is the net-profit out of the aggregate sale of Rs. 4,76,79,000/-, it is implied that the profit embedded in sales of Rs. 12,41,704/- has also been accepted by the AO and, therefore, separate addition of this amount u/s. 68 of the Act would amount to double addition and for such a proposition relied on the decision of this Tribunal in New Pooja Jewellers Vs. ITO (ITA No.1329/Kol/2018) dated 26.02.2020. According to Ld. A.R in this decided case (New Pooja Jewellers) a survey action u/s. 133A was conducted upon the assessee at the Delhi Airport and he was found to be in possession of cash to the tune of Rs.60 lacs which was seized by the Department. The assessee had explained that he was a jeweler and the cash found from his possession represented the proceeds/ advances received against sale of jewellery. In the return of income filed for the relevant AY, these advances which subsequently got converted into sales, were credited to Profit & Loss Account and formed part of the overall business income reported by the assessee. In the order passed u/s. 143(3), although the AO accepted the business income returned by the assessee but he separately added the sum of Rs.60,00,000/- by way of unexplained cash credit u/s. 68 of the Act. On appeal this Tribunal deleted the impugned addition by holding as under:

“15. Be it as it may, in the normal course, we would have restored the issue to the file of the AO for fresh verification of the claim of the assessee that it had received advances from customers on the occasion of Ramnavami Nayakhata. In other words, we would have given the AO more time to conduct enquiries and investigation. In this case we find that these advances have subsequently been recorded as sales of the assessee firm and that these sales have been accepted as income by the AO during the year. He has not disturbed the sales of the assessee. When a receipt is accounted for as income, no separate addition of the same amount as income of the assessee under any other Section of the Act can be made as it would be a double addition. In the result, we delete the addition made and allow its claim of the assessee.” [Emphasis by me]

8. Relying on the ratio of the above decision of the Tribunal, the Ld. A.R submits that in this case, when the AO had accepted the sum of Rs.12,41,704/- by way of sales from the total turnover of Rs. 4.76 crores while assessing income under the head ‘Profits & Gains of Business’, then the separate addition of the same amount made by him u/s. 68 was untenable on facts and in law inasmuch as it tantamounts to double addition. The assessee therefore, prays that the impugned addition be deleted.

9. Further, according to Ld. A.R., the AO erred in making addition u/s. 68 of the Act after having rejected the books of account (which was audited) and according to him it is undisputed that the AO had rejected the books of accounts of the assessee u/s 145(3) of the Act and then he has to estimate the income for the relevant year by passing the best judgment assessment. According to Ld. A.R when the AO found the books of accounts to be rejected, then he could not rely on the same books [which he has rejected]for making separate additions on account of unexplained cash credit u/s. 68 of the Act. Reliance in this regard was placed on the decision of the Hon’ble Karnataka High Court in the case of CIT Vs Bahubali N Muttin (72 taxmann.com 139) [Page 50 – 56 of PB] which according to him involved similar facts and circumstances as in the present case. According to him, in the decided case (Bahubali) the AO had rejected the books of accounts of the assessee-firm and estimated its business income for the relevant year. The AO further made ‘other additions’ by way of undisclosed income u/s 68/69B towards trade creditors, unexplained investments etc. On appeal, both the CIT(A) & ITAT deleted the ‘other additions’ made by the AO after estimating the income by rejecting the books u/s 145(3) of the Act. On further appeal by the Revenue, the Hon’ble High Court relying upon the decision of the Andhra Pradesh High Court in the case of Indwell Constructions Vs CIT (232 ITR 776) held that when the books maintained by the assessee had been rejected, then the AO could not rely on the same books for making additions u/s 69B/68 of the Act. The High Court accordingly dismissed the appeal filed by the Revenue.

10. The Ld. A.R further placed his reliance on the following decisions wherein the Hon’ble Courts have held that where the assessee’s books of accounts were rejected and its income were assessed on estimation, then it would not be appropriate to simultaneously rely on the same books for making addition by way of ‘undisclosed income’. Malpani House of Stones Vs CIT (88 taxmaann.com 546) (Raj HC) and CIT Vs Aggarwal Engg Co. (302 ITR 246) (P&H HC) by relying on the above cited judicial precedents, the Ld. A.R submits that the impugned addition made by the AO u/s 68 after rejecting the books of accounts u/s 145(3) was clearly impermissible in law and the same deserves to be deleted. And, therefore, he pleaded that Rs.12,41,700/- may be deleted.

11. Per contra, the Ld. D.R vehemently opposed the submission of Ld AR and referred to observation made by AO at page 4 and 5 of his order and, thereafter to page 7 and 9 of Ld. CIT(A) in order to support their actions and in the light of the same, he does not want me to interfere.

12. Both the sides have been heard. It is noted that assessee is into trading business of buying and selling dry fish at Jagi Road, District Morigaon, State of Assam. The assessee’s accounts are duly audited and it was brought to my notice that for the last seven (7) years the assessee’s accounts are audited. From a perusal of the trading account it is revealed that assessee has shown total sales for a sum of Rs.4, 76, 78,990/- and closing stock of Rs.71,93,896/- and Gross profit to the tune of Rs.16,83,317/- and net profit declared is shown at Rs.6,00,240/- (refer page 2 and 3 of paper book). The AO notes that the assessee had deposited after demonetization the invalid currency notes of Rs.500/- after 8/9lh November, 2016 to the tune of Rs. 23,50,500/-. However, the AO noted from perusal of the cash book of assessee that as on 8.11.2016 the assessee had shown Rs.11,08,796/-. This fact according to AO shows the source of cash in respect of Rs.11,08,796/-. The balance amount of in-valid currency notes to the tune of Rs.12,41,704/- was added u/s. 68 of the Act as unexplained cash credit in its book. According to the Ld. A.R, the assessee has returned an income of Rs.6,00,240/- from the total turnover of Rs.4,76,78,990/- and since the AO has accepted the Net profit from the turnover given by the assessee, which included the cash deposited on sales to the tune of Rs.12,41,704/- therefore, this action of AO to make separate addition of this amount is akin to double addition which is erroneous and has cited this Tribunal’s order in New Pooja Jewellers (supra). The other contention of Ld. A.R is that AO having rejected the books of account of assessee which fact is discernible from page 4 of the assessment order; could not have ventured thereafter to make separate addition u/s. 68 of the Act as held by the Hon’ble Karnataka High Court in Bahubali (supra) and Hon’ble Punjab & Haryana High Court in Aggarwal Engg. Co. (supra) and Hon’ble Rajasthan High Court in Malpani House of Stones (supra).

13. On merits in order to show the genuineness of the business and sales transaction of the assessee during the FY 2015 -16 (AY 2016-17) the Ld. A.R drew our attention to the following facts which gives a birds eye view about the cash deposits and banking transaction / sales transaction of assessee during AY 2016 -17 which is as under:

14. From a perusal of the cash deposits/ banking transactions, the Ld. A.R drew our attention to the fact that as per the audited books, especially the trading accounts it can be noted that assessee’s sales (total) in this year was to the tune of Rs. 4,76,78, 990/-(Rs. 4.76 crores) and the bank deposits tally i.e. Rs. 4,76,78,990/- in three (3) bank accounts. It was brought to my notice that before November, 2016 (demonetization on 08.11.2016) i.e. from April to October, 2016, the assessee had deposited Rs. 2,37,84,953/- and from November to March, 2017, the assessee had deposited Rs. 2,38,94,037/-. And out of which only Rs. 12,41,704/- was added by the AO since it were invalid currencies. So looking at the volume of business according to Ld. A.R this amount Rs. 12,41,704/- cannot be termed as from any tainted source and it is probable that this amount is from genuine business transaction. It has been brought to my notice by the Ld. A.R that assessee is into dry fish business and his accounts are audited for the last seven (7) years. From a perusal of the trading account it is revealed that assessee has shown total sales in this year for a sum of Rs. 4,76,78,990/- and closing stock of Rs. 71,93,896/- and Gross profit to the tune of Rs. 16,83,317/- and net profit declared is shown at Rs. 6,00,240/-. The AO has not disturbed the returned income of Rs. 7,42,118/- so, it can be safely inferred that the profit embedded in sales of Rs. 4,76,78,990/- has been accepted by the AO, so, question is whether separate addition of Rs. 12,41,704/- is justified and whether this action of AO amounts to double addition of the same trading receipt.

15. No doubt in such a factual scenario, it amounts to double addition. When the justifiability of separate addition of Rs. 12,41,704/- is to be examined, it should be borne in mind that the AO is making a ‘guess’ about the source of demonetized currency. And the assessee is assailing the ‘guess work’ with an explanation which should be tested; and if the explanation given by the assessee is a plausible/probable from a traders/business man’s/prudent man’s angle/view, then that cannot be brushed aside by the AO, without disproving the explanation / facts or by giving cogent reasons. So the explanation of assessee in respect of receipt of invalid currencies to the tune of Rs. 12,41,704/- need to be tested as discussed. The explanation of assessee is that other than the cash credit of Rs. 11,08,796/- in the books as on 08.11.2016 (which has been accepted by the AO) the assessee had received Rs. 12,41,704/-during the demonetization period, which represents the amount collected from sundry debtors, which formed part of his sales credited to the P & L account during pre-demonetization period (i.e. before 8th November, 2016). So according to assessee, when the AO has accepted the cash credit of Rs. 11,08,796/- as on 08.11.2016, the sundry debtors as on 08.11.2016 should be accepted to the extend received by the assessee even if it is by way of invalid currencies. Explaining further on this point the Ld. A.R submitted that the assessee being a local dry fish dealer, had sold dry fish on credit to several sub-dealers/traders (before 8th November, 2016), who had deposited in the assessee’s account (Post-demonetization i.e. after 8th November, 2016) the earlier payments/debts of the dry fish sold on credit (i.e. pre-demonetization) which included currencies which were no longer valid. According to the assessee, he had no control over the sundry debtors depositing the trade debts as afore-stated in his bank account and so such sale consideration cannot be separately taxed as unexplained cash credit, particularly when it was credited by way of sales in the books which was duly audited and accepted by the AO. Therefore, the plea of the Ld. A.R is that taking into consideration the peculiar facts of the case, separate addition Rs. 12,41,704/- was not warranted. In this backdrop when I examined the statement of bank accounts of assessee (3 bank accounts) it is noted that assessee has deposited in his three bank account (pre-demonetization) an amount to the tune of Rs. 2,38,94,037/- and during (Post-demonetization period) the assessee had deposited to the tune of Rs. 2,38,94,037/- and it is found that the total bank deposit tallys with the figure shown in trading account i.e., Rs. 4,76,78,990/- (Rs. 4.76 crores). So taking into account all these facts and circumstances and demonetization being declared on the night of 8/9th November, 2016, it is noted that AO has accepted the invalid currencies to the tune of Rs. 11,08,796/- because it was shown by the assessee in his regular books maintained as on 08.11.2016. The assessee’s explanation in respect of Rs. 12,41,704/- is that it is the amount which has been deposited by the sundry debtors as on 08.11.2016 which is found to be correct for the reason that the sundry debtors as on 08.11.2016 was to the tune of Rs. 14,93,120/- as is evident from the list of sundry debtors which given below:

So on the same reasoning as adopted by the AO to have accepted Rs. 11,08,796/-(invalid currency notes) as genuine (trade receipt), I find no reason not to accept the explanation of assessee that Rs. 12,41,704/- was deposited by the sundry debtors reflected in the books as on 08.11.2016. And since the AO has accepted the sales/turnover of the assessee which were reflected in the audited books of accounts, as well as the explanation of assessee is supported by material on record, the AO/Ld. CIT(A)’s action of addition of Rs. 12,41,704/- cannot be countenanced. So on this factual finding the assessee’s explanation regarding Rs. 12,41,704/- is plausible. And it is noted that the AO / Ld. CIT(A) / Ld. D.R could not disprove or controvert this fact and so it is accepted. In the aforesaid facts and circumstances, the assessee depositing invalid notes to the tune of Rs. 12,41,704/- cannot be dis-believed as from any tainted source or termed as black money. So taking into consideration the peculiar over all facts and circumstances discussed supra, it is directed that the addition of Rs. 12,41,704/- be deleted.

16. In the result, the appeal of the assessee is allowed.

Order is pronounced in the open court on 17th February, 2021.