Cash Deposit Out of Cash Sales treated as Undisclosed Income Under Section 68 & 69A of Income Tax Act, 1961

On the night of 8th November 2016 the honorable Prime Minister of India announced that Rs. 500.00 and Rs. 1000.00 notes will no longer be legal tender. No fresh transaction could be done using these notes as legal tender status of these notes was taken away. The time to deposit the said notes in a bank account was given from 10.11.2016 to 30.12.2016. People rushed to banks to deposit their cash and it was also declared that those people who are deposing cash upto Rs. 250000.00 will not be questioned, of course the cash must be explainable. Every day new notifications/circulars came from Reserve Bank of India. Serpentine queues were seen outside bank, people were seen carrying cash to banks and depositing in their bank accounts. The said scheme was aimed by Government of India with a view to reduce the cash flow and promote digital payment system. Another plan was to unearth the black money which was there in the system, and also to give a blow to fake currency which was also there in the system. This article is aimed to help those persons who had deposited their cash which was accumulated in their books of account due to genuine cash sales. Cash sales if deposited in bank account can never be treated and unexplained income or unexplained investment as per Sections 68 and 69A. Hence can’t be taxed as per Section 115BBE. This is explained with the help of following cases :

1. Shree Sanand Textiles Industries Ltd. V. DCIT vide ITA No. 1166/AHD/2014.

It was held that the provisions of section 68 cannot be applied in relation to the sales receipt shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income at the time of sale only. It was also accepted that there is not even iota of evidence having any adverse remark on the purchase shown by the assessee in the books of accounts. Once the purchases have been accepted, then the corresponding sales cannot be disturbed without giving any conclusive evidence/finding. In view of the above the order of CIT(A) was set aside and Assessing Officer was asked to delete the additions.

2. CIT v. Vishal Exports Overseas Limited (Gujarat High Court) Tax Appeal No. 2471 of 2009

Revenue carried the matter in appeal before the Tribunal. The Tribunal did not address the question of correctness of the C.I.T. (Appeals)’s conclusion that amount of Rs.70 lakhs represented the genuine export sale of the assessee. The Tribunal however, upheld the deletion of Rs.70 lakhs under section 68 of the Act observing that when the assessee had already offered sales realization and such income is accepted by the Assessing Officer to be the income of the assessee, addition of the same amount once again under section 68 of the Act would tantamount to double taxation of the same income.

3. Lakshmi Rice Mills v. Commissioner of Income-tax [1974] 97 ITR 258 (PAT.)

Section 69A of the Income-tax Act, 1961 – Unexplained moneys – Assessment year 1946-47 Whether when books of accounts of assessee were accepted by revenue as genuine, and cash balance shown therein was sufficient to cover high denomination notes held by assessee, assessee was not required to prove source of receipt of said high denomination notes which were legal tender at that time – Held, yes.

4. M. Wire Inds v. CIT (High Court Of Delhi) Income Tax Reference No. 96 of 1989

In this case the assessee had made sales of Rs. 3.00 Lakh to one M/s Sandeep Wire Industries and the same was included in sales. On making enquiries it was gathered that no such entity M/s Sandeep Wire Industries existed hence sale was not accepted as genuine and the said amount was treated as undisclosed income. On appeal before CIT(A) it was demonstrated that even if the said sale was treated as undisclosed income there can’t be any addition in undisclosed income, since the said amount has already been included in sales and hence in total income. The honorable Delhi High Court accepted the contention if assessee.

5. CIT v. KAILASH JEWELLERY HOUSE in Appeal No. ITA 613/2010 (Delhi High Court)

The Commissioner of Income-tax (Appeals) had returned a finding that the stock and cash found at the time of search had been examined by the Assessing Officer and was compared with the stock and cash position as per books. The stock and cash position as per the books had been arrived at after the effect of the aforesaid cash sales. The stock position as well as the cash position as per the said books had been accepted by the Assessing Officer. The Commissioner of Income-tax (Appeals) also noted that the appellant had furnished the complete set of books of accounts and the cash books and no discrepancy had been pointed out. The Assessing Officer had doubted the aforesaid sales as bogus and had made the aforesaid addition. However, the Commissioner of Income- tax (Appeals) as well as the Income-tax Appellate Tribunal returned findings of fact to the contrary. The Tribunal also noted that the departmental representative could not challenge the factual finding recorded by the Commissioner of Income-tax (Appeals). Nor could he advance any substantive argument in support of his appeal. The Tribunal also observed that it is not in dispute that the sum of Rs 24,58,400/- was credited in the sale account and had been duly included in the profit disclosed by the assessee in its return. It is in these circumstances that the Tribunal observed that the cash sales could not be treated as undisclosed income and no addition could be made once again in respect of the same. The findings of the Commissioner of Income-tax (Appeals) and the Tribunal, which are purely in the nature of the factual findings, do not require any interference and, in any event, no substantial question of law arises for our consideration. The appeal is dismissed.

6. CIT Vs JINDAL DYECHEM INDUSTRIES PVT LTD ITA 283/2011 & ITA 343/2011 (Delhi High Court)

The Assessing Officer, while making the assessment in respect of the assessment year 2004-2005 made an addition of 11907201.00 on account of the alleged understatement of sale of bullion (gold and silver) by invoking the provisions of Section 69A of the Income Tax Act, 1961. According to the learned counsel for the revenue, all these sales represented cash sales of gold and silver to unknown persons. When the Assessing Officer had required the assessee to disclose the names of those persons to whom the cash sales of gold and silver were made, the assessee was unable to do so and, therefore, the Assessing Officer came to the conclusion, on the basis of the average rates of the Delhi Bullion Association, that the sales were understated to the extent of 11907201.00. Accordingly, the Assessing Officer made an addition of 11907201.00 on this account. Being aggrieved, the assessee preferred an appeal, as aforesaid, before the CIT (A), who agreed with the submissions made by the assessee and deleted the said addition. The CIT (A) noted that it had been verified by the Assessing Officer that the said Delhi Bullion Association rates were in respect of retail transaction and not in respect of the wholesale trade. It may be pointed out that the assessee was admittedly involved in the wholesale trade and not in the retail trade. Consequently, the CIT (A) held that the Delhi Bullion Association rates were, therefore, not applicable to the transactions entered into by the assessee and, therefore, the same could not have been used for arriving at the conclusion that there was an understatement of the sales. As a result, the CIT (A) deleted the addition of 11907201.00. As pointed out above, the revenue preferred the appeal before Tribunal, after hearing the counsel for the parties, came to the following conclusion in respect of the said deletion of 11907201.00. It was observed that :

We have heard both the counsels and perused the records. AO’s basic reason is that there are cash sales which are not verifiable and the rates whereof is below the average rate of Delhi Bullion Association. As pointed out by the ld. CIT(A),AO on remand has himself accepted that the Delhi Bullion Association rates are wholesale rates and are not applicable to the case of the assessee. In any case, it is not the case of the AO that he has come across any material showing that the assessee is receiving something over and above that entered into the books of accounts maintained. All the requisite books and records are maintained and the same are duly audited and no specific defect in the same has been pointed out. Moreover, Ld. CIT(A) rightly observed that the lower rates of the Delhi Bullion Association are quite comparable with that shown by the assessee. The ITAT concurred with the findings of CIT(A), the same was the view of honorable Delhi High Court in this case.

When the assessing officer has not doubted the genuineness of purchases or opening stock, and has not rejected the books of accounts u/s 145(3), then the Assessing Officer cannot deny the source of cash deposit out of cash sales and thus he cannot make any addition under section 68 or 69A of the Act. Before taking any adverse view regarding sales as declared by assessee resulting in accumulation of cash in books of account of assessee it has to be established beyond doubt that there is no sales and cash is generated out of any other undisclosed source, only then Sections 68 or 69A comes into play.

I hope the above article will be helpful to readers.

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