Extraordinary event of demonetization to be considered while comparing cash sales during that period

DCIT Vs Aura Jewels (ITAT Bangalore)

ITAT Bangalore held that addition u/s. 68 treating cash sales as unexplained cash credit merely due to unusual increase in volume of sale during demonetization period as compared to average monthly cash sales not justified as extraordinary event of demonetization not considered.

Facts- The assessee, a partnership firm, is engaged in the retail trading of jewelry, gold, silver, and other ornaments. During the assessment proceedings, AO found that the assessee had reported a gross receipt of ₹21.99 crores in its return of income, with cash sales amounting to ₹11,64,59,923/- only. Out of such cash sales, a sale worth of ₹6,85,43,098/- was made between November 1, 2016, and November 8, 2016, out of which ₹6,72,68,168/- was transacted on a single day, i.e., November 8, 2016 only. Thus, on the day of the demonetization announcement, the assessee claimed to have made cash sales of ₹6,72,68,168/-, accounting for more than 57% of the total cash sales made during the year. AO held that the cash sales recorded in a day before the demonetization period were nothing but a book entry, a sham transaction, or a colorable device to evade taxes. AO treated the excess cash sales of ₹6.61 crores as unexplained cash credit u/s. 68 of the Act and added the same to the total income of the assessee.

CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that the invoices issued by the assessee contained a barcode. A barcode on a tax invoice serves as a verification mechanism, ensuring that the sale is recorded in the system and adds a layer of authenticity. Tax authorities or businesses can scan the barcode to verify transaction details, reducing the chances of tampering or post-issuance alteration. While the presence of a barcode does not automatically validate every sale, it does enhance transparency and accuracy in accounting and tax records. However, the AO, without verifying this aspect or pointing out any specific defects, mechanically treated the sales as bogus and sham transactions which in our considered opinion is unjustified.

Held that the AO, without considering the extraordinary event of demonetization, concluded that the cash sales on November 8, 2016, were bogus solely due to their unusually high volume compared to average monthly cash sales. In our considered opinion, applying a normal monthly cash sales average to an extraordinary event like demonetization is incorrect. The approach of the AO in treating cash sales exceeding the average as bogus is both flawed and unjustified.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the Revenue against the order passed by the NFAC, New Delhi dated 27/03/2023 vide DIN No. ITBA/NFAC/S/250/2022-23/1051404289(1) for the assessment year 2017-18. The assessee has filed cross objection.

2. The Revenue has raised the following grounds of appeal;

“1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 6,61,00,000/- made by the AO u/s 68 of the IT Act, 1961

2. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the above mentioned addition as the assessee has never produced the details of the persons including PAN and address either before the assessing officer or before the Ld. CIT(A)

3. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the above mentioned addition as the assessee was not able to produce the confirmation of sales from third party either before the assessing officer or before the Ld. CIT(A).

4. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the above mentioned addition as section 68 of the IT Act, 1961 states that in failure of satisfactory explanation of the nature and source of cash credits in the bank account, the assessing officer can invoke section 68 of the IT Act, 1961. In this case, the assessee failed to discharge the onus of proving the nature and source of cash credits made during the month of ‘ Nov.]6 and thereby unexplained cash credits were added as Income by the assessing officer by invoking the section 68 of the Fl Act, 1961. 1lence. Ld. CIT(A) ought not to have deleted the addition made under section 68 of the IF Act, 1961.”

3. The interconnected issue raised by the revenue is that the Learned CIT-A erred in deleting the addition of Rs. 6,61,00,000/- made by the Assessing Officer (AO) under Section 68 of the Act.

4. The relevant facts are that the assessee, a partnership firm, is engaged in the retail trading of jewelry, gold, silver, and other ornaments. The assessee’s case for the assessment year under consideration was selected for scrutiny under CASS, and accordingly, a notice under Section 143(2) of the Act, dated September 24, 2018, was issued. During the assessment proceedings, the AO found that the assessee had reported a gross receipt of ₹21.99 crores in its return of income, with cash sales amounting to ₹11,64,59,923/- only. Out of such cash sales, a sale worth of ₹6,85,43,098/- was made between November 1, 2016, and November 8, 2016, out of which ₹6,72,68,168/- was transacted on a single day, i.e., November 8, 2016 only. Thus, on the day of the demonetization announcement, the assessee claimed to have made cash sales of ₹6,72,68,168/-, accounting for more than 57% of the total cash sales made during the year. Further, the assessee claimed that during November 2016, total cash sales amounted to ₹7.23 crores, out of which:

• ₹12,74,930/- was made between November 1 and November 7, 2016,
• ₹6,72,68,168/- was made on a single day, November 8, 2016, and
• The remaining cash sales for the month of November 2016 amounted to ₹38 lakh.

5. Accordingly, the AO raised a question regarding the genuineness of the cash sales made during November 2016, through a notice dated December 9, 2019.

6. In response, the assessee furnished relevant documents, including Form VAT-40, details of sundry debtors and creditors, purchase registers, and confirmations from creditors such as M/s Vijay Gems & Jewelry and Mehta Gold (P) Ltd. The assessee, relying on documentary evidence, claimed that the cash sales recorded in the books were genuine and that the cash deposits made in the bank during the demonetization period (November 9, 2016, to December 31, 2016) originated from these cash sales proceeds.

7. However, the AO disagreed with the assessee’s submission and held that the cash sales recorded in a day before the demonetization period were nothing but a book entry, a sham transaction, or a colorable device to evade taxes. The AO’s conclusion was based on the following observations:

1. Abnormal Cash Sales Volume: The AO found that the assessee’s average monthly cash sales from April 2016 to October 2016 were only ₹61.64 lakh, whereas, during the short period of November 1 to November 8, 2016, cash sales amounted to ₹6.85 crores, including ₹6.72 crores on a single day (November 8, 2016). The AO considered this volume abnormally high and commercially unfeasible.

2. Lack of Credible Evidence: The invoices issued for cash sales did not contain the proper names and addresses of customers, which was against the statutory requirements under the Karnataka State Value Added Tax Rules, 2005. The AO also noted that the failure to furnish customer details amounts to non-compliance with the onus for the provisions under section 68 of the Income Tax Act. Additionally, the assessee did not provide confirmation from all creditors, and the purchase bills submitted lacked itemized details.

8. Based on the above observations, the AO concluded that out of the total cash sales of ₹7.23 crores recorded in November 2016, only ₹61.64 lakh (the average monthly cash sales) could be considered genuine. Consequently, the AO treated the excess cash sales of ₹6.61 crores (₹7.23 crores – ₹0.61 crores) as unexplained cash credit under Section 68 of the Act and added the same to the total income of the assessee.

9. The aggrieved assessee preferred an appeal before the learned CIT(A).

10. Before the learned CIT(A), the assessee submitted that, due to the announcement of the demonetization of high-value currency notes (₹500 and ₹1,000) on the evening of November 8, 2016, people rushed to general stores, fuel stations, and jewelry shops to make purchases before the effective implementation of demonetization from November 9, 2016, onward. The extraordinary sales due to demonetisation resulted in a significant spike in cash sales on November 8, 2016, across various sectors, including jewelry sales, which was widely reported in national media and magazines.

11. Accordingly, the assessee claimed that its cash sales on November 8, 2016, were unusually high compared to its average monthly cash sales under normal circumstances. However, the AO, without considering the extraordinary event and its resultant impact on sales volume, held that the cash sales in November 2016, particularly on November 8, 2016, were not genuine merely on the basis of assumptions and conjecture.

12. The assessee further contended that the impugned cash sales were made through tax invoices containing barcodes, indicating that there was sufficient inventory available at the time of sale to support such high-volume transactions. In support of its claim, the assessee furnished:

• Sample copies of tax invoices,
• Stock summary for the period from November 6 to November 10, 2016, and
• Average stock details for FY 2015-16 to FY 2017-18.

13. The assessee also asserted that all necessary details, including purchase records, were submitted before the AO, except for the addresses and confirmations of customers, which were impossible to provide under the given circumstances. Despite this, the AO failed to present any evidence to disprove the assessee’s claims. The AO did not point out any discrepancies in inventory records or mismatches between the purchase and sales registers.

14 Furthermore, the assessee argued that section 68 of the Act could not be invoked in this case, as the nature of the income was duly recorded in the books of accounts as sales and was offered to tax.

15. Regarding the cash sales on November 8, 2016, the assessee contended that it complied with Rule 29 of the Karnataka VAT Act except for the requirement to mention the buyer’s address. The failure to record customer addresses was attributed to the fact that, after the demonetization announcement, a large number of customers rushed to purchase jewelry in exchange for their cash and were unwilling to disclose their addresses. Given these circumstances, the assessee argued that it was practically impossible to obtain customer details and, therefore, it should not be penalized for a situation beyond its control.

16. The Ld. CIT-A, after considering the facts in totality deleted the addition made by the AO by observing as under:

“6.3 The assessee is into retail trade business of purchase and sale of jewellery. During the assessment proceeding, the AO has observed that the assessee has declared gross receipts of Rs.21.99 Crores. During the assessment proceedings, the Assessee was specifically required to submit the sources of cash deposits made in his bank account. It is also noticed that the assessee has made total sales of Rs. 21.99 crores during the year out of which cash sales have been made to the extent of Rs. 11.64 Crores. Further, out of the total cash sales, the assessee has shown cash sales of Rs. 6.85 Crore, only during the period 01.11.2016 to 08.11.2016 which works out to around 58.84% of total cash sales of the year. However, suddenly one day before demonetization period i.e 08.11.2016 huge cash sales have been shown, it also noticed that the assessee has shown cash sales of Rs. 6.85 Crore during the period from 08.11.2016 i.e only in 08 days, which is quite abnormal and is not in tune with the regular sales of the assessee even after considering the usual high and low period of the sales on account of various reasons across the year. The Assessee in his reply has submitted the source of the cash deposits made to be out of the sale proceeds of the business only. However, the complete, name and address to whom the cash sales have been made are not furnished during the assessment proceedings.

6.4 During the appellate proceeding, the appellant has stated that the Appellant furnished all the documents/evidences to support its claim except the address of the _buyers and confirmation by the buyers. The Appellant has also explained why it could not furnish the address of the buyers. The Appellant has discharged its initial burden by furnishing all the documents. The AO had not accepted the arguments of the appellant and observed that as per the explanation, these deposits were made out of cash sales conducted on a single day i.e 08.11.2016 and cash in hand increased is unbelievable and unacceptable.

6.5 The appellant has stated during the appellate proceedings that section 68 does not apply to trading receipts. Section 68 cannot be invoked where the sum found represents proceeds of cash sale of jewellery to customers particularly when the existence of adequate inventory to support the reported sales was not denied. The Assessing Officer has completely ignored the implications and consequences of demonetization. The Assessing Officer has failed to appreciate that 08.11.2016 being an extra- ordinary day the unusual sales took place not only in the jewellery business but also in other areas like Petrol Pumps, Real Estate, medicines, salon, and spa etc. The fact that there was spike in gold sales due to demonetization. Further, the appellant has stated that the Learned Assessing Officer at paragraphs 8, 11 & 14 has stated that the Appellant did not furnish the names of thers, to whom the cash sales have beecu..made. The aforesaid finding is perverse, as the Appellant vide its letter dated -12.12.2019 furnished copies of the tax invoices, which contained names of the buyers. All the tax invoices are supported by barcode. The existence of barcode in the tax invoice raised by the Appellant would mean that there was sufficient inventory for making huge sales on 08.11.2016.

6.6 The Assessing Officer has stated in the assessment order that the provisions of Karnataka VAT rules, 2005 clearly illustrate that a person doing business needs to maintain bills/invoices containing of the person to whom sales are being made. In the instant case, in respect of sales, the assessee failed to furnish the name and address of the persons to whom sales have been made in respect of sales exceeding Rs. 100. However the details of the persons to whom sales have been made have not been provided in this case. In this regard, the appellant has stated that the Appellant except mentioning the address of the buyer as required under Rule 29(1)(d) has complied with all the requirements of the aforesaid Rule. The Appellant could not mention the address of the buyer for the reason that, the buyers who rushed to Jewellery shop to exchange their cash for money, hesitated to disclose their address and identity. Such being a case, it was highly impossible for the Appellant to get tt address from such buyers. It is further submitted by the appellant that merely becaus( the tax invoices did not contain the address of the buyers addition under Section 61 cannot be made more so when the Appellant has not found any discrepancies in the stock ledger and inventory position of the Appellant.lt is submitted that the VAT Officer has accepted the aforesaid tax invoices vide order passed under 30(1) r.ws 123 Section 36 & 72(a) of the KVAT Act dated 11.06.2018. When the authority under the KVAT Act accepts the tax Invoices without the address of the buyers, the Assessing Officer cannot dispute the same. It is not open for the Income Tax authorities to invoke the powers under other statutes.

6.7 The appellant has submitted that the assesse had furnished explanation with regard to the nature and source of the cash deposited in banks. The explanation offered by the assessee was in line with the trend of cash deposits in the past years which were accepted by the Department in the past. AO has not brought on record any material to draw an inference that the explanation offered by the assessee was incorrect or unreasonable as against the entries recorded in the audited books of the Assessee. The cash deposited in the banks from the explained source could not be treated as unexplained cash credits u/s 68 without bringing on record any credible evidence/material in support of such allegation. It is argued that entire sales of the assessee are supported by the bills, duly verifiable from books of accounts & records and the AO did not specify any defects in the sale and the sales during the demonetization period are in line of its own previous history.

6.8 Further, the assessee has submitted the AO has not pointed out any specific defects in the explanation. The entire assessment order is based on presumption and assumption by twisting the data and drawn the conclusion, just to make the huge addition. Huge cash sales is normal on occasions like Navratri, Diwali and AkshayTritiya. Further, the sales supported by the proper invoices and shown in the VAT return, which are accepted by the VAT authorities and VAT returns were not revised, therefore, the same cannot be considered as fabricated or manipulated transactions. The appellant maintained the proper books of account in regular course of business which was duly audited by the independent Chartered Accountant under section 44AB of the Act. All the sales, purchases and stocks were recorded in the books of account which had not been doubted by the AO. The sales shown by the appellant had been accepted by Sales Tax/VAT Department.

6.9 The AO has neither disputed the books of accounts nor pointed out any discrepancy in the sales register and stock. The cash sales made by the assessee has been credited in the books of account and reduction in the stock has not been doubted by the AO. If the reduction of stock position is matching with the sales, it proves that the cash received/deposited represents the sales. The AO has not rejected the books of accounts.lt is also true that no businessmen can refuse to make sale to any customer when stock is available and if it is within the four corners of law, especially when price of the gold was high and there is demand for gold at that time of the day. If minimum details of the customers are taken on sale bills as required under a VAT Act, that cannot be doubted, particularly in the rush of the hour. If the AO alleges that the appellant has brought the unaccounted money generated, then the onus is on the AO to bring on record evidence to demonstrate that such purchases and sales were made by the appellant out of books or that the appellant had other source of income which is not disclosed. In the absence of any evidence, cannot be accepted under the law.

6.10 The expression “nature and source” in section 68 has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. The Law on the subject has been illustrated in a number of decisions prior to 1968. Hon. Supreme Court, in Kale Khan Mohd. HanifVs. CIT (supra), pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference draw form the facts. The law after section 68 is not different. If the prima facie;’. inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue. Proper enquiry must be made by AO before making any addition u/s 68: The AO must make proper enquiry before making any addition u/s 68 In Khandelwal Constructions v. CIT 227 ITR 900 (Gau.) it has been held that section” 68 of Income Tax Act, 1961 empowers the assessing officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation AO must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained. As far as the creditworthiness or financial strength of the creditor/subscriber is concerned, element of credit worthiness and satisfaction of AO is subjective and requires more efforts/inquiry on the part of the AO to give a finding in the order.

6.11 Power of the AO u/s 68 of the Income Tax Act is not absolute — It is legally well settled that the power of the Assessing Officer under section 68 is not an absolute one. It is subject to his satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to the explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the Assessing Officer to consider the same and form an opinion whether the explanation is satisfactory or not. The expression used in the section clearly lays the burden on the assessee to explain the nature anc source of the fund. Unless an explanation is offered, the Assessing Officer is free to treat the fund as income of the assessee from undisclosed sources chargeable to tax. Once an explanation is offered by the assessee, the assessing Officer is bound to consider the same. Such consideration is guided by sound principles of law. The opinion so formed must be reasonable and based on materials and shall not be perverse. The extent of the power of the Assessing Officer while considering the materials produced by the Assessee is very wide. It is a question of examining as to whether the apparent is real. The Assessing Officer is empoweredtoliftthecorporateveilandexaminetherealnatureofthetransactio n. Intheprocess, he may exercise his power of examining the materials. He may require the assessee to produce further materials if so required. He may seek information from the sources on the basis of material produced. In the process of enquiry, the assessee has no right of hearing, but the assessee has a right to challenge the conclusion arrived at on the basis of inquiry made. The assessee may point out the perversity in the finding [Hindusthan Tea Trading Co. Ltd. V. CIT, (2003) 263 ITR 289, 293 (Cal)]. While assessing a partnership firm, the AO can go behind the source of income, but he cannot go to the source of source as per section 68 [PrayagTendu Leaves Processing Co. v. CIT, (2018) 400 ITR 120, 133 (Jharkhand)].

6.12 As per the provisions of Section 68 of the Act, before invocation of the said section, proper enquiry is needed. In the case of the appellant, no proper enquiries were conducted by the AO, which is clearly evident from the assessment records. Section 68 empowers the Assessing Officer to make enquiry specificallytobesatisfiedregardingthecashcredit.lfheissatisfiedthattheseent riesar enotgenuine, he has every right to add these amounts as income from other sources. The satisfaction of the Assessing Officer is the basis of invocation of the powers under section 68 and the satisfaction must be derived from relevant factors on the basis of proper enquiry [Rajshree Synthetics Pvt. Ltd. v. CIT, (2002) 256 ITR 331, 335 (Raj)]. The enquiry envisaged under section 68 is an enquiry which is reasonable and just [Khandelwal Constructions v. CIT, (1997) 227 ITR 900, 904 (Gauh)]. In the facts of that case, it has been held that the amount of cash credits could not be included in the total income of the assessee because the enquiry was not properly made.

6.13 The provisions of sec.68 can be invoked only in cases of receipts shown as cash credits, which are not explainable in terms of requirement of Under sec.68 of the Act, a legal fiction is created in order to assess certain receipts shown as cash credits and not as income, i.e., when a taxable receipt is camouflaged as cash credit (non-taxable item of receipt), then the AO could invoke the provisions of sec.68 of the Act. In the instant case, the assessee has declared cash sales as its income in its profit and loss account and hence, it is not a case of showing receipts as cash credits and camouflaging the said receipt not as income, which would attract the provisions of sec.68 of the Act. The assessment order could not disprove the appellant’s claim as per books of accounts and other documentary evidences. Further, the cash deposited in the demonetized currency added as income of the assessee by applying the provisions of section 68 of the Act while the provisions of 68 as such are not applicable on the sale transactions recorded in the books of accounts because the sale transaction are already part of the income which is already credited in statement of profit & loss, therefore there is no occasion to again consider the same as income of the assessee by applying the provisions of section 68 of the Act. It is further relevant to mention here that if the intention of the legislature would be to apply the provisions of section 68 of the Act on the sale transactions also, then in such case as per law it would be mandatory to have the identity, genuineness and creditworthiness of each buyer. But the law is not so and in case of sale below to certain limit, the assessee was not required to prove all these ingredients of section 68 of the Act and even also in case of sale exceeding to certain limit the assessee is not required tc prove the creditworthiness of buyer. Thus, this also, strengthen the contention of the assessee that the provisions of section 68 are not applicable on the transaction which are already credited in the P&L and the same can only made applicable on the cash credit; such as loans, share application etc. It is an admitted fact that in the case of transactions o sales/purchases of goods/investments/assets, the creditworthiness of the payer is no relevant for the receiver as the amount was received against the something sold to him therefore such transactions cannot be examined with point of view of cash credits.

6.14 The AO accepted cash deposit in bank against all other cash sales except ca, deposited in demonetization period: – It is also pertinent to note that while the A.O. He accepted the cash deposited in the bank accounts in the previous financial years, cash deposited in banks during the impugned F.Y. 2016-17 in the pre demonetization period are cash deposited in banks from the sales made after 08.11.2016. The AO did not accept if same modus operandi with respect to the cash deposited in demonetized currency mere on the pretext that the same was deposited in demonetized currency and hence, w:’suspicious in nature. Thus, the AO is blowing hot and cold in same stream accepting at rejecting the explanations offered by the assessee with respect to the transactions identical nature. The real question that arises in this case is whether the cash deposits made by the assessee into its bank account have been properly explained or not. The assessee has claimed the sales have been duly recorded in the books of accounts as stock register. The AO did not consider such submission and documents in right perspective and by brushing aside all the submission and settled principal of law. This fact is apparent from the assessment order which was framed without considering the submission as well as facts of assessee in right perspective. The amount deposited in demonetized currency out of cash balance as on 08.11.2016 is entirely added as income of the assessee presuming that as on this date the assessee did not holding any single legitimate SBN (Specified Bank Note) at the end of 08.11.2016.

6.15 The AO has treated the cash deposited in the banks during the demonetization period in demonetized currency as unexplained cash credits u/s 68 of the Act although the nature and source of the cash deposits being proceeds arising out of cash sales etc. is patently evident from the entries in the audited books of account of the Assessee. It is not the case of the Department that the cash deposited in the banks during the demonetization period was in excess of what was available in the cashbooks. The cash sales & receipts are duly supported by relevant bills, which were produced before the AO in course of the assessment proceedings, and nothing adverse in connection therewith was noted by the A.O. The fact that cash sales and corresponding cash deposits in banks have been regular feature of the assessee’s business over the past several years has not been denied by the A.O. The provisions of sec.68 can be invoked only in cases of cash credits, which were not offered as income, i.e., a legal fiction has been created in sec.68 of the Act to assess certain cash credits, which were not otherwise shown as income. In the instant case, the assessee has declared the cash sales as its income in the profit and loss account. Hence it is not a case of cash credits, which were not shown as income, in order to attract the provisions of sec.68 of the Act. In the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC), the Hon’ble Apex Court decided the matter in favour of assessee of the ground that it was clear on the record that the assessee maintained the books of accounts according to the mercantile system and there was sufficient cash balance in its cash books and the books of account of the assessee were not challenged by the Assessing officer. If the entries in the books of accounts are genuine and the balance in cash is matching with the books, it can be said that the assessee has explained the nature and source of such deposit. In the case of Lakshmi Rice Mills v. CIT [1974] 97 ITR 258 (Pat.) Hon’ble Patna High court held as under:

“It is, in my view, a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination not subsequently demonetized and even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within the meaning of the law,”

6.16 The above decisions cited supra suggest that once, the assessing officer accepts thl books of accounts and the entries in the books of accounts are matched, there is no case for making the addition as unexplained. Hon’ble Delhi High court considered the issue c taxing the opening stocks in the case of CIT v. Akshit Kumar [2021] 124 taxmann.cor 123/277 Taxman 423 (Delhi), and upheld the order of the ITAT in deleting the addition related to sales. The Hon’ble High Court has extracted the relevant part of the order of the ITAT which reads as under:

“17. Thus, in our opinion the sale made by the assessee out of his opening, stock cannot be treated as unexplained income to be taxed as ‘income from othE sources’; firstly, the stock was available with the assessee in his books of account and trading in such stock including purchase, sale, opening and closing stock (quantity wise and value wise) has been accepted by the department year after year and in some years under scrutiny proceedings, therefore, non existence of stock c business cannot be upheld; secondly, the sale of stock in the earlier years and the sale of balance left out stock in subsequent years has been accepted or has not bee disturbed, then to hold that no stock was sold in this year and remained with th assessee will be difficult proposition; thirdly, inquiry and inspection by the AO don much after the closure of business may not be persuasive for the past event especially in wake of facts as discussed above; and lastly, once neither any item in the trading account, nor gross profit has been rejected, then one part of credit side of the trading account, that is, sales cannot be discarded completely so as to hold that it unexplained money. “

6.17 Identical issue was also decided by the Hon’ble Visakhapatnam bench of ITAT in the case of Hirapanna Jewellersin favour of the assessee. Vide I.T.A. No.253/Viz/2020 and C No.2/Viz/2021 dated 12.05.2021.The relevant part of the decision are asunder:

7. We have heard both the parties and perused the material placed on record. In tl instant case, the assessee has admitted the receipts as sales and offered for taxation. T1 assessing officer made the addition u/s 68 as unexplained cash credit of the same amout which was accounted in the books as sales. In this regard, it is worthwhile to look in section 68 which reads as under.-

68. Where any sum is found credited in the books of an assessee maintained for a previous year, and the assessee offers no explanation about the nature and source there or the explanation offered by him is not, in the opinion of the [Assessing] Officer satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:

From the perusal of section 68, the sum found credited in the books of accounts for which the assessee offers no explanation, the said sum is deemed to be income of the assessee. In the instant case the assessee had explained the source as sales, produced the sale bills and admitted the same as revenue receipt. The assessee is engaged in the jewellery business and maintaining the regular stock registers. Both the DDIT (Inv.) and the AO have conducted the surveys on different dates, independently and no difference was found in the stock register or the stocks of the assessee. Purchases, sales and the Stock are inter/inked and inseparable. Every purchase increases the stock and every sale decreases the stock. To disbelieve the sales either the assessee should not have the sufficient stocks in their possession or there must be defects in the stock registers/stocks. Once there is no defect in the purchases and sales and the same are matching with inflow and the outflow of stock, there is no reason to disbelieve the sales. The assessing officer accepted the sales and the stocks. He has not disturbed the closing stock which has direct nexus with the sales. The movement of stock is directly linked to the purchase and the sales. Audit report u/s 44AB, the financial statements furnished in paper book clearly shows the reduction of stock position and matching with the sales which goes to say that the cash generated represent the sales. The assessee has furnished the trading account, P& L account in page No. 7 of paper book and we observe that the reduction of stock is matching with the corresponding sales and the assessee has not declared the exorbitant profits. Though certain suspicious features were noticed by the AO as well as the DDIT (lnv.), both the authorities did not find any defects in the books of accounts and trading account, P&L account and the financial statements and failed to disprove the condition of the assessee. Suspicion however strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence.

7.1 In the case of CIT v. Associated Transport (P.) Ltd. [1996] 84 Taxman 146/(1995] 212 ITR 417 (Cal.) the Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, therefore, held that there was no reason to treat this amount as income from undisclosed sources and it was not a fit case for treating the said amount as concealed income of the assessee. The revenue moved to Calcutta High Court against the order of the tribunal and the Hon’ble High Court has confirmed the order of the Tribunal while deleting the penalty, Hon’ble Calcutta high court held as under:

“8. The Tribunal was of the view that the assessee had sufficient cash in hand. In the books of account of the assessee, cash balance was usually more than Rs. 81,000. There is no reason to treat this amount as income from undisclosed sources. It is not a fit case for tr amount of Rs. 81,000 as concealed income of the assessee and consequently imposition of penalty was also not justified in this case. “

In the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC), the Hon’ble Apex Court decided the matter in favour of assessee of the ground that it was clear on the record that the assessee maintained the books of accounts according to the mercantile system and there was sufficient cash balance in its cash books and the books of account of the assessee were not challenged by the Assessing officer. If the entries in the books of accounts are genuine and the balance in cash is matching with the books, it can be said that the assessee has explained the nature and source of such deposit.

In the case of Lakshmi Rice Mills v. CIT [1974] 97 ITR 258 (Pat.) Hon’ble Patna High court held as under:

“It is, in my view, a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination notes subsequently demonetised and even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within the meaning of the law.”

All the decisions cited supra suggest that once, the assessing officer accepts the books of accounts and the entries in. the books of accounts are matched, there is no case for making the addition as unexplained. The `Hon’ble “Delhi High court considered the issue of taxing the opening stocks in the case Akshit Kumar [2021] 124 taxmann.com 123/277 Taxman 423 (Delhi), and upheld the order of the ITAT in deleting the addition related to sales. The Hon’ble High Court has extracted the relevant part of the order of the ITAT which reads as under:

“17. Thus, in our opinion the sale made by the assessee out of his opening stock cannot be treated as unexplained income to be taxed as ‘income from the sources’; firstly, the stock was available with the assessee in his books of account and trading in such stock including purchase, sale, opening and closing stock (quantity wise and value wise) has been accepted by the department year after year and in some years under scrutiny proceedings, therefore, non existence of stock of business cannot be upheld; secondly, the sale of stock in the earlier years and the sale of balance left out stock in subsequent years has been accepted or has not been disturbed, then to hold that no stock was sold in this year and remained with the assessee will be difficult proposition; thirdly, inquiry and inspection by the AO done much after the closure of business may not be persuasive for the past event of specially in wake of facts as discussed above; and lastly, once neither any item in the trading account, nor gross profit has been rejected, then one part of credit side of the trading account, that is, sales cannot be discarded completely so as to hold that it is unexplained money.”

7.2 In the instant case the assessee has established the sales with the bills and representing outgo of stocks. The sales were duly accounted for in the books of accounts and there were no abnormal profits. In spite of conducting the survey the AO did not find any defects in sales and the stock. Therefore we do not find any reason to suspect the sales merely because of some routine observation of suspicious nature such as making sales of 270 bills in the span of 4 hours, non availability of KYC documents for sales, non writing of tag of the jewellery to the sale bills, non-availability of CCTV footage for huge rush of public etc. The contention of the assessee that due to demonetization, the public became panic and the cash available with them in old denomination notes becomes illegal from 9-11-2016 and made the investment in jewellery, thereby thronged the jewellery shops appear to be reasonable and supported by the newspaper clippings such as The Tribune, The Hindu etc. It is observed from the newspaper clippings that there was undue rush in various jewellery shops immediately after announcement of demonetization through the country.

8. The Ld.DR placed reliance on various decisions. In the case of Sumati Dayal (supra), Durga Prasad More (supra), Durga Prasad More (supra) both the cases are related to the circumstantial evidences in the absence of direct evidence. In the instant case, the facts clearly support that the assessee has made the sales and there were sufficient stocks to meet the sales. Thus, the facts of the assessee’s case are clearly distinguishable. The Ld.DR further relied on the decisions of Kale Khan Mohammad Hanif (supra), wherein, the Hon’ble Supreme Court held that the AO is permitted to make addition of unexplained cash credits even though the income is estimated on sales. In the instant case, the AO had accepted the sales and no unexplained cash credits were found, thus, the case law relied upon by the Ld.DR is also distinguishable on the facts of the case. The Ld.DR relied on the decision of P. MohanaKala (supra), Devi Prasad Vishwanath Prasad (supra) both the cases refer to the sums found credited in the books of account but not offered as income, whereas in the instant case the assessee admitted the same as sales and offered for taxation, hence, the case laws has no application in the assessee’s case. The Ld.DR also relied on the decision in Naresh Kumar Tulshan (supra), the decision was related to the addition u/s 69A representing huge deposit of cash in bank for which the initial source was declared as past profits and subsequently explained as withdrawal from partnership firm without relevant matching entries in the banks, therefore, the coordinate bench of ITAT held that withdrawal of such huge amount in high denomination was not practicable. The Ld.DR also relied on the decision of J.M.J. it Company (supra) in the cited case, the assessee effected large sales in one month of each year continuously for two years and the assessee is eligible for deduction u/s 80/C and the AO observed that the assessee was inflating the sales and claiming tf huge deductions. No such cash inflow is involved due to demonetization. Whereas in tF assessee’s case there were no such deduction or the exempt income and the profits we, also not abnormal. The assessee explained the reason for huge sales with evidence ar thus the case law relied up on by the DR is distinguishable. The Ld.DR relied on varioL case laws and all the case laws more or less are related to the additions made u/s 68 is unexplained cash credit and in none of the cases the assessees have admitted the sarr as income. Therefore, we find that the case laws relied up on by the Ld.DR has r application in the instant case and the same are distinguishable.

9. In view of the foregoing discussion and taking into consideration of all the fact and the circumstances of the case, we have no hesitation to hold that the cash receipt represent the sales which the assessee has rightly offered for taxation. We have gone, through the trading account and find that there was sufficient stock to effect the sales are we do not find any defect in the stock as well as the sales. Since, the assessee he already admitted the sales as revenue receipt, there is no case for making the addition u, 68 or tax the same u/s 115BBE again. This view is also supported by the decision c Hon’ble Delhi High Court in the case of KailashJewellery House (ITA No.613/20109) an the Hon’ble Gujarat High Court in the case of Vishal Exports Overseas Ltd. (ITA 2471 2009), Hence, we do not see any reason to interfere with the order of the Ld. CIT(A) an the same is upheld.”

6.18 The Hon’ble Banglore ITAT in ITA No 541/BANG/2021dt.13.12.2021 in the matter of Anantpur Kalpana has decided similar issue in the favour of the assessee where in it we held as under:

“9. I have carefully considered the rival submissions. Both the AO and CIT( accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. The addition has been made only on the basis that aft demonetization, the demonetized notes could not have been accepted as va, tender. Since the sale proceeds for which cash was received from the custom was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again unexplained cash credit which is against the principles of taxation. It is also record that the assessee was having only one source of income from trading beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources. Hon’ble Kolkata Tribunal in the case of CIT Vs. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the view that when cash sales are admitted and income from sales are declared as income, wherein the Hon’ble Tribunal found that the assessee had sufficientcash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources. The Hon’bleVishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in ITA No. 253/Viz/2020 on identical facts held that when cash receipts represent the sales which the assessee has offered for taxation and when trading account shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assesseealready admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. I am of the view that in the light of the facts and circumstances of the present case, the addition made is not sustainable and the same is directed to be deleted.”

6.19 Recently, the Hon’ble Delhi ITAT in ITA No 171/DEL/2022dt.26.04.2022 in the matter of Ramesh Kochar has decided identical issue in the favour of the assessee wherein it was held as under:

I have heard the rival submissions made by both the parties and perused the material on record. The dispute before the Tribunal is with respect to addition at Rs.34,99,500% made on account of cash deposits during the demonetization period.

It is an admitted fact that assessee is engaged in the business of trading of electrical wires and trading in electrical equipments, products etc. find assessee has placed on record the details of cash sales made [a copy of which is placed in paper book] and it contains the details namely the date of sale, the voucher number, the name of the party, the amount of sales. It is also an undisputed fact that on the aforesaid sales, VAT as per the applicable rates has been paid by the assessee and the payment of VAT is also reflected in the VAT returns filed by the assessee with the Department of Trade and Tax, Government of Delhi. Before me, Revenue has not placed any material on record to demonstrate that the details of cash sales filed by the assessee are fictitious or bogus. Further, the Revenue has also not placed any material on record to demonstrate that the VAT return filed by the assessee before the Appropriate Authorities have been rejected by the Authorities. It is also a fact that the assessee is having only one source of income which is also not in dispute.

Further the purchase of goods from which the alleged sales have been made by the assessee has also not been rejected by the Revenue. I find that the Bangalore Bench of the Tribunal, on similar facts, in the case of Anantpur Kalpana, Gangavathi, Karnataka vs., /TO, Ward- 1, Koppal in ITA.No.541/Bang/2021 order date( 13.12.2021 and after considering the decision of Kolkata Bench of the Tribunal and Visakhapatnam Bench of the Tribunal in the case of ACIT vs., M/s. Hirapanna Jewellers, Visakhapatnam in ITA.No.253/Vizag/ 2020 order dated 12.05.2021 ha,, held that when the sales have been accepted as revenue receipt, the same could not have been again added as income. I find the issue in the present case is also covered by the aforesaid two decisions relied on by the Learned A.R. of the assessee. In such circumstances and in absence of any contrary material brought on record by the Department, I am of the view that in the present case no addition is called for. 1, therefore, direct for deletion of the addition made by A. 0. and upheld b: the Ld. CIT(A). Thus, the ground raised by the assessee is allowed.

6.20 After careful examination of the facts of the case, I find that the arguments of the appellant are more convincing and supported by evidence in the form of books of account which re neither disputed nor rejected by the assessing officer. The AO has not pointed out single defect in the books of account and also not rejected the books of accounts. The appellant’s books show sales with the bills and outgo of stocks. The sales were duly accounted for in the books of accounts. There was sufficient stock to effect the sales an no defect has been found in the stock as well as the sales and purchases. Therefore, I do not find any reason to suspect the sales. In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case and considering the decision on similar issue by various Courts. I have no hesitation to hold that the cash receipt represent the sales which the assessee has rightly offered for taxation. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. Therefore, the action of the Assessing Officer is not justified. Hence, the addition u/s 68 cannot be upheld. Accordingly the Assessing Officer is directed to delete the addition of Rs. 6,61,00,000/-. The ground appeal no. 6 and 7 raised by the assessee are allowed.

17. Being Aggrieved by the order of the learned CIT(A), The revenue is in appeal before us.

18. The Ld. DR before us has filed the return submissions along with the citation addition of case laws and vehemently supported the findings contained in the assessment order contention of the

19. On the other hand, the Ld. AR before us filed two paper books running from pages 1 to 514 and 1 to 291 and detailed written submissions in support of the findings of the ld. CIT-A.

20. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the primary contention of the Revenue is that the cash sales reported during the demonetization period were abnormally high and were not supported by complete buyer details, such as PAN and the addresses of customers.

20.1 Regarding the Revenue’s allegation that the PAN and address of customers were not mentioned on invoices, we note that the requirement to mention PAN applies only when the transaction value exceeds ₹2 lakhs. In the present case, the assessee claimed that all invoices for cash sales were below this threshold, thereby making it unnecessary to mention PAN details. We also find that the AO did not identify any specific invoice where the transaction value exceeded ₹2 lakhs.

20.2 Further, the assessee’s learned AR submitted that the assessee had conducted cash sales before November 2016, and those invoices also did not contain PAN details; however, the Revenue did not dispute those sales at the same time. We note that the learned DR has not controverted the claim of the learned AR. In our considered opinion, consistency should be maintained, and the Revenue cannot be allowed to take different positions on similar transactions conducted on different dates in the same financial year.

20.3 Regarding the absence of customer addresses on invoices, which is required under Rule 29 of the Karnataka VAT Act, we note that the statutory requirements should generally be followed. However, the circumstances under which the requirement was not met must be considered before drawing an adverse inference against the assessee.

20.4 It is noted that after the announcement of demonetization on the evening of November 8, 2016, effective from November 9, 2016, the people rushed to general stores, jewelry shops, fuel stations, etc., to spend their cash before it became invalid for general transactions. Furthermore, it is important to note that the requirement to record the buyer’s address is a VAT regulation and not under the Income Tax Act. Furthermore, the VAT Department accepted the invoices raised by the assessee as genuine without any dispute. Therefore, in our considered opinion, solely for the reason that the buyers addresses were not mentioned on invoices, the sales made by the assessee cannot be held bogus or sham transaction.

20.5 We further note that the invoices issued by the assessee contained a barcode. A barcode on a tax invoice serves as a verification mechanism, ensuring that the sale is recorded in the system and adds a layer of authenticity. Tax authorities or businesses can scan the barcode to verify transaction details, reducing the chances of tampering or post-issuance alteration. While the presence of a barcode does not automatically validate every sale, it does enhance transparency and accuracy in accounting and tax records. However, the AO, without verifying this aspect or pointing out any specific defects, mechanically treated the sales as bogus and sham transactions which in our considered opinion is unjustified.

20.6 We further note that the AO, without considering the extraordinary event of demonetization, concluded that the cash sales on November 8, 2016, were bogus solely due to their unusually high volume compared to average monthly cash sales. In our considered opinion, applying a normal monthly cash sales average to an extraordinary event like demonetization is incorrect. The approach of the AO in treating cash sales exceeding the average as bogus is both flawed and unjustified.

20.7 We note that the Ahmedabad Tribunal, in the case of Hinima Atul Shah vs. ITO (164 Taxmann.com 439), dealt with identical facts and circumstances and deleted the addition. The relevant finding of the bench extracted as under:

7. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the Assessing Officer has accepted the transactions about purchase and sale of jewellery in gold and silver without raising any doubt regarding books of account, purchase and sale stock registers and the bills produced by the assessee. The cash transaction before the demonetisation period was also revealed by the assessee as the period before the demonetisation was also the period of Diwali and that itself shows that why the cash transaction took place in that particular period. Ther was no doubt created by the Assessing Officer in respect of purchase and sale of stock register as well as books of account. Since the stock register as well as the family evidences produced by the assessee are found to be genuine, the cash transaction has also been proved by the assessee being genuine transaction. These factual aspects were totally ignored by the Assessing Officer and CIT(A). Therefore, the appeal of the assessee is allowed.

21. In view of the above detailed discussion, we do not find any reason to interfere with the finding of the learned CIT(A). Hence the ground of appeal raised by the revenue is hereby dismissed.

Now coming to CO No.9/Bang/2023 for the asst. year 2017-18

22. Since the revenue appeal is dismissed, hence the cross objection rasied by the assessee is not required to be adjudicated. Accordingly the cross objection is dismissed.

23. In the result, the cross objection filed by the assessee is dismissed.

24. In the combined result, the appeal filed by the revenue and the cross objection filed by the assessee are dismissed

Order pronounced in court on 24^th day of February, 2025