Legal sale of gold using prohibited currency/ SBNs not permissible

By POONAM GANDHI Income Tax Judiciary January 11, 2023

TaxGuru Citation: 2023 taxguru.in 321
Case Name: Vaishnavi Bullion Private Limited Vs ACIT (ITAT Hyderabad)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Related Assessment Year: 2017-18
Courts: All ITAT, ITAT Hyderabad

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Vaishnavi Bullion Private Limited Vs ACIT (ITAT Hyderabad)

ITAT Hyderabad held that no legal sale of gold can be made with the use of either prohibited currency or prohibited Specified Bank Notes (SBNs)

Facts- Assessee is a Private Limited Company engaged in the business of trading in gold, diamond jewellery and bullion. In this case, a search and survey action u/s 133A of the Act was carried out in the business premises of the assessee on 01.12.2016 by the Investigating Wing. During the survey, it was noticed that assessee had deposited Rs.39,64,98,000/- in its Axis Bank account and Rs.50,00,000/- in Bank of Baroda, Hyderabad and thus, the total deposit after demonetization made by the assessee company was Rs.40,14,98,000/-. Later, the MD of the assessee filed a declaration of Rs.40 crore under Pradhana Mantri Garib Kalyan Yojana, 2016 (PMGKY) on 30.12.2016 and paid tax of Rs.1 crore on 13.01.2017. Thereafter, the M.D. filed an affidavit withdrawing the declaration on 16.01.2017 filed under PMGKY.

The assessee submitted that the assessee had agreed to cover under the Pradhana Mantri Garib Kalyan Yojana, 2016 as the assessee was given the assurance, no criminal prosecution / PMLA inquiry / investigation would not be done.

Later on ED started investigation and the income tax department made an addition against the assessee based on the confession made by the Director of the assessee before the ED.

Conclusion- In our opinion, the conduct of the assessee was incomprehensible and abnormal and it had caused immense harm to well intention notification and the Act. The withdrawal of legal tender character was one of the significant steps in weeding out the fake currency and to curb the black money in the country. The persons like assessee have given a setback to well-intended and well-thought policy of Government of India and they have used this as an opportunity to convert their or others’ ill-gotten money into bullions. In the present case the bank account. The above said act of the assessee is not only against the law but also against the interests of the nation. In the present case, the bank account with the AXIS Bank was only opened on 10.11.2016. As per the notification, the assessee cannot deposit more than the amount of Rs.50,000/- in its account till KYC is completed. It is not the case of the assessee that the KYC had been completed on the date of opening of its account.

It is not understandable how the bank permitted the deposit of huge amounts in the newly opened account, on the date of its opening itself. The concerned agency must look into the role of the bank employees in this regard. When the assessee itself cannot deposit more than Rs.50,000/- as per notification, then how a third party can be authorized to deposit more than the specified limits in the bank account of the assessee. The disability of the assessee would entail the disability of its delegate / agent.

Thus, it is clear that SBNs were subsequently received by the assessee and were wrongfully deposited with the bank and thus, the assessee had mischievously and unscrupulously brought the SBNs into the network. In our view, the stand of the Assessing Officer is correct, as he had rightly concluded that no legal sale of gold could have made with use of prohibited currency /SBNs.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

These are the cross appeals filed by the assessees mentioned above and Revenue feeling aggrieved by the order of ld. Commissioner of Income Tax (Appeals) – 11, Hyderabad, (hereinafter referred as “ld. CIT(A)”) passed on 07.09.2020 for A.Y. 2017-18.

2. The grounds raised by the assessee in ITA No.561/Hyd/2020 reads as under :

“1. The ld.CIT(A) erred in confirming the addition of Rs.11,74,50,000/- which is not sustainable on facts and in law.

2. The ld.CIT(A) erred in not considering the fact that the cash deposited in the bank account of the appellant reflected the business turnover of the appellant and the appellant has offered net profit earned on such turnover in his return of income and paid taxes.

3. The ld.CIT(A) erred in not considering the evidence that the cash deposited in the bank account of the appellant was utilized for purchase of gold bullion by the appellant in the normal course of his business.

4. The ld.CIT(A) erred on facts and in law in granting partial relief of Rs.28,37,00,000 out of cash deposit of Rs.40,11,50,000 and confirming the addition of Rs.11,74,50,000/- although the entire cash deposits are of the same genre of business.

5. The ld.CIT(A) erred in law in confirming the AOs findings that the provisions of section 68 are attracted in respect of cash deposits made in the appellant’s bank account.

6. The ld.CIT(A) erred in law in confirming the AOs findings that the provisions of section 68 are attracted in respect of cash deposits made in the appellant’s bank account despite the fact that the AO did not make any inquiries to satisfy himself about the explanation offered by the appellant although making of such inquiries is a condition prerequisite for invoking the provisions of section 68.

7. The ld.CIT(A) erred on facts and in law in ignoring the various judicial pronouncements of High Courts and Supreme Courts submitted by the appellant which showed that the AO could not have invoked the provisions of section 68 considering the facts of the appellant’s case.

8. The ld.CIT(A)’s finding that the AO, in the statement recorded from the appellant u/s 131 on 20.11.2019 discussed the issues raised by the appellant is contrary to the facts on record.

9. The ld.CIT(A)’s finding that the AO, in the statement recorded from the appellant u/s 131 on 20.11.2019 discussed at length the explanation regarding sources of cash as submitted by the appellant in his letter dt.01.11.2017 is not a fact and is based on the wrong appreciation of the contents of the assessment order.

10. The finding of the ld.CIT(A)’s that the requirements of section 68 are met by AO is not based on correct appreciation of the provisions of section 68 of the Act in as much as that the ld.CIT(A) erred in law in concluding that recording of statement u/s 131 from the appellant amounts to conduct of due inquiries contemplated under section 68 of the Act.”

3. The grounds raised by the Revenue in ITA No.58/Hyd/2021 reads as under :

“1. The ld.CIT(A) erred both in law and on facts of the case in allowing relief to the assessee.

2. The ld.CIT(A) erred in granting relief of Rs.28,37,00,000/- in respect of the addition made u/s 68 on the ground that the deposits received from Mr. Neel Sundar stood explained.

3. The Ld.CIT(Appeal) erred in disregarding the fact that acceptance of cash in SBNs and purchase of bullion with such ‘ceased legal tender’ cannot be treated as a legal business transaction in view of the special circumstances prevalent after announcement of demonetization.

4. The Ld.CIT(Appeal) erred in treating a portion of the credits as explained when the assessee was prevented by RBI norms in accepting cash in SBNs either directly or indirectly after 08.11.2016.

5. The Ld.CIT(Appeal) erred in ignoring the trite principle that a later special law though not so consistent with earlier general law; will prevail over the earlier general law- when the Reserve Bank of India issued Special Law by way of Notifications after demonetization barring SBNs as legal tender after 08.11.2016 – the sale advances received not in legal tender cannot be treated as per general law of Income Tax Act.

6. The Ld.CIT(Appeal) erred in ignoring the findings of Central Forensic Science Laboratory that the computer systems claimed to have been used by the assessee for making advance credit entries on 08.11.2016 were not at all opened/used on that date and consequently the credit entries in the books of account are antedated to escape the consequences of accepting SBNs after demonetization.

7. The ld.CIT(Appeal) erred in taking into cognizance the letter dated 01.11.2017 claimed to have been filed by the assessee before the assessing officer without calling for a remand report as no such letter had been filed before the assessing officer.

8. The ld.CIT(Appeal) erred in granting relief solely on the basis of the statements given by Mr.Neel Sundar before Investigative agencies which was retracted in his subsequent statement given before the DDIT(Inv) on 09.02.2017, wherein he categorically stated in reply to Q.No.13 that ?the cash does not belong to me or my family or my concern M/s. Ashta Lakshmi Gold nor does it belong to any of my friends from the market.”

9. The Ld.CIT(Appeal) erred in not taking into cognizance of the fact that the retraction before DDIT(Inv) was given on 09.02.2017 i.e, much after the statement given before police on 11.01.2017 and 21.01.2017.

10. The Ld.CIT(Appeal) erred in deleting the addition made stating that no enquiries were conducted. The ld.CIT(A) who has coterminous powers to conduct further enquiries before coming to his conclusions instead of deleting the addition for lack of enquiry.

11. The Ld.CIT(Appeal) erred in holding that the assessing officer simply ignored the material produced before him by the assessee and made his own conclusions without bringing any material evidences to show that Sri Neel Sundar had contributed Rs.28.37 crores, except for referring to the Bank CCTV footage and Cell phone recordings, which were never produced before Income tax authorities at any point of time.

12. The Id.CIT(Appeal) erred in of restricting credits which his view were to shown the sources as sales of and the credits received ignoring in SBNs the and nature can therefore be assesses only u/s.68 of the Act.”

4. The grounds raised by the assessee in ITA No.560/Hyd/2020 reads as under :

“1. The ld.CIT(A) erred in confirming the addition of Rs.20,74,01,000/- which is not sustainable on facts and in law.

4. The ld.CIT(A) erred on facts and in law in granting operational relief of Rs.37,11,34,000 out of cash deposit of Rs.57,85,35,000 and confirming the addition of Rs.20,74,01,000 although the entire cash deposits are of the same genre of business.

5. The ld.CIT(A) erred in law in confirming the AOs findings that the provisions of section 68 are attracted in respect of cash deposits made in the appellant’s bank account.

8. The ld.CIT(A)’s finding that the AO, in the statement recorded from the appellant u/s 131 on 20.11.2019 discussed the issues raised by the appellant is contrary to the facts on record.

5. The grounds raised by the Revenue in ITA No.59/Hyd/2021 reads as under :

“1. The ld.CIT(A) erred both in law and on facts of the case in allowing relief to the assessee.

2. The ld.CIT(A) erred in granting relief of Rs.37,11,34,000/- in respect of the addition made u/s 68 on the ground that the deposits received from Mr. Neel Sundar stood explained.

4. The Ld.CIT(Appeal) erred in treating a portion of the credits as explained when the assessee was prevented by RBI norms in accepting cash in SBNs either directly or indirectly after 08.11.2016.

8. The ld.CIT(Appeal) erred in granting relief solely on the basis of the statements given by Mr. Pawan Agarwal before Investigative agencies without appreciating the fact that no material evidence was furnished in support of the claim.

9. The ld.CIT(A) erred in relying on the confession statement given by Mr. Pavan Kumar Agarwal before the police authorities even though such statement is not admissible as evidence.

10. The ld.CIT(A) erred in relying on the statement of Sri Pavan Kumar Agarwal given before Police Authorities on 17.02.2017 that he contributed 37.11 crores out of total cash deposits made in the bank accounts of the assessee, without considering the fact that this averment was different from the statement recorded before the Income Tax authorities.

11. The Ld.CIT(Appeal) erred in deleting the addition made stating that no enquiries were conducted. The ld.CIT(A) who has coterminous powers to conduct further enquiries before coming to his conclusions instead of deleting the addition for lack of enquiry.

12 The Ld.CIT(Appeal) erred in holding that the assessing officer simply ignored the material produced before him by the assessee and made his own conclusions without bringing any material evidences to show that Sri Pavan Agarwal had contributed Rs.37.11 crores, except for referring to the Bank CCTV footage and Cell phone recordings, which were never produced before Income tax authorities at any point of time.

13. The Id.CIT(Appeal) erred in of restricting credits which his view were to shown the sources as sales of and the credits received ignoring in SBNs the and nature can therefore be assesses only u/s.68 of the Act.”

6. Although a number of grounds have been raised in these cross appeals, however, these relate to the part relief granted by the ld.CIT(A) out of the addition made by the Assessing Officer of cash deposited in the bank during the demonetization period.

6.1. At the time of arguments, both the parties have submitted that the facts and issues raised in both the sets of appeals are identical, except the amounts and names involved and hence, appeals in the case of Vaishnavi Bullion Pvt. Ltd bearing Nos. ITA 561/Hyd/2020 and the appeal of Revenue in ITA 58/Hyd/2021 may be taken as lead cases for the sake of convenience.

ITA 561/Hyd/2020 & ITA 58/Hyd/2021

7. The brief facts of the case are that assessee is a Private Limited Company engaged in the business of trading in gold, diamond jewellery and bullion. In this case, a search and survey action u/s 133A of the Act was carried out in the business premises of the assessee on 01.12.2016 by the Investigating Wing, Hyderabad. During the survey, it was noticed that assessee had deposited Rs.39,64,98,000/- in its Axis Bank account and Rs.50,00,000/- in Bank of Baroda, Hyderabad and thus, the total deposit after demonetization made by the assessee company was Rs.40,14,98,000/-. During the course of survey, a statement was recorded from Shri Nitin Gupta, MD of the assessee wherein he stated that the said amount was received from 2153 customers on 08.11.2016 as advances after the announcement of demonetization and each customer had paid advance below Rs.2 lakhs for purchase of bullion. On 07.12.2016, he reconfirmed the above statements. Later, the MD of the assessee filed a declaration of Rs.40 crore under PMGKY on 30.12.2016 and paid tax of Rs.1 crore on 13.01.2017. Thereafter, the M.D. filed an affidavit withdrawing the declaration on 16.01.2017 filed under PMGKY.

For the A.Y. 2017-18, assessee filed its return of income admitting an income of Rs.1,42,71,390/- after adjustment of brought forward losses of Rs.8,60,150/-. The case was selected for scrutiny and a notice u/s 143(2) of the Act was issued on 14.08.2018. Later, notice u/s 142(1) of the Act were issued from time to time calling for certain information and after considering the information filed, assessment was completed by the AO u/s.143(3) of the Act on 31.12.2019 assessing the total income at Rs.41,57,69,390/- by making an addition of Rs.40,11,50,000/-u/s 68 of the Act.

8. The relevant portion of Assessing Officer’s discussion and finding reads as under :

“3.5.1 Apparent inconsistency even in the second version of cash advance from one customer:

The first issue for consideration is the deviation of the assessee in replacing single customer in place of their earlier stance of 2153 customers, who purportedly lent advance of Rs.40.11 crores. In para 15 of the above submissions, the assessee now brings in the concept of ‘human possibility’ of receiving cash of below Rs.2 lakhs from 2100 persons within three and half hours in their business premises. In fact, the claim of the assessee of receiving cash of Rs.40.11 crores and the probability of entering the details of 2153 customers (5200 customers including the customers of M/s MGJPL), printing cash receipt vouchers within three hours from 09.00 PM to 12.00 midnight on 08.11.2016 was questioned in the statement recorded u/s 131 on 01.12.2016 vide Q.No.70. To this, the Director of the assessee company replied as under:

“… It is correct that around 5200 customers had visited this premises on 08.11.2016 from. 09.00 PM onwards for depositing cash advance in Musaddilal Gems and Jewels P Ltd and Vaishnavi-bullion P Ltd. I don’t know how we had managed, but it was done”.

Though the assessee claimed that the statement given on 08.11.2016 was under duress and the statements given on 20.11.2019 is true, no evidence to substantiate that the assessee / their Director is in receipt of cash from one person was provided with cogent evidences, except referring to the bank footage or some confessional statements of others. When a credit entry is made in the books of an assessee, the burden is on the assessee to prove the sources of such credit to the satisfaction of the Assessing Officer with cogent evidences. In the case on hand, the assessee takes the liberty of changing their stance before the Income Tax authorities as well as before other investigating agencies (will be discussed in the ensuing paragraph 3.5.3) to suit their convenience and when it comes to others, insist on a statement given before other investigating agencies and outside bank CCTV footage as evidences, to prove their innocence. Such double standards cannot come to the rescue of the assessee in discharging the primary obligation cast on them in proving the sources of credit appearing in their books of account.

3.5.2 Acceptance of proposal for cash advances — Legal position — Allied Acts —Special Circumstances after demonetization:

The second submission of the assessee is that there is time gap between ‘acceptance of proposal’ and ‘acceptance of cash’. As per the submissions of the assessee, the proposal of taking cash advance from One customer for sale of gold was accepted by him on 08.11.2016 and the cash was directly deposited by the said Sri Neel Sundar Tharad on 10.11.2016 in the assessee’s bank account, and therefore, they acted prudently for legitimate profit on the (ill)advice of their Chartered Accountant.

This claim of the assessee has two components. The first component is that their acceptance of proposal for cash advance against sale of gold was, entered in their books on the night of 08.11.2016 itself, (and not after 09.11.2016 against the intention of demonetization announcement): This claim of the assessee has two pronged flaws. As per assessee’s own’ ad-Mission, the list of 2153 customers was provided by Sri Neel Sundar Tharad and accordingly they entered the advance cash receipts in their books against 2153 customers. Having accepted (even other-wise proved later by the Investigation Wing that the list of customers is a fabricated one) that the list is a bogus one,, the assessee cannot ‘Claim that cash advances were entered in their books on the night of-08.11.29164sell and only physical cash was directly deposited by the purported lone customer on 10.11.2016. ‘The second flaw is also factual and was proved by the CFSL report that no entries whatsoever were made in the systems impounded from the business premises of the assessee on 08.11.2016. A separate discussion on this-issue of entry of cash advances is made in the ensuing paras (3.5.5).

Now coming to the second component of this claim, that the cash was directly deposited in their bank account by Sri Tharad on 10.11.2016 and therefore the same does not belong to them. It is against this claim of Director, Sri Nitin Gupta, the other Director of M/s MGJPL, Sri Mallesh in his statement recorded u/s 131 (pl. refer to para 2.6 above) averred that he got a call from Sri Nitin Gupta to rush to the bank on 10.11.2016 and oversee the work of depositing the cash in their bank account. Even thereafter, the cash deposited in the bank account was utilized by the assessee company for purchase of bullion through RTGS transfer.

All these enquiries by the Investigation Wing and, the CFSL findings prove, that the assessee had made entries of cash advances of Rs.40.11 crores in their books of account well after 08.11.2016 and also collected cash after 08.11.2016 in demonetized notes (SBNs) directly or indirectly against the prevailing norms after demonetization and deposited the cash in their bank account. These findings give rise to a piquant situation, not from the angle of Income-Tax Act, but from the angle of prevailing norms after demonetization on 08.11.2016 and also from other Allied Acts. The allied Acts which come in to picture in this context are the Indian Sale of Goods Act 1930, the Indian Contracts Act 1872, and the Reserve Bank of India Act 1934. The sale of goods was earlier dealt under the Indian Contracts Act itself, but, for the sake of convenience, it was separated, and Sale of goods Act was brought about. The relevant provisions are as under:

Section 4 of the Sale of Goods Act :

4. Sale and agreement to sell.—

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (emphasis supplied)

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to (4)An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred

Section 2 of the Sale of Goods Act :

2.Definitions.—In this Act, unless there is anything repugnant in the subject or context,

(1). …………………

(10)”price” means the money consideration for a sale of goods; .(emphasis supplied)

Section 23 of Indian Contracts Act 1872 :

23. What considerations and objects are lawful, and what not. —

The consideration or object of an agreement is lawful, unless— it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent ; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. (emphasis supplied)

Section 26 of the Reserve Bank of India Act 1934 :

26. Legal tender character of notes.—

(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government.

(2) On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification any series of bank notes of any ease to be legal tender save at such office or agency of the Bank and to such extent ‘as may be specified in the notification.. (emphasis supplied).

To sum up, the above provisions in relation to the discussion made above in the case of the assessee, every Sale transaction carried on by a trader is a contract of sale governed by the sale of Goods Act, 1930. As per Sec.4(1) of the said Act, the contract of sale was defined to mean ‘a contract whereby the seller transfers-or agrees to transfer the property in goods to a buyer; for a price. As can be seen from the said definition, a contract’ of sale requires a seller, a buyer, transfer of property in the goods, and a price. ‘Price’ was further defined under section 2(10) of the Sale of Goods Act to mean ‘money consideration for a sale of-goods’. Thus, in a contract of sale, payment of price in money is an essential part. The word ‘money’ has not been defined under the said Act, but the most common definition of ‘money’ as found from dictionaries is that money means an authorized medium of exchange especially coins or paper currency issued as legal tender by a Government. Hence, in a concluded and valid contract of sale, the ‘price’ for which the goods have been sold to the buyer has to be understood as money in legal tender only. In India such ‘legal tender’ status to the paper currency is given by the Central Government in terms of the provisions of Sec.26 of the RBI Act. Under the same section, the Central Government is also empowered to withdraw the ‘legal tender’ status of the currency notes. Thus, the currency -notes are a mere piece of paper unless the same are recognized by the Government of India as ‘legal tender’ in terms of Section 26 of the RBI Act.

On the night of 08-11-201.6, the Hon’ble Prime Minister of India while addressing the Nation has announced the decision of the Central. Government to withdraw the legal tender status to the existing series of bank notes of the value of Rs.500 and Rs.1000 w.e.f. 09-11-2016.

Accordingly, a Notification in S.O.No.3407(E) dt. 08-11-2016 was also issued withdrawing the, legal tender status to the bank notes of the value of Rs.500 and Rs.1000 (referred to as specified bank notes or SBNs). However, in the said Notification a facility was granted to the holders of SBNs for the deposit of such SBNs in their account maintained with any bank on or before 30-12-2016 so that the equivalent value of SBNs will be credited to such accounts. The Government has further announced that the SBNs will continue to be legal tender during demonetization period for the limited purpose of making payments at places like petrol bunks, gas agencies, etc. Thus, except where the SBNs were deposited in a bank, or exchanged for goods / services at designated places like petrol bunks etc., in all other cases such SBNs are no longer legal tender w.e.f. 09-11-2016.

Coming to the present issue on hand, as discussed in para 5.3.2, it was proved that the assessee has carried on their trading operations, made cash sales during the demonetization period, paid sales tax (VAT) wherever required, and also reported such sales to the VAT Authorities. As already discussed above, in a concluded and valid Contract of Sale, price for the goods sold shall only be the receipt of money in legal tender. Once the assessee says that he has carried out sales, even during demonetization period, it ha ‘to be understood thit he has received the money not in legal tender, because from 09-11-2016 onwards, the SBNs are no longer money but a mere piece of paper as between the seller and the buyer, and do not constitute money in legal tender. Thus, a valid contract of sale during demonetization period and SBNs are mutually exclusive, and the assessee cannot be permitted to club both of them.

The issue can also be tested from another angle. Since the sale of goods is also a contract, the relevant provisions of Indian Contract Act will also apply to such sale. As per the provisions of Sec.23 of the Contract Act, every contract, of which the consideration is ‘unlawful’, is void. The said section also enumerates various circumstances under which the consideration of a contract is said to be ‘unlawful’. Two such circumstances are, (i) the consideration of a contract is of such nature that, if permitted, it would defeat the provisions of any law, or (ii) the Court regards it as immoral or opposed to public policy. Hence, if any one says that he has received price in SBNs as a part of contract of sale, such contract itself is void and non-est in the eyes of law, because the claim of receipt of such price in SBNs as a part of contract of sale, if accepted, would defeat the provisions of Sec.26(2) of RBI Act, 1934 and the Notification in S.O.No.3407(E) dt. 08-11-2016 issued there under, through which the Central Government has withdrawn the legal tender status of SBNs from 09-11-2016 onwards.

As per the said Notification, the only way-out given to the persons holding SBNs as on 09-11-2016 to realize the equivalent value of such SBNs is to deposit the same into his bank account (please see Para 2(iii) and 2(iv) of the Notification). If the SBNs are claimed to have been dealt by the persons who held the SBNs as on 09-11-2016, in a manner other than what was prescribed in the statutory Notification, like exchanging the same with unauthorized persons other than banks, and if such a claim is accepted, it would bring the said statutory Notification, which was issued as a measure to tackle black money, to ridicule and renders nugatory. Also, since the ‘public policy’ behind the withdrawal of legal tender status to the SBNs from 09-11¬2016 onwards was explained by the Central Government to be a measure to tackle the black money in the economy, to lower cash circulation which is directly linked to corruption, fake currency etc., any claim of acceptance of SBNs as a part of-contract of sale is opposed to the said ‘public policy’ as announced by the Central Government and vitiates the whole exercise of demonetization. Hence, for these reasons, the contract of sale if it involves receipt of SBNs as price’, is ab-initio void as per the provisions of Sec.23of the Contracts Act, 1872 and thus non-est in the eyes of law. Hence, such SBNs cannot be treated as having arisen out of a contract for sale.

The above discussion takes care of the additional submissions made by the assessee on 24.12.2019 that entire credits in the books are nothing but advance against sales which; were ultimately ‘credited to the profit & loss account and that since the character of such sale has already been offered to tax, the question of treating the said credits as unexplained u/s 68 of the Interne Tax Act, 1961 does not arise at all.

In the case on hand, the assessee is claiming that the cash deposits made on 10.11.2016 by others directly in their bank account do not belong to them. Acceptance of this version as such does not help the case of the assessee in view of the discussion made as above on SBNs and other allied Acts. The assessee after receipt of cash deposits purportedly made by others in their bank account on 1-01172-CYI acted on such deposits and made bullion trading. As this trading is not recognized. in the eyes of law, the transaction of sale is ab-initio void. Once the trading transaction carried on by the assessee is treated is void, the immediate fall on the credits in the books of assessee with regard to such void transaction carried out against public policy are to be treated as not relating toles but as mere credits unexplained.

3.5.3 In para 11 of their submissions, the assessee claims that from 09.12.2016 onwards; the assessee has been trying to approach the Income Tax Department to give his factual statement/retract/make,, corrections to his earlier statements recorded on 01st and 7th December, 2016, since those statements are given under undue influence, mental pressure and ill health condition. However, such averments are far from true as discussed in pare 3.5.1. In this connection, reference to the confessional statement of Sri Nitin- Gupta made before CCS, Hyderabad on 17.01.2017 is in place.

“Further. I would like to inform that all three firms, (i) Musaddilal Gems & Jewels Pvt. Ltd., (2) Vaishnavi Bullion (P) Ltd., and (3) Musaddilal Jewellers Pvt Ltd, are independent of each other doing business separately.

On 08.11.2016 at around 7 PM I was at my office of M/s Musaddilal Gems & Jewels (Pvt) Ltd and M/s Vaishnavi Bullion (Pvt) Ltd, during that time some people called me for purchase of gold& then I have informed them to come to my office and they said that they want to purchase gold from me at that time. I did not have much stock of gold due to which I told that customers to place order by giving advance amount, accordingly those people have place booking by paying the amount and giving the names on which they wanted me to. raise the advance cash receipts. The advance cash receipts were prepared as per the list of names given by them by accepting advance amount. I have received nearly about 40 Crores for Mr Neel Sunder Tharad who is owner of M/s Astha Laxmi Gold and nearly 3537 Crores from Mr Pavan Agarwal who is the owner of M/s Balaji Gold, nearly 3-3.5 crores received from Tarun Jain who is a private Individual; nearly about 1.5-2 crores received from Mr Manish Gupta who is owner of Musaddilal & Sons Jewellers, Basheer Bagh, Hyderabad, nearly about 6-7 crores from Mr Sanjay Sarda who is partner of M/s Sanjay & Sunil Associates situated at Secunderabad & some amount received from other customers the names of the customers I don’t remember.

I have done the above transactions purely as a business transaction and without any intention of any illegal gain from this transaction since my both firms were having Secured and un-secured loans. I thought by doing these legal business transactions I will earn some profit and clear my loans. I requested the customers who have deposited the cash with me on 8-112016 to help me to assist us in depositing the cash in bank by carrying their own cash from our office to our respective banks. Accordingly they came to my office and helped me for depositing the cash in my bank from 10-112016 onwards since 9-11-2016 was bank holiday.

As per the order received from the customers, we have placed the order of gold to various bullion dealers eg:- M/s Asthalaxmi Gold, M/s Sri Balaji Gold, M/s S.K.Impex, M/s Nav-Durga Bullion Co-op.

We transferred all the amount to the bullion dealer by way of RTGS and cheques. Subsequently we have received the gold on various days and accordingly we have given the delivery of gold to the customers by raising the sales invoices against the oath receipts generated. Further, I would like to inform that the total business transactions has been reflected in our books of accounts and we have shown the profit earned and paid the necessary advance tax to the Income tax department and VAT, the Commercial tax department. All the amount collected during the business transaction has been deposited in bank transferred to the necessary bullion dealers for purchase of gold and from the remaining amount the secured loan of about 1 crore of SBI and un-secured loans of about 3 crores have been paid and the necessary taxes of income tax department and commercial tax department has already been paid.

Therefore I have lastly decided that ‘to give my confessional statement in writing and submit at your office and your good-self.

From the above it can be seen that’ thought the assessee is claiming that the statements given u/s 131,before the Income Tax authorities on 1st /2nd & 7th December, 2017 are under influence of others, he continued to stick to his version of accepting cash advances ‘from customers on 08th December, 2016 (though the number of customers are not specifically mentioned), asked them to assist in depositing the cash into their bank account from their office, etc. Against this confessional statement given on 17.01.2017 before the CCS, Hyderabad the assessee claims that he had decided to retract from the statements given on 1st December 2017 before the IT authorities and make corrections to his earlier statements.

3.5.4 Date of Entry of cash advance receipts in computers and CFSL findings

On the date of survey, as brought out earlier, a statement u/s 131 was recorded from the Director of the assessee-company, Sri Nitin Gupta on 01st / 2nd December, 2016. Of the many issues covered in this statement, the date of entry of cash advance receipts by the assessee in the systems is one of the issue. The relevant questions and replies of the Director on this aspect are reproduced hereunder:

Q 67. Please state in which computer system in this premises the receipt vouchers have been entered and state which employee has entered these details in the computer.

Ans. The receipt vouchers for both these companies were entered in the five computers installed in this premises. I don’t remember the name of the employee who entered the details in the tally accounting package installed in these computers.

The-same version was reiterated by the assessee in a recent statement recorded u/s 131 on 20.11.2019, the relevant portion of which is as under:

“20. To SLIM up, you are confirming that you have received cash advances of Rs.57,75,35,000/- from six customers (against 3100 customers stated in the statement recorded on 01.12.2016) ion the case of MGJPL on 08.11.2016 after 09.00 PM, entered the cash advances in your books on the same day, generated cash receipts on the same day from the systems available in your premises in tally software and issued to all the customers.

Likewise, in the case of M/s VBPL, you have received Rs. 40,11,50,000/- as cash advances from one customer (2100 customers earlier) and followed the Ohm piticedure.as was done in the case of M/s MGJPL?

Ans. Yes. I confirm that in M/s MGJPL, I have received approximately Rs.57 crores from sis customers and Rs.40 crores from one customer in M/s VBPL. Entered the details of cash advances bifurcating all below Rs.2 lakhs in the names of various persons (as provided by six and one customer respectively), started generating cash deposits on 8th No. 2016 to 09th Nov.2016 from the systems available in our premises in Tally software and handed over the receipts to the respective seven customers”.

Against this admission, when the findings of CFSL were put before him, the Director the assessee company gave a vague and evasive reply with respect to entry of cash receipt vouchers in the systems. The respective questions and replies are reproduced hereunder:

“21. As you are aware, as per page -3 of the impounding order, the five systems available (one Compaq CPU — SG 34401L, one assembled PU — Intex, One Lenovo CPU S.No.L9CH015, One Lenovo CPU S.No.L9C3LC60 (belonging to MGJPL) and Lenovo CPU S.No.ES097220256 (belonging to M/s VBPL) in your premises on the date of survey in which you have claimed to have entered the cash advances were impounded by the Department vide impounding order u/s 133A(3)(la) on 02.12.2016. Please confirm.

Ans I exactly do not remember the number and models of the systems. However, certain systems were impounded from our premises when the survey was conducted as per the above impounding order.

22. The above impounded CPUs were sent to Central Forensic Science Laboratory and a report was obtained. I am showing you the findings of CFSL, dated 01.05.2017, starting from pages 1 to 9 along with covering letter dated 01.05.2017. Please offer your comments?

Ans. From the said report, I have understood that the timings of operation of our systems, which were impounded from our premises, four systems were not operated on 08.11:2016 and one system was operated and closed at 18:45:34 on 08.1.1.2016. In this regard, I would submit that the office of the above said two companies is in the B-Block of the compound. Our residence is in the A-Block of the compound. As you know, today is computer is necessity of life to us and to our children and we are having Systems even in our residence and during that time, lot of shuffling of systems had happened. I may not be aware of the timing of opening and closing of a system.

23. Please refer to Q.12 & 13 above and the replies, wherein you have stated that generation of the’ cash receipts Started on night ‘of 08th Nov. 2016 and concluded on 09.14.2016. Also refer to Q.20 above and your reply, wherein you have stated that this work of generation of cash receipts was done in the systems available in your premises on the-date-of servey. How-could you deviate from the replies already given-above in reply to Q.22 above?

Ans. I am not a technical expert in operating computer systems. Whatever Was conveyed to me by my staff, I in turn conveyed to the IT authorities on the date of survey. I cannot comment too much on the technicalities involved in computer systems.

24. We are not interested in involving you too much into technicalities of computer systems. The question is when on the date of survey, all the systems shown by you were impounded from the business premises, purportedly used for entering cash receipts received on 08th November, 2016. Against this, the- CFSL report suggests that these systems used for entering the cash receipts were not at all opened (four systems) and one was closed by 06.45 PM. Therefore, the findings of CFSL clearly indicate that the cash receipts were generated much after 09th November, 2016. Please comment.

Ans. On the inputs given by my staff, I stated <that all -the cash receipts generated on 08th Nov.2016 were in the systems available in the premises on the date of survey, i.e., 01.12.2016. I cannot actually differentiate computers on my own.

25. I am showing you again the statement recorded n 01.12.2016. Your attention is invited to reply to question No.67, wherein you have stated that the receipt invoices were entered in the five computers installed in this premises …………….

Please offer your comments.

Ans. I do not exactly remember on which computer the cash receipts were entered. However, what was suggested to me by my staff, the same thing was conveyed in reply to question No.67 above.

As could be seen from the above, all the way from 01.12.2016, i.e., the date of survey to 20.11.2019 the assessee is consistently claiming that cash receipt vouchers were entered in Tally software in the systems available in their business premises on 08.11.2016 itself, and when this claim was countered with clinching and scientific evidence (CFSL report), the assessee suddenly gives evasive and vague replies that some other systems are available at his residence, without any basis.

3.5.5 Reliance on Provisions of 68 of the IT Act:

Finally, the reliance placed by the assessee is on the provisions of section 68 and judicial precedents available in the form of case laws. Referring to the tests applicable for treating a credit u/s 68 as unexplained, The assessee submits that the identity, creditworthiness and genuineness of the transaction of receiving cash from lone customer was proved and therefore the cash credits =in their books cannot be treated as unexplained: .Further, the assessee claims that .proper enquiries should be made by the Department in respect of Sri Neel Sundar Tharad, who purportedly gave cash advance to them; Sri Tharad should be cross-examined before arriving at any conclusion against them; and once they discharged their onus by furnishing necessary evidence against Sri Tharad obviously in the form of confessional statements made before CCS / ED, no addition can be made in their case u/s 68.

The submissions of the assessee and other case laws relied upon can be considered as such, once it is initially proved that the assessee had discharged their onus of proving the three tests applicable for not invoking the provisions of section 68— genuineness of the transaction, identity of the creditor and their creditworthiness. In this context, it is the claim of the assessee that they have given the identity of the creditor by furnishing their address, their creditworthiness / credentials in the field of bullion trading are verifiable and the transaction of receiving cash from them as advance towards sale of gold is genuine.

However, it is also equally the case of the said Sri Tharad that he traded in bullion with the assessee on receipt of RTGS and no further. In this context, it is seen that on one hand, the assessee company submits to accept the averments made by their Directors, who constantly went on changing their versions from time to time before various investigating agencies to suit their convenience and feigned to ignorance on occasions when clinching evidences and circumstantial evidences were put beforethem-173inst the submissions made; and on the other hand claims that Sri Tharad confessed before CCS and ED owning up the money in question and therefore, their responsibility of proving the genuineness of the transaction is discharged.

In this process; the assessee company resorted to (i) forgery of documents by furnishing false information in respect of 12 identified customers, (ii) falsification of their accounts by claiming that they entered all the cash receipts in their cash on the night of 08th November, 2016, which was proved otherwise. At the same time, the assessee company accepts that their Directors succumbed to the inducement of other persons and accepted the proposal of cash advances on the ill-advice of their Consultant, the list of customers against whose names the cash receipts were to be generated was to be provided by the alleged lone person, they accepted all the unaccounted cash from Sri Tharad for the purpose of handsome commission offered in the process, etc. Once an entry of credit is made in the books of account, the assessee cannot throw the burden of proof, of proving the sources of such credit on the Assessing Officer or on some other person, referring to some distant statements, and ask for further verification and to conduct enquiries. In this context, the provisions of section 292C are clear and cast the onus of proving the genuineness or otherwise of the books on the assessee only. The provisions of the section read as under :

“Where any books ‘of account,- other: documents, money …. is found in the possession or control of any person in the course of survey u/s 133A, it may, in any proceedings under this Act, be presumed — …. (it) that the contents of such books of account and other documents are true.

To apply any case law rendered by Hon’ble Courts to any one’s particular case, it is of common knowledge, that the facts in the case relied upon should be identical to the facts of their particular case. Mere reliance on the case laws is of no help. Once the primary burden of proving the genuineness of a credit transaction in the books of account of an assessee is not proved and is shrouded by many conjunctions / juxtapositions and surmises / assumptions, the other two conditions though considered as proved should, not come to the rescue of the assessee in treating the said credit as explained. In this connection, the following case laws, which underline that the three ingredients of section 68 should be satisfied together and further cast the initial burden of proving the credits in their books on the assessee are relied upon:

The Apex Court in the landmark case of Kalekhan Mohd Haneef Vs CIT (1963) 50 ITR 01 (SC) and Roshan Di Hatti Vs CIT (1977) (107 ITR (SC) laid down that the onus of proving the source of sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction and creditworthiness, then the AO must conduct an enquiry, and call for more details before invoking sec.68 of the Act. If the assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the revenue to hold that it is the income of the assessee, and there would no further burden on the revenue to show that the income is from any particular source.

With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence that the investment made in the share capital (or any cash credit u/s 68) are genuine borrowings, since the facts are exclusively within the assessee’s knowledge”.

Similarly in the case of CIT Vs Mohankala (291 ITR 278) (SC), the Apex Court held that:

“A bare reading of the sec.68 of the Income Tax Act, 1961 suggests that (i) there has to be credit of amounts in the books maintained by the assessee; (ii) such credit has to be a sum of money during the Previous year, and (iii) either (a) the assessee offers no explanation about the nature and source of such credits found in the books or (b) the explanation offered by the assessee, in the opinion of the Assessing Officer is not satisfactory. It is only then the sum so credited may be’ charged to income tax as the income of the assessee of that previous year. The expression “the assessee offers no explanation” means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in, the books maintained by the assessee. The burden is on the assessee’.-to take the plea that, even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as receipt of income nature.”

Further, in the case of CIT Vs C.P. Adam (1976) (105 ITR 465) (Ker.) while dealing with the issue of addition u/s 68, it was held that:

“It is well established that the onus of proving the source of any money received by the assessee is upon him. If liability to pay tax is disputed, it is the responsibility of the assessee to show that the receipt was either not income or income exempted from payment of tax. As pointed out by the Supreme Court in Commissioner of Income Tax Vs Devi Prasad Vishwanath Prasad, (1969) (72 I7R 194), 197(SC):

“Where there is an unexplained cash credit, it is open to the Income Tax Officer to hold that it is the income of the assessee and no further burden lies on the Income Tax Officer to show that income is from any particular source.

“4. What is Stake – Loss to the Exchequer :

Before concluding the assessment, it is pertinent to refer to the quantum of stake involved in the whole exercise carried out by the assessee in bringing cash advances into their books on 08.11.2016. The undoubted fact involved in this whole exercise of the assessee is bringing in unaccounted cash in the form cash advances into their books of account, whether such cash belongs to the assessee or to others. By bringing in, such unaccounted money into books the assessee tried to give the transaction a colour of trading in gold, and caused loss to the exchequer to the extent of taxes on such unaccounted cash.

5. Conclusion:

To sum up, though the assessee made out two versions of sources for the credit of Rs.40.11 crores in their books of account on 08.11.2016, one as received from 2153 persons and the other as received from single person, the assessee failed miserably to prove that the same belong to either the said 2153 persons or one person with cogent evidences. The assessee has indulged in mis-representation/suppression of facts. Therefore, for the reasons discussed above and particularly in para 3.5.1 to 3.5.5 & 4,111e – credits appearing in the books of account of the assessee in the form of cash advances against gold sales on 08.11.2016 aggregating to Rs. 40,11,50,000/- are treated as unexplained credits in the hands of the assessee u/s 68 and assessed-as such, @ 60% tax irate as prescribed under provisions of section 115BBE of the IT Act.”

In view of the detailed discussion above and the provisions of section 270A(9), I am satisfied that the assessee has indulged in under-reporting of income in consequence of mis-reporting of income, and accordingly, Penalty proceedings u/s 270A are initiated for mis-reporting of income u/s 270A(9).”

9. Feeling aggrieved with the order of Assessing Officer, assessee carried the matter before ld.CIT(A), who partly allowed the appeal of the assessee. The relevant portion of the discussion and finding of the ld.CIT(A) are as under :

“5.1) On receipt of credible information that the appellant received cash of Rs.40,11,50,000/-on 08.11.2016 and deposited cash of 39.64 crores in Axis Bank Jubilee Hills Branch in A/c No.916020066093266 which was opened on 10.11.2016 and also deposited an amount of Rs.SO lakhs in Bank of Baroda, PBB Branch, Road No.10, Banjara Hills, Hyderabad, during the period of Demonetization in November, 2016, between the period 10.11.2016 to 30.11.2016, the Investigation Wing of Hyderabad carried out Survey operation u/s 133A of the Act in the business premises of the appellant on 01.12.2016. On verification of books of account as on the date of survey it was seen that there was no opening cash balance as on 01.04.2016 and the cash balance as on 07.11.2016 was Rs.5,73,481/-.

5.2) When enquired about the deposits of Rs.40.11 crores, Sri Nitin Gupta Director of the appellant company in course of sworn deposition recorded u/s 131 on the date of survey i.e. 01.12.2016, stated as under:

1. That the assessee was in receipt of cash advances of Rs. Rs.40,11,50,000/- (all in SBNs of Rs.500/- and Rs.1,000/-) from around 2153 customers after 8.30 pm to midnight of 08,11. 20 16, all done with the help of 10 staff members apart from another Director Sri Seera Mallesh and Sri Jeelan Basha, cashier.

2. Entered the cash advances in their books maintained in tally software in the systems available at their business premises, issued advance receipts till midnight of 08.11.2016.

3. Deposited the cash in their bank account after 11.11.2016.

4. Purchased bullion and diamonds by making payments through RTGS and received bullion

5. Effected sales from 11.11.2016 and continued till 19.11.2016 against the total advances of Rs.40 .11 crores received on 08.11.2016.

When questioned about the details of such 2153 customers who gave advances on 08.11.2016, the appellant furnished names and addresses of 65 customers. On verification it was found that the customers were from faraway places like Mumbai, Vizag, Krishna District, Trivandrum and Odisha. When enquired in about 12 customers, it had come to light that none of them out of these 12 customers visited the business premises of the appellant and that no such cash advances were given by them for purchase of gold/bullion on 08.11.2016.

5.3) Sri Gupta also claimed that around 2153 customers attended their office in the night of 08.11.2016 after announcement of demonetization and gave advances ranging from Rs.1,89,000/- to 1,72,000/- and that they entered these advances in their systems and generated receipts to all the 2153 customers and this work continued till midnight. When questioned as to how he handled 2153 customers by way of collecting cash on one side, generating receipts and discussing the weightage etc.. Sri Nitin Gupta said that he managed the things with the help of another Director of Musaddilai Gems & Jewels Pvt Ltd, Sri Mallesh and cashier Sri Jeelan Basha. In course of survey, it was found that another sister-concern M/s Musaddilal Gems and Jewels Pvt Ltd also carried business from the same premises and the above findings were Quite similar and since the assessee is making seemingly incomprehensible and dubious claims with regard to the receipt of advances, fabricated KYC forms/declarations, a police complaint was lodged with the Jubilee Hills police Station. Accordingly, an FJR was registered vide No.7552016, dated 07.12.2016 against the Directors of the assessee company. Based on the above F1R registered with Jubilee Hills, Hyderabad, 1nvestigations were carried out further by the police Department and an F1R was registered by the central Crime Station with No.263/2016.

5.4) 1nformation was also gathered in the case of the assessee and others and the same was shared with Enforcement Directorate and the ED registered a case under PMLA-2000 against the assessee and others.

Further, the computers/CPUs and other hard disks impounded during the course of survey wherein the assessee claimed to have entered the cash receipts for over 2153 customers on the night of 08.11. 2016 were forwarded to central Forensic Scientific Laboratory (CFSL) for analysis by the Investigation Wing.

5.5) Pending 1nvestigation by various agencies, the assessee field an application under Pradhan Mantri Garib Kalyan Yojana 2016 on 30.12.2016 offering Rs. 40.00 crores under the said scheme stating that the above deposit of Rs40.00 crores as their income earned between 10.11.2016 to 18.11.2016 and accordingly filed an affidavit on 30.12.2016 and paid Rs.1 crore on 13.01.2017. However, the appellant filed another later dated 16.01.2017 retracting from the above affidavit which is reproduced, as under:

By our affidavit, we have informed you that we are going to get covered under the “Prime Minister Garib Kalyan Yojana [PMGKY] since we were given strong assurance that such a course of action will protect us from criminal prosecution and PMLA enquiry investigation

Sincerely believing the same, we have submitted that the affidavit to get covered under the scheme and in that context we have started that the money belong to us.

Even after nearly one month, we are subjected to enquiry and interrogation by the police and Enforcement Department authorities.

We have disclosed the benefit in our books of accounts and we have paid the self assessment tax thereon.

It is only under pressure and misrepresentation by police / ED / IT we have submitted to get covered under the scheme.

All our directors are under threat of arrest and their petition for Anticipatory Bail are pending.

Hence, we hereby withdraw our affidavit dated 30.12.2016 and hence our request for getting covered under the scheme is hereby withdrawn / rescinded”

5.6. Against the police FIR, the appellant along with other companies approached the Hon’ble High Court of Telangana seeking anticipatory ball in relation to Crime No.263/2016. The Hon’ble High court vide their common order in CRLP Nos.124, 125, 132, 155 and 157 of 2017, dated 30.01.2017 dismissed tile anticipatory bail. Subsequently, the appellant was arrested on 31.01.2017 along with Sri Kailash Chand gupta father of Sri Nikhil Gupta, brother of the appellant.

………………..

“7.3 Coming to the amounts mobilized by Sri Neel Sunder Tharad, Proprietor of M/s Ashtalakshmi Jewellers, he had in fact confessed in his statement dated 21.01.2017 before the ACP that he mobilized Rs.28 crores from the following persons.