Delhi ITAT : Once Sales Are Accepted, Entire Cash Deposits Cannot Be Taxed Again – Only Reasonable GP Addition Sustainable

Jasbir Singh Vs ITO (ITAT Delhi)

Delhi ITAT : Once Sales Are Accepted, Entire Cash Deposits Cannot Be Taxed Again – Only Reasonable GP Addition Sustainable

The Delhi ITAT granted major relief to the assessee by holding that once the Revenue accepts the assessee’s turnover and business activity, the entire cash deposited in bank accounts cannot again be treated as unexplained cash credits u/s 68. The Tribunal accordingly deleted most of the addition of ₹11.52 crore and restricted the addition only by estimating a reasonable gross profit rate.

The assessee had declared meagre income of about ₹1.59 lakh, whereas huge cash deposits exceeding ₹11.52 crore were found in two bank accounts. Based on this mismatch, the assessment was reopened and the AO treated the entire cash deposits as unexplained credits u/s 68.

Before the Tribunal, the assessee explained that he had started a new business of importing Chinese mobile phones and selling them in the local wholesale and retail market. The assessee furnished IEC registration certificate, import invoices, airway bills, shipping documents, bills of entry, audited financial statements, tax audit report and sample sale invoices to demonstrate that the deposits represented business turnover.

The Revenue argued that the assessee could not properly explain the modus operandi of the mobile business during statements recorded years later and therefore the alleged business activity was merely a camouflage. However, the Tribunal observed that the AO had failed to point out any defect in the import documents, sales invoices or audited books of account. The ITAT also noted that the business activity had taken place in 2011 whereas statements were recorded much later in 2018, and therefore inability to explain minute operational details after several years could not by itself render the business non-genuine.

A crucial observation made by the Tribunal was that the AO had never invoked section 145(3) nor rejected the books of account, yet simultaneously accepted the sales turnover while treating the corresponding sale proceeds deposited in bank as unexplained cash credits. The ITAT held that such an approach was legally unsustainable because once sales are accepted, the corresponding receipts cannot ordinarily be treated as unexplained.

The Tribunal held that at best the case could involve suppression of profits and not taxation of the entire turnover. Since the assessee had disclosed GP rate of only 0.70% on turnover of ₹15.76 crore, the ITAT estimated a reasonable GP rate of 1% to cover possible leakage of revenue and directed the AO to recompute income accordingly. The balance addition out of ₹11.52 crore cash deposits was deleted.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal is filed by the assessee against the order dated 12.07.2024 by Ld. Commissioner of Income Tax (A), NFAC, Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-19/10474/2018-19 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 31.12.2018 passed u/s 143(3)/147 of the Act pertaining to Assessment Year 2011-12.

2. Brief facts of the case are that the assessee is an individual, filed his return of income on 18.02.2012, declaring total income of INR 1,59,845/-. The AO had information that assessee has two bank accounts in which he had made cash deposits of INR 9,11,38,235/-in Axis Bank, Karol Bagh, New Delhi and INR 2,41,03,076/- in Indusind Bank, Ashok Vihar, New Delhi and since the income declared by the assessee was not commensurate with the cash deposited in the bank account, the case of the assessee was re­opened by issue of notice u/s 148 after recording the reasons and approval from the competent authorities. Thereafter, the AO had made the addition of INR 11,52,41,311/- being cash deposits as unexplained credit u/s 68 of the Act.

3. Aggrieved by the said order, the assessee preferred appeal before Ld. CIT(A) who vide impugned order dated 12.07.2024, dismissed the appeal of the assessee.

4. Against the order of Ld. CIT(A), the assessee is in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo.

5. During the course of hearing, the assessee has filed revised Grounds of appeal wherein the assessee has taken additional Grounds of appeal with respect to the re-opening of assessment wherein the assessee challenged the approval granted u/s 151 of the Act.

6. Since the amendment has been made vide Finance Act, 2026 and section 292BC is inserted in the Statute which provides as under-

[Circumstances in which approvals by income-tax authority not to be invalid.

292BC. “Notwithstanding anything contained in this Act or in any judgment, order or decree of any Court, for the removal of doubts, it is hereby clarified that any approval given by an income-tax authority in relation to any assessment, reassessment or recomputation proceedings under this Act shall be deemed to be administrative and supervisory in nature and shall not be invalid or shall not be deemed to be invalid by reason of any insufficiency of the reasons recorded or by reason of any defect in the form or manner of its authentication or communication including whether digital signature have been appended to such approval or not, where such approval is granted electronically.”

7. As per the aforesaid section, the approval granted under the Act shall be deemed to be administrative and supervisory in nature and shall not be invalid by reason of any insufficiency of the reasons recorded or by reason of any defect in the form or manner of its authentication or communication and shall be treated as administrative approval. In view of this section, the contention of the assessee regarding defective approval cannot be accepted and therefore, all the additional Grounds of appeal taken regarding re-opening of assessment are dismissed.

8. Coming to Ground of appeal Nos. 6 to 9 raised by the assessee which are taken against the merits of the additions.

9. Ld. AR for the assessee submits that assessee during the year under appeal had started new activity of trading in mobiles where he imported the Chinese mobile phones and sold them in local market on wholesale and retail basis. The sales have been made in cash and the cash received was deposited in the bank account. Ld. AR submits that though the turnover was of more that INR 15 crores however, assessee had incurred losses and therefore very meagre income was disclosed in the return of income filed for the year under appeal. Ld. AR further submits that during the course of assessment proceedings, assessee has filed copies of import purchases invoices, bill of entry, shipping bill etc. in support of the import made from outside India and all the purchases invoices and necessary documents as filed before the AO are paced at pages B-1 to B-345 of the Paper Book. Ld. AR further drew our attention to the sales bills filed before us which are available at pages A-182 to A-275 of the Paper Book. Ld.AR submits that assessee has obtained the registration certificate of IEC code which is placed at page A-181 and all the payments were made for imports through banking channel. Ld. AR also filed audited financial statements as per which the total turnover stated was of INR 15,76,62,907/- and both the bank accounts are forming part of the books of accounts maintained. It is thus, submitted by Ld.AR that cash deposited in the bank account are duly recorded in the books of accounts maintained in regular course of business which has not been rejected before making the additions on account of cash deposited. Ld.AR submits that AO has made an error or fact wherein on one hand, it has accepted the turnover of the assessee and further added the cash generated from the said sales which was deposited in the bank account. Ld.AR alternatively submits that in the given circumstances, a reasonable G.P. rate could be applied though the books of accounts of the assessee were not rejected.

10. On the other hand, Ld. CIT DR vehemently supported the orders of the AO and submits that the assessee has failed to explain about the modus-operandi of the new business of trading in mobile phones when his statements were recorded by the AO. As per Ld. CIT DR that assessee has no knowledge of how the business was carried out and was not able to explain the day-to-day working of the business. He, therefore, submits that the claim of the assessee of the new business activity is nothing but an after-thought or the said business was carried out by someone else int eh name of the assessee and the cash belong to that person and since the assessee has filed to identity such other person, the addition has rightly been made in his hands towards the cash deposits into bank and same deserves to be uphold.

11. Heard the contentions of both the parties at length and perused the material available on record. In this case, sole issue of consideration before us is with respect to the source of cash deposits made in the bank accounts of the assessee. It was the claim of the assessee that he had started new business of import of mobile phones from China and for the purpose of import has obtained IEC certificate which is placed at page A-181 of PB. Thereafter, assessee has imported the mobile phones from China and filed all the documents necessary for the purpose of import such as purchases invoice issued by the foreign vendor, airway bill for shipping of mobile phones, bills of entry etc. All these documents are placed in the Paper Book filed before us. It is further observed that the assessee has filed the summary of the inventory available with him at the end of the year. Further the assessee, has filed sample copies of sale invoices issued which are placed in the Paper Book filed before us. It is further observed that the assessee has got his account audited and the audited financial statements and tax audit report are placed at pages 157 to 168 of the Paper Book, which were never doubted by the AO. It is observed that assessee has turnover of more than INR 15.00 crores however, the income declared was around INR 1.5 Lakhs only. This creates doubts in the minds of the lower authorities as the assessee was having cash deposits of more than INR 11.00 crores in the bank.

12. It is observed that assessee has made sales and all the bills and vouchers were submitted. The purchase invoices and the import details were submitted as stated above. The AO has failed to point out any error in such documents and solely for the reason that the assessee has not been able to describe the business activity carried out by him in the statements recorded during the course of proceedings before him concluded that the entire business activity shown is camouflaged and actuality was done by some other person. It is observed that such statements were recorded in the year 2018 wherein assessee had carried out this activity in the year 2011. This fact has been admitted in the said statements. Since the assessee had suffered losses, he had closed this business which has also been stated in the statements recorded. All these facts deserve to be given credence and the version of the assessee that he was carrying out the activity of trading of mobile phones where mobile phone sets were imported from China and sold in the local market and the consideration received was deposited in the bank account. It is also a matter of fact that the AO has not invoked the provisions of section 145(3) of the Act and the treated the entire cash deposit as unexplained in the hands of the assessee though the sales declared was accepted. Once the sales have been accepted, corresponding consideration received and deposited in the bank account cannot be doubted. At the most, it could be the case where the assessee has suppressed the profits. In view of the entirety of the facts and circumstances of the case, we hold that the addition of the entire cash cannot be made and a reasonable rate of profit should be applied. The assessee has declared G.P rate @ 0.70% on the turnover of INR 15,76,62,907/-. Considering the overall facts, we hold the G.P. rate of 1.00 % on the turnover of 15,76,62,907/- as fair and reasonable to cover up any possible leakage. Accordingly, the addition made on account of cash deposits of INR 11,52,41,311/- is reduced accordingly and the remaining addition is deleted. The Grounds of appeal Nos. 6 to 9 of the assessee are partly allowed.

13. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on 22.05.2026.