ACIT Vs Kamlesh Gupta (ITAT Lucknow)
Lucknow ITAT: Cash Sales During Demonetisation Cannot Be Taxed Again as Unexplained Money Merely Because Sales Spiked
The Lucknow ITAT dealt with an addition of ₹1.075 crore arising from cash deposits during the demonetisation period. The assessee, a wholesale and retail trader in FMCG products, had recorded the amounts as cash sales. The AO considered the sales during the relevant period abnormally high and treated ₹1.075 crore as unexplained. The CIT(A) deleted ₹87.50 lakh but sustained ₹20 lakh on an estimated basis.
The Tribunal observed that the books of account had not been rejected under section 145(3), purchases were not doubted and sufficient stock was available to support the reported sales. The assessee had also discharged VAT on the turnover and the sales stood accepted by the VAT authorities. Once purchases and stock are accepted, corresponding sales cannot be discarded merely on suspicion or by comparison with sales during dissimilar periods.
Importantly, the ITAT held that where cash sales are duly recorded in the books and already offered as revenue receipts, the same sale proceeds cannot again be treated as unexplained income under section 68. Such an addition would effectively amount to double taxation of the same receipt.
The Tribunal further emphasised that an abnormal or sudden increase in sales by itself is not evidence of tax evasion. Suspicion or a spike in turnover cannot justify an addition under sections 68/69A when the sales are recorded in regular books and supported by accepted purchases and stock.
It also deleted the remaining ₹20 lakh sustained by the CIT(A), holding that once the very basis of the AO’s addition had been found unsustainable, an arbitrary ad-hoc addition without identifying any specific defect in the books or unrecorded income could not survive. Consequently, the entire ₹1.075 crore addition stood deleted; the assessee’s appeal was allowed and the Revenue’s appeal dismissed.
Cases Discussed:
- PCIT vs. Akshit Kumar (Delhi High Court), [2021] 124 taxmann.com 123 (Delhi)
- ACIT vs. Hirapanna Jewellers (ITAT Vishakhapatnam), ITA No.253/VIZ/2020, vide order dated 12.05.2021
- Sumati Dayal vs. CIT (SC), 1995 AIR 2105 (SC)
- Lakshmi Rice Mills vs. CCIT (Patna High Court), [1974] 97 ITR 258 (Patna)
- CIT vs. Durga Prasad More (SC), 82 ITR 540 (SC)
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
These are cross-appeals by the assessee as well as the Revenue against the order dated 23.09.2020, passed by the Learned Commissioner of Income Tax (Appeals)-1, Lucknow [Ld. CIT(A)] for Assessment Year 2017-18.
2.0 The brief facts of the case are that the assessee was a trader engaged in wholesale as well retail business of consumer goods, like Agarbattis, Dhoop Batties, Bidi, Cigarette, Match box, Mineral Water, Mouth Freshner, etc. under the proprietary concern ‘M/s Shree Maa Vaishno Devi Trading Company’. The assessee e-filed his return of income for the year under consideration on 31.10.2017, declaring a total income of Rs.21,76,880/-. The case was selected for scrutiny under Computer-Assisted Scrutiny Selection (CASS). The Assessing Officer (AO) issued statutory notices along with questionnaire, requiring the assessee to furnish information/documents as sought for in the questionnaire. During the year under consideration, the assessee had disclosed total turnover of Rs.35,64,57,319/-, Gross Profit of Rs.32,61,559/- and Net Profit of Rs.22,04,684/- from business.
2.1 The Income Tax Department was in possession of information that the assessee had made cash deposits amounting to Rs.7,05,51,175/- in his Bank Account No.62436203798 maintained with State Bank of India. However, as per the details filled by the assessee in the return of income with regard to cash deposits during the demonetization period, the assessee had shown cash deposits amounting to Rs.2,62,00,000/- in his Bank Account No.62211115443 maintained with State Bank of India. In order to verify the genuineness of the cash deposits made by the assessee during the course of demonetization period, the assessee was required to furnish the details/source of cash deposits duly supported with documentary evidences. In the meantime, the Bank Account details of the assessee were also called for from the Bank under section 133(6) of the Act. After considering the submissions of the assessee and the materials on record, the AO accepted the cash deposits of Rs.2,57,50,000/- as duly explained and held that the assessee had failed to explain the real source of cash amounting to Rs.1,07,50,000/-(Rs.2,57,50,000 – Rs.1,50,00,000) deposited during the demonetization period. The AO was of the view that there was abnormal increase in cash sales but the assessee had failed to substantiate the claim of increase in sales and, therefore, the assessee’s claim of cash deposit against sales made was not acceptable. The AO held that on the facts and circumstances of the case, the availability of cash deposit made upto 13.11.2026 to the tune of Rs.150.00 lakhs could be accepted but the cash deposits of Rs.107.50 lakhs on subsequent dates could not be accepted. The AO, therefore, treated the same as unexplained cash deposits and added the same to the total income of the assessee under section 68 of the Act. The AO completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.1,29,26,880/- after making addition of Rs.1,07,50,000/- being unexplained money under section 68 of the Act.
2.2 The AO also invoked the provisions of section 115BBE of the Act and initiated penalty proceedings under section 271AAC of the Act, separately.
2.3 Aggrieved, the Assessee preferred an appeal before the NFAC, which sustained the addition to the extent of Rs.20,00,000/- and deleted the addition of Rs.87,50,000/- out of the total addition of Rs.1,07,50,000/- and directed the AO to make the addition of Rs.20,00,000/- under section 69A read with section 115BBE of the Act.
2.4 Aggrieved by the order of the NFAC, the assessee as well as the Revenue are in appeal before us.
2.5 The grounds of appeal raised by the Revenue in ITA No.448/LKW/2020 are as under:
1. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.87,50,000/- made by the AO on account of cash deposits during demonetization period due to failure on the part of the assessee to prove genuineness and credential of the cash credits transaction in his books of account to his satisfaction.
2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.87,50,000/- made by the AO u/s 68 of I.T. Act, 1961 on account of cash deposits during demonetization period due to sales credited to his books of accounts to the extent unsupported by past trend and data prevailing in his case remained unexplained.
3. Appellant craves leave to add as amend any one or more of the ground of appeal as stated above as and when need of doing so arises with the prior permission of the Hon’ble ITAT.
2.6 The grounds of appeal raised by the assessee in ITA No.381/LKW/2020 are as under:
1. Because the CIT(A) has erred in facts and in law in upholding an addition of Rs.20,00,000/- out of total sales u/s 69A treating it be unexplained cash deposited in the bank, which addition is bad in law and be deleted.
2. Because the entire purchases and sales being accepted, the accounts being tax audited, books having not been rejected, the profits as declared not being disturbed, no specific defect in the books being pointed out, the CIT(A) was not justified in upholding an addition of Rs.20,00,000/- as unexplained cash deposited in the bank, u/s 69A, the addition being contrary to the facts and law be deleted.
3. Because the entire addition of Rs. 20,00,000/- treating the same as unexplained cash deposited in bank, upheld by the CIT(A) is based an estimate, presumption conjectures and surmises, which addition being without any basis, the same being totally unwarranted be deleted.
4. Because the CIT(A) has erred on facts and in law in holding that the cash to the extent of Rs.20,00,000/-deposited in bank in unexplained and is to be taxed as per provisions of section 69A read with section 115BBE, which finding is totally misplaced bad in law, the addition neither being unexplained nor undisclosed, the upheld by the CIT(A) be deleted.
5. Because the CIT(A) has failed to appreciate that the amount of Rs.20,00,000/- treated as unexplained is part of the sales as declared in the audited accounts, which is neither unexplained nor treated as unexplained, thus any addition made would result no double taxation, the addition upheld be deleted.
3.0 The Ld. Authorized Representative for the Assessee (Ld. A.R.) at the outset submitted that the addition made by the AO related to sales of Agarbattis, Dhoopbatties, Bidi, Cigarette, Match Box, Mineral Water, Mouth Freshner, Pan Masala, Soap, Spices, Tobacco, Toffees, Choclates, Confectionary, Biscuits and Candy etc. It was further submitted that the assessee had sufficient stock in his books of account out of which the sales in question were made by the assessee. In support of his submission, the Ld. A.R. has placed before us the copy of the Stock Summary for the year under consideration as well as for preceding year, which were duly furnished before the lower authorities during the assessment proceedings as well as First Appellate proceedings. The Ld. A.R. further submitted that during the year under consideration, the cash collection amount had increased due to considerable increase in sales during the festivals of Dusshera, Dhanteras, Deepawali. It was also submitted that the assessee had discharged his liability with VAT Department in line with the sales made during the relevant period. The assessee had also furnished the copies of the Form No.52 and VAT Tax Assessment order for the year under consideration, which were duly furnished before the authorities below also.
3.1 The Ld. A.R. submitted that the Ld. First Appellate Authority has recorded a finding that the AO has neither doubted the purchases made by the assessee nor had pointed out any defect with regard to the Stock Register and, therefore, once the purchases are not doubted, and the Stock Register is also not doubted, the addition made by the AO was only on the basis of comparison of sales that too of totally unrelated period of business. It was further submitted that the AO had discarded the sales of the assessee only on the ground that there was abnormal increase in sales but had failed to bring any evidence on record to establish that the explanation of the assessee regarding sales was not true. It was also argued that the invocation of provisions of section 68 of the Act was not correct as this had resulted in double taxation of the sales which had already been included in the return of income and on which tax due had already been paid. The Ld. A.R. reiterated that the Ld. First Appellate Authority has rightly held that the AO had made the impugned addition on assumption that the assessee had made abnormal sales disclosed in the books in the months of October and November, 2016 and the AO has not brought anything on record, except for comparison made on monthly sales figures and trend of cash deposits, to substantiate his assumption. He prayed that the appeal of the Department be dismissed.
3.2 With reference to assessee’s appeal, the Ld. A.R. submitted that the Ld. First Appellate Authority has on estimate basis upheld the addition of Rs.20,00,000/- without assigning any cogent reason for such estimation. The Ld. A.R. prayed that the order of the Ld. First Appellate Authority may be set aside on the issue and the addition of Rs.20,00,000/- sustained by him may be deleted.
4.0 Per contra, the Ld. Sr. D.R. submitted that the Ld. First Appellate Authority has erred in law and on facts in deleting the addition of Rs.87,50,000/- made by the AO on account of cash deposits during demonetization period. The Ld. Sr. D.R. submitted that out of the total sum of Rs.2,62,00,000/-deposited by the assessee in his Bank Account during the demonetization period, the AO has accepted the deposit of Rs.2,57,50,000/- as explained and the balance amount of Rs.1,07,50,000/-, for which there was no justifiable explanation from the side of the assessee, was added to the total income of the assessee under section 68 of the Act. The Ld. Sr. D.R. submitted that the assessee had failed to prove the genuineness of the cash credits amounting to Rs.1,07,50,000/- to the satisfaction of the AO and, therefore, the AO has rightly made the addition of Rs.1,07,50,000/- being unaccounted income of the assessee under section 68 of the Act. The Ld. Sr. D.R. prayed that the order of the Ld. First Appellate Authority may be set aside and that of the AO may be restored.
4.1 With reference to the sustenance of addition of Rs.20.00 lakhs by the Ld. First Appellate Authority, the Ld. Sr. D.R. supported the impugned order.
5.0 We have heard the rival contentions, perused the material available on record, and carefully considered the orders passed by the lower authorities. The undisputed facts of the case are that the assessee was engaged in the retail/wholesale trade of fast-moving consumer goods (FMCG) such as Agarbattis, Dhoopbatties, Bidi, Cigarette, Match Box, Mineral Water, Mouth Freshner, Paan Masala, Soap, Spices, Tobacco, Toffees, Chocolates, Confectionery, Biscuits, etc. During the year under consideration, the AO made an addition of Rs.1,07,50,000/- on account of cash deposits in his Bank Account, alleging abnormal sales trends by comparing them with unrelated, non-peak business periods. We find that the AO has neither rejected the books of account under Section 145(3) of the Act, nor raised any doubt regarding the purchases made by the assessee during the year. The assessee placed on record the Stock Summary for both the current year and the preceding year, establishing that sufficient stock was available to effect the reported sales. It is a settled position of law that when purchases and opening/closing stock are accepted, sales corresponding to such stock cannot be brushed aside on mere suspicion or comparison with dissimilar periods. The assessee discharged his VAT liability on the total turnover, including the sales in question. The sales figures stand accepted by the State VAT authorities via Form No. 52 and VAT Tax Assessment Order.
5.1 It is well settled law that when the sale proceeds are duly supported by books of account and other primary evidences, which were not disproved by the AO, and that where such sale proceeds are already accepted by the AO as revenue receipts from sales, then it would be wholly improper for the AO to again tax these sale proceeds as unexplained income under section 68 of the Act, as it would amount to double taxation of the same amount. 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 receipts, which would attract the provisions of section 68 the Act. For the sake of ready reference, section 68 of the Act is reproduced hereunder:
“Section 68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof 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.”
5.2 The Vishakhapatnam Bench of the ITAT in the case of ACIT vs. Hirapanna Jewellers in ITA No.253/VIZ/2020, vide order dated 12.05.2021 has dealt with the issue of deposit of cash during the course of demonetization by the assessee, who was in jewellery business and the AO had made addition under section 68 of the Act. While holding that the addition under section 68 of the Act was not in order, the ITAT Vishakhapatnam Bench went on to observe that in terms of section 68 of the Act, wherein the sum found credited in the books of account, for which the assessee offers no explanation, such sum is to be deemed to be the income of the assessee whereas in the appeal before the Vishakhapatnam Bench, the assessee had explained the source as sales, produced the sale bills and admitted the same as revenue receipt. The assessee was engaged in jewellery business and was maintaining regular Stock Registers and no difference was found in the Stock Register or the stocks of the assessee. The Purchases, sales and the stocks are interlinked and inseparable and, therefore, to disbelieve the sales, either the assessee should not have sufficient stocks or there must be defects in the Stock Register. Once there is no defect in the purchases and sales, there is no reason to disbelieve the sales. The Vishakhapatnam Bench further noted that the Departmental authorities did not find any defect in the books of account and trading account, profit and loss account and the financial statements and failed to disprove the contention of the assessee and further observed that suspicion howsoever strong, it should not be decided against the assessee without disproving the sales with tangible evidence. The Vishakhapatnam Bench further observed that once the AO accepts the books of account and the entries in the books of account are matched, there is no case for making addition as unexplained. In this regard, the Vishakhapatnam Bench placed reliance on the judgement of the Hon’ble Patna High Court in the case of Lakshmi Rice Mills vs. CCIT [1974] 97 ITR 258 (Patna) and another judgement of the Hon’ble Delhi High Court in the case of PCIT vs. Akshit Kumar [2021] 124 taxmann.com 123 (Delhi). It was also observed by the ITAT, Vishakhapatnam Bench that the sales could not be suspected merely because of some routine observation of suspicious nature such as making sales through 270 bills in the span of four hours, non-availability of KYC documents for sales, non-writing of tag of the jewellery on the sale bills, non-availability of CCTV footage to establish rush of public, etc. The ITAT, Vishakhapatnam Bench also did not accept the reliance placed by the Department in the case of Sumati Dayal vs. CIT, 1995 AIR 2105 (SC) and CIT vs. Durga Prasad More, 82 ITR 540 (SC) by observing that these two cases were related to circumstantial evidences in the absence of direct evidence, whereas, in the instance case, the facts clearly supported that the assessee had made sales and there were sufficient stocks to make the sales.
5.3 Therefore, in view of the above cited judicial precedents, the grounds of appeal of the Department are rejected.
5.4 Further, it is settled position of law that an abnormal or sudden increase in sales does not automatically justify an addition to income under the Income Tax Act. Suspicion or a spike in turnover alone is not evidence of tax evasion. If the sales proceeds are already recorded in the regular books of account and offered as turnover in the Profit & Loss Account, the AO cannot add the same amount under Section 68 or 69A as unexplained cash credits. Doing so amounts to taxing the same income twice. If the purchases and opening/closing stock are accepted by the Department, the corresponding sales generated from that inventory cannot be arbitrarily rejected.
5.5 We further observe that the Ld. First Appellate Authority has rightly arrived at a categorical finding that the addition made by the AO was based purely on assumptions and unsupported monthly comparisons of sales. Having correctly held that the AO’s action was unsustainable in law, the Ld. First Appellate Authority erred in sustaining an addition of Rs. 20,00,000/- on an estimated basis. It is a settled proposition of law that an estimation or sustaining of an addition cannot be made on ad-hoc conjectures or arbitrarily without identifying specific defects in the books of account or assigning cogent, verifiable reasons. Once the foundation of the addition made by the AO was discredited by the Ld. First Appellate Authority, sustaining a partial addition of Rs.20,00,000/- without any supporting calculation or finding of unrecorded income is legally cannot be sustained in the eye of law.
5.6 The Ld. First Appellate Authority has also held at para 10 of his order as under:
“10. The entire addition has been made by the AO on presumption and on ‘preponderance of probability’ and not on evidence. Though preponderance of probability is an accepted principle to judge reliability of evidences as held by the Hon’ble Courts in plethora of cases but its application in judging the quality evidences should be done in a reasonable manner. The above action of the AO is not reasonable as he was not able to point any defect in the books of account or sales of the appellant. When as per the submission of the appellant sales are the sources of these cash deposits in SBN then some inquiries on sales claimed by the appellant ought to have been done by the AO. The AO has completely ignored the fact the appellant has made substantial sales in the months of November (after 08/11/2016), December, 2016, January, 2017, February, 2017 and March 2017.”
5.7 In view of the above factual matrix and legal position, we find no justification for sustaining the addition of Rs.20,00,000/-. Accordingly, the order of the Ld. First Appellate Authority to the extent of sustaining the addition of Rs.20,00,000/- is set aside, and the AO is directed to delete the addition in full.
6.0 In the final result, the appeal of the assessee stands allowed and the appeal of the Revenue stands dismissed.
Order pronounced in accordance with Rule 34(4) of the ITAT Rules, 1963, by putting on Notice Board on 07.08.2026.
