Demonetization Deposits Explained: Section 68/69A not Invocable

S. Balaji Mech-Tech Private Ltd. Vs ITO (ITAT Delhi)

ITAT Delhi held that provisions of section 68 or 69A of the Income Tax Act for cash deposit during demonetization period unjustified since source of cash deposits duly explained. Hence, addition liable to be deleted.

Facts- The assessee filed its return of income declaring an income of Rs.9,88,387/- on 29.10.2017. The case was selected for scrutiny under CASS for the reason ‘abnormal increase in cash deposit during the demonetization period as compared to pre-demonetization period and higher turnover reported in service-tax return as compared to ITR. AO made addition of Rs.1,62,46,533/- on account of unexplained cash deposits u/s 68 of the Act during demonetization period after allowing credit of opening cash balance of Rs.10,01,164/- as on 01.04.2016 and Rs.5,303/- being average cash deposit in bank from 01.04.2016 to 31.1 0.2016.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that the assessee had deposited the cash out of cash sales recorded during the period Oct, Nov and Dec’2016. The reasons recorded by the AO to reject the reasons for such cash deposits are out of cash sales by observing that the cash is nothing but undisclosed funds of the assessee and it has manipulated the cash sales to make such cash deposits. From the records we observe that the AO neither rejected the book results or method of account adopted by the assessee. The AO or CIT(A) has not found any discrepancies in the method of accounting, margin declared by the assessee which are in consonance with the previous periods. Since the AO did not have any material against the assessee but made the addition merely on the basis his perception that the same is only out of assessee’s undisclosed income.

Held that the AO/CIT(A) cannot invoke the provisions of section 68 or 69A when the assessee is already declared the source for cash deposits in the books of accounts and the lower authorities without their being any material to support on their contrary view, the provisions of section 68 or 69A cannot be invoked.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal has been filed by the assessee against the order of ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC) [“ld. CIT(A)”, for short] dated 11.01.2024 for the Assessment Year 2017-18.

2. Brief facts of the case are, the assessee filed its return of income declaring an income of Rs.9,88,387/- on 29.10.2017. The case was selected for scrutiny under CASS for the reason ‘abnormal increase in cash deposit during the demonetization period as compared to pre-demonetization period and higher turnover reported in service-tax return as compared to ITR.

3. Assessee is involved in the business of trading of general purpose machinery parts/bearings. Notices under section 143(2) & 142 (1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire were served on the assessee. After issue of several notices u/s 142(1) of the Act, assessee filed the relevant information along with confirmation of unsecured loan, ledger copy of expenses and reconciliation of sale/turnover shown in ITR and VAT return. With regard to cash deposits during demonetization period, assessee submitted that out of cash of Rs.2,01,53,000/-, cash of Rs.29,00,000/- was deposited in new currency. He further submitted that entire cash deposited during the year was out of cash in hand appearing in cash book as on 08.11.2016. The Assessing Officer observed that no cash book was submitted by the assessee.

4. Further, directions under section 144A of the act were sought from the Addl.CIT, Range 22, New Delhi. The Addl.CIT sought further information from the assessee by issue of show-cause notice dated 11.12.2019 to the assessee to explain the abnormal higher cash sales for October and November, 2016 and consequently, deposit of Rs.2,01,53,000/- during the demonetization period shall be treated as unexplained and other issues relating to cash deposits. In response, the assessee submitted detailed submissions and bank statements. The same is reproduced in the assessment order at para 6 of the order. After considering the submissions of the assessee, Assessing Officer noted that the assessee has successfully explained the reconciliation of turnover as per the VAT return and audited accounts. He further noted that there has been no change in the turnover reported in the VAT returns filed after demonetisation. The trading results of the assessee as per the audited accounts was accepted by him in toto. As per the facts on record, AO did not reject the books of accounts u/s 145(3) of the Act. He opined that the cash sales of the assessee has increased before demonetisation. He further noted that the assessee has duly reconciled the sum of Rs.20 lacs which was withdrawn from the bank. He held that the assessee is not able to justify the cash deposited in banks during demonetisation. He noted that the assessee had deposited cash of Rs.29,00,000/- in new currency notes. He further noted that opening cash balance as on 01.04.2016 was Rs.10,01,164/-and average cash deposit in bank from 01.04.2016 to 31.10.2016 was only Rs.5,303/-. The AO accepted the cash deposit in new currency of Rs.29,00,000/- and made addition of Rs.1,62,46,533/- on account of unexplained cash deposits u/s 68 of the Act during demonetization period after allowing credit of opening cash balance of Rs.10,01,164/- as on 01.04.2016 and Rs.5,303/- being average cash deposit in bank from 01.04.2016 to 31.1 0.2016.

5. Aggrieved, the assessee went in appeal before the learned CIT(A) and filed detailed submissions before the learned CIT(A) along with supporting documents. However, Ld CIT(A) sustained the additions made by the AO.

6. Aggrieved, the assessee is in appeal before us and raised following grounds of appeal:

“1. Because the Ld. CIT (A) has erred, as per law as well as on the facts and in the circumstances of the case, in affirming the addition of Rs.1,62,46,533/- made by the Ld. AO as unexplained money u/s 68 of the Income Tax Act.

2. Because the Ld. Lower Authorities erred in presuming that the whole cash deposited during demonetization period is an afterthought without considering the fact that VAT returns were filed well within time and no VAT return has been revised.

3. Because the Ld. Lower Authorities has erred in alleging that the reply is devoid of any evidences whereas the appellant has submitted documentary evidences such as VAT returns, quantitative details of purchase and sales etc. to substantiate the sales made during the year out of which cash were deposited in bank accounts.

4. Because the CIT(A) NFAC has erred in alleging that no cash book was submitted without considering the fact that the appellant had requested the Ld. AO vide reply dated 17.12.2019 to produce cash book during physical hearing because of being vary voluminous, however, the Ld.- AO proceeded to pass the order on 20.12.2019 without providing any opportunity to present the same which shows that the Ld. AO has passed the order without providing reasonable opportunity of being heard and made the addition u/s 68 of the Act based on his whims and fancies.

5. Because the CIT(A) NFAC has erred in doubting the cash sales made as the books of account of the appellant is duly audited by Independent Chartered Accountant and quantitative details were also given in audited report.

6. Because the Ld. AO has erred in making addition on account of cash deposited in bank account without rejecting the books of account. Moreover ~ on one hand the Ld. AO has accepted cash deposited in new currency of Rs.29,00,000/- out of sale proceeds and on the other hand rejected cash deposited in SBNs of Rs.1,62,46,533/- which is also part of books of accounts maintained by the appellant, after allowing deduction of Rs.10,01,164/-opening cash balance held at the beginning of the year and average cash deposited from 01.04.2016 to 31.10.2016 of Rs.5,303/- on his whims and fancies.

7.Because the CIT(A) NFAC has erred in affirming the addition made by the AO on sole ground of comparison of cash sales and cash deposits during the demonetization period with that of earlier period/years.

8. Because the CIT(A) NFAC erred in confirming the action of the AO based upon surmises and conjecture without there being any evidence contrary to the contention of the assessee which is duly supported by documents.

9. That the CIT(A) NFAC has erred in confirming the order of the AO ignoring the position of law that provisions of section 68 cannot be applied in respect of income from a source which has already been taxed which would amount to double taxation.

10. Because the Ld. Lower Authorities has erred in making addition only on the basis of assumptions and presumptions without having any cogent and corroborative evidence on record.

11. Because the Ld. Lower Authorities also erred in making addition without considering the submission made the appellant and case laws relied upon.”

7. At the time of hearing, Ld AR brought to our notice the relevant findings of the AO and submitted that the AO has ignored the date wise and bill wise details of cash sales made during the year which forms part of total sales and was duly recorded in the audited accounts. It was submitted that VAT returns for the first two quarters were filed before the announcement of demonetization and the same was accepted by the Sales Tax authorities. The VAT returns submitted post demonetization was also accepted by the Sales Tax Department. There was no change in turnover in the revised VAT returns which was submitted after demonetization was announced. The VAT returns were revised for the first three quarters for incorporating changes in TIN number of some dealers. It was further submitted that as evident from the audited balance sheet, Note 2.30, there was a balance of SBN for Rs.l,72,53,000/- as on 8th November 2016, which was deposited in bank during the demonetization period and the source of such cash in hand was cash sales made by the assessee duly recorded in the audited books.

8. Further, it was submitted that proceedings U/S 144A of the Act was initiated by the learned JCIT, Range 22, Delhi vide issue of notice dated 11-12-2019 wherein it was proposed to reject the books of accounts of the assessee u/s 145 of the Act for difference in turnover reported in the audited accounts and turnover submitted based upon the replies made during assessment proceedings. In reply during assessment dated 17.12.2019, wherein the assessee submitted the reconciliation of turnover and no discrepancies were found by the AO and the trading results of the assessee as per the audited accounts was accepted and the books of accounts were not rejected by the AO U/S 145(3) of the Act. The original and revised VAT returns were also accepted by the AO. The purchases, sales, opening stock, closing stock and financials of the assessee company was accepted as such and no discrepancy was reported by the AO. w.r.t the allegation of the AO that cash book requisitioned during assessment was not submitted, please note that the assessee vide reply dated 17.12.2019 requested the learned AO to give an opportunity of personal hearing to submit the cash book since the same is voluminous and cannot be uploaded. However, no such opportunity of personal hearing was provided to the assessee and with a prejudiced mind, he added the cash deposits ofRs.1,62,46,533/- u/s 68 of the Act vide order dated 20-12-2019 on the pretext that the assessee failed to substantiate the source of cash deposits. The books of accounts were riot rejected by the learned AO in making the impugned addition u/s 68 of the Act.

9. The learned CIT(A) too did not appreciate the submissions filed by the assessee. He acknowledged the fact that the assessee has produced the quarter wise details of cash sales, daily bill wise cash sales register, bank statements, details of item wise stock position etc. However, he alleged that confirmations were not provided by the assessee from customers to whom cash sales were made. He further alleged that the assessee has not produced the stock register to substantiate the claim of sales. He further opined that the claim of the assessee that the addition has been made u/s 68 of the Act without rejection of books of accounts does not help the case of the assessee. He opined that neither the purchases is substantiated nor sales is substantiated with sale bills/cash receipts or names and address of the customers. In the backdrop of the these accusations, the learned CIT(A) rejected the books of accounts and held that the assessee is in possession of unexplained money of Rs.l,62,46,533/- and added the same to the total income of the assessee u/s 69A of the Act. The relevant extract of the findings is quoted below:

“The claim of the appellant that addition is made without rejection of the books the financial statements generated from the said books of accounts does not help the case of the appellant. The sales disclosed in the books of accounts has led to the offering of the profit computed by the appellant for tax. This is not in consonance with the legal position that in respect of the unexplained cash deposited in bank, the appellant was liable to be taxed on the entire amount and not on only the part offered as profit. In the order passed the addition is made u/s 68 of the IT Act to tax the amounts credited by the appellant as sales and for which no satisfactory explanation was given. However, the books of accounts are not found to be reliable in so far as unexplained sums have been credited as sales and a percentage of such unexplained amount is offered as profits. In a nut shell neither are the Purchases duly substantiated nor were the Sales substantiated with Sale Bills/Cash Receipts or names and addresses of the customers. In the background the Books of the appellant are not found to be reliable and do not reflect the correct picture of the affairs of the business. Hence, the books of accounts are rejected u/s 145 (3) of the Act by exercise of powers of the Commissioner of Income Tax (Appeals) which are co-terminus with the powers of the Assessing Officer. In the background of the rejection of the books of accounts, the addition made U/S 68 of the IT Act is found to be inconsistent with the facts. In the present case the finding is that the appellant was found to be in possession of unexplained cash of Rs 1,62,46,533/- which was deposited in the bank accounts. hence, since, the possession of cash precedes its credit in books as sales, it would be more appropriate to tax the money of Rs 1,62,46,533/- for which the appellant failed to give satisfactory explanation, U/S 69A of the Income Tax Act.”

10. Further, Ld. AR for the assessee submitted oral submissions and also filed written submissions which are reproduced below :-

“Grounds 1-11: Addition of Rs.1,62,46,533/- u/s 69A of the Act, being cash deposits during demonetization.

The assessee has revised Ground No.9. The same is read as follows:

“That on the facts and in the circumstances of the case, the learned CIT(A), NFAC has erred in rejecting the books of accounts u/s 145(3) of the Act and treating the sum of Rs.1,62,46,533/-, being cash deposits during demonetization period as unexplained money u/s 69A of the Act when it was duly explained that the source of such cash deposits was cash sales made by assessee which was duly reported in the audited accounts and accordingly offered to tax, thus adding the same again u/s 69A of the Act would amount to double taxation.”

It is humbly requested before Your Honours to admit the revised ground raised by the assessee at this stage of proceedings.

1. At the outset, it is expedient to quote Section 145(3) of the Act which deals with the method of accounting and provides that in cases where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, the assessment may be carried out in accordance with the procedure laid down in Section 144 of the Act. Section 145(3) of the Act reads as under:-

“145. Method of accounting—

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2)], the Assessing Officer may make an assessment in the manner provided in Section 144.]”

For the sake of clarity, Section 144 of the Act, which prescribes the manner in which the best judgment assessment has to be completed by the Revenue, is quoted as under:-

“144. Best Judgment Assessment— (1) If any person

(a) fails to make the return required under sub-section (1) of Section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) [or an updated return under sub-section (8 A)] of that section, or

(b) fails to comply with all the terms of a notice issued under sub-section (1) of Section 142 or fails to comply with a direction issued under sub-section (2-A) of that section, or

(c) having made a return, fails to comply with all the terms of a notice issued under sub­section (2) of Section 143,

the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment:

Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment:

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of Section 142 has been issued prior to the making of an assessment under this section.

A plain reading of the aforementioned provisions would indicate that the AO or CIT(A) wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO/CIT(A) is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under section 144 of the Act.

2. Reiterating the facts of the case, it is submitted that it was explained before the learned CIT(A) that the cash deposits made during demonetization was out of available cash in hand on 08-11-2016 and the source of such cash in hand was cash sales made by the assessee before demonetization was announced on 08-11-2016. The learned CIT(A) understood that the addition made by the learned AO u/s 68 of the Act is not consistent with the facts of the case. However, he rejected the books of accounts of the assessee u/s 145 of the Act on the pretext that,

i) the stock register is not maintained by the assessee and

ii) the purchases/sales is not substantiated with sale bills/cash receipts or names and address of the customers/confirmation not provided by customers.

3. With a prejudiced mind and preset notion, the learned CIT(A) upheld the addition of cash deposits during demonetization period as unexplained money u/s 69A of the Act. However, no addition/disallowance/adjustment was made to the total sales and/or corresponding purchases made by the assessee during the year. The financials/trading results of the assessee company was not disturbed by him. This means that the sales and purchases made by the assessee were not rejected by the learned CIT(A). However, proceeds from cash sales which was deposited in the bank during demonetization period was treated as unexplained money u/s 69A of the Act in the garb of rejection of books of accounts u/s 145(3) of the Act.

4. Here, please note that the learned CIT(A) perused the submissions and the documents submitted by the assessee during the course of assessment. He noted that the learned AO has wrongly invoked section 68 of the Act. He rejected the books of accounts of the assessee u/s 145(3) of the Act and sustained the addition made by the learned AO u/s 69A of the Act in the garb of rejection of books of accounts u/s 145(3) of the Act.

5. Here, it may kindly be noted that at no point of time, during the course of appellate proceedings, the assessee was called upon to explain as to why the books of accounts should not be rejected. The same is evident from the notices issued by the learned CIT(A), enclosed at page 202-233 of the paper book. On the other hand, it was duly submitted before the learned CIT(A) that proceedings u/s 144A of the Act was  initiated on the assessee by the JCIT vide letter dated 11-12-2019, refer page 53-55  of the paper book, and a proposal was made to reject the books of accounts of the assessee on account of difference in turnover reported in ITR and turnover reported in the VAT return. The JCIT also questioned about the revised VAT returns filed by the assessee in the said letter.

6. In reply to the said letter, refer page 106-109a, the assessee satisfactorily explained the reconciliation of turnover. At page 107 of the paper book, the assessee has clearly reconciled the quarter wise turnover as per the VAT return and audited accounts. W.r.t the query that the VAT return has been revised for the first three quarters starting from April, 2016 to December,2016, it was submitted that there is no change in value of turnover as filed in the original VAT returns and Revised VAT returns. These returns were required to be revised for incorporating change in TIN number of some dealers. The assessee also submitted a tabular chart showing that there was no change in the value of turnover as reported in the original return and revised return. Both original return and revised return were submitted to substantiate the same. It was further submitted that as evident from the audited balance sheet, Note 2.30, there was a balance of SBN for Rs.1,72,53,000/- as on 8th November 2016, which was deposited in bank during the demonetisation period and the source of such cash in hand was cash sales made by the assessee.

7. On successful explanation given by the assessee w.r.t. points raised in the said letter, the financials of the assessee company, the sales, purchase, stock, trading results etc reported in the audited accounts, were duly accepted by the learned AO and the books of accounts were not rejected u/s 145 of the Act. The returned income of the assessee as per the audited accounts was accepted by him and addition u/s 68 of the Act was made to the returned income of the assessee.

8. However, the learned CIT(A) totally ignored the notices issued by the Department and replies filed by the assessee explaining as to why books of accounts should not be rejected u/s 145 of the Act and without affording any opportunity of being heard during the course of assessment proceeded to reject the books of accounts u/s 145(3) of the Act and sustained the addition of cash deposits u/s 69A of the Act. At no point of time during appellate proceedings, the assessee was aware of the fact that the addition u/s 68 of the Act made by the learned AO would be sustained by the CIT(A) u/s 69A of the Act after rejecting the books of accounts u/s 145 of the Act. Here, it is humbly submitted that books of accounts can be rejected u/s 145(3) of the Act only under the following circumstances, which are –

1. If not satisfied with the correctness or completeness of accounts; or

2. If either cash or mercantile system has not been followed consistently; or

3. If notified accounting standards have not been followed consistently.

In the present case, none of the above conditions are met. There is no deviation in the accounting policies followed by the assessee in the current year vis a vis the preceding years. The trading results of the current year was more or less the same as that of the last year. In this regard, your kind attention is invited to page 39 of the paper book. In the Tax Audit Report, the Gross profit percentage on turnover for the current year was reported at 7.1% and for the immediately preceding year, the same was reported at 7.14%. Similarly, the net profit percentage on turnover for the current year was reported at 0.32% and for the immediately preceding year, the same was reported at 0.4%. Details of GP and NP ratio of the last 3 years is tabulated below:

AY	GP Ratio	NP Ratio
2015-16	7.10%	0.35%
2016-17	7.14%	0.40%
2017-18	7.27%	0.31%

Thus, there is no deviation in the financial results of the current year as compared to the immediately two preceding years. Same accounting policies is followed by the assessee consistently year after year. The appellant is a private limited company and is required to maintain its books of account as per Companies Act’ 2013 and the same was audited by an Independent Chartered Accountant u/s 44AB of the Income Tax Act, 1961. Nothing adverse was pointed out by the auditor of the company w.r.t correctness or completeness of the accounts. Furthermore, as a normal practice followed every year the assessee takes physical stock of all the machinery items at the year end and item wise quantity of stock at the yearend is duly reported in the Tax Audit Report and the value of such closing stock is duly recorded in the audited accounts. This practice has been followed in the preceding and succeeding years also.

9. Here, please note that in case of rejection of books of account, burden of proof lies with revenue. Thus, before rejecting the books of account, the Ld. CIT(A) must have given reasoning that the case of the assessee fall under one of the situations mentioned above. In the present case, the learned CIT(A) has not made out a case as how any of the above condition is met to reject the books of accounts. Furthermore, no opportunity of being heard was provided to the assessee before rejecting the books of accounts u/s 145(3) of the Act. Section 144 of the Act clearly says that before making best judgment assessment, opportunity of being heard has to be given to the assessee. Relevant section is again quoted below:

“…..

the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment:

Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment:

In the present case, as clearly evident from the notices issued during appellate proceedings, refer page 202-233, no notice/intimation was provided to the assessee regarding rejection of books of accounts and sustaining the addition u/s 69A of the Act instead of section 68 of the Act made by the learned AO. As such, rejection of books of accounts by the learned CIT(A) was patently wrong and unsustainable in law.

9.1 In this regard, assessee places reliance of the judgment of the Hon’ble SC in the case of CIT v. Woodward Governor [2009] 312 ITR 254/179 Taxman 326 wherein provisions of section 145 of the Act was discussed in length and it was held that,

“The provisions of section 145 recognise the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word ‘paid’ in section 43(2), which is used in several sections from sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed under section 28/29. That is why, in deciding the question, as to whether the word ‘expenditure’ in section 37(1) includes the word ‘loss’, one has to read section 37(1) with sections 28, 29 and 145(1). Accounts regularly maintained in the course of business are to be taken as correct, unless there are strong and sufficient reasons to indicate that they are unreliable. Under section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account, the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is lower. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant, because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year’s account in a continuing business are not brought to the charge as a matter of practice, though loss due to fall in the price below cost is allowed even though such loss has not been realized actually. The said system of commercial accounting can be superseded or modified by legislative enactment. Under section 145(2), the Central Government is empowered to notify from time-to-time the Accounting Standards to be followed by any class of the assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting has been made mandatory for companies. In other words, Accounting Standard, which is continuously adopted by an assessee, can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the instant case, there was no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there was no finding given by the Assessing Officer stating that the assessee had not complied with the Accounting Standards. [Para 14]”

> Here, reliance is also placed on the judgment of the Hon’ble jurisdictional Delhi High Court in the case of PCIT vs Forum Sales (P.) Ltd [2024] 160 taxmann.com 93 (Delhi) pronounced on 01-03-2024 wherein detailed discussion was made w.r.t rejection of books of accounts u/s 145(3). Relying on the judgment of the Hon’ble High Court of Delhi in the case of Pr. CIT v. Swananda Properties (P.) Ltd. [2019] 111 taxmann.com 94/267 Taxman 429/2019 SCC, the Hon’ble HC held that,

“19. A plain reading of the aforementioned provisions would indicate that the AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under section 144 of the Act. At this juncture, what needs consideration is the question whether such an addition must be made only after the rejection of the books of account by the AO.

20. The Division Bench of the High Court of Bombay in the case of Pr. CIT v. Swananda Properties (P.) Ltd. [2019] 111 taxmann.com 94/267 Taxman 429/2019 SCC OnLine Bom 13359, had an occasion to consider the said question and the same was accordingly answered as under:-

“11. We note that the books of account of the respondent were rejected by the Commissioner of Income-tax (Appeals) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of account to disregard the same. We note that the Commissioner of Income-tax (Appeals) in his order while rejecting the books of account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of the books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the respondent’s records which would warrant rejection of the books and making a best judgment assessment. Thus, on facts the view taken by the Tribunal is a possible view. Therefore, no substantial question of law arises. Thus not entertained.”

[Emphasis supplied]

21. The Division Bench of the Karnataka High Court in the case of CIT v. Anil Kumar & Co. [2016] 67 com 278/386 ITR 702/2016 SCC OnLine Kar 8512, has held that in cases where the Revenue had failed to reject the books of account and proceeded to an estimation of income without framing the assessment under Section 144 of the Act, such an action is unsustainable as per law. The relevant paragraph of the said decision is reproduced as under:-

“11. Insofar as the estimation of gross profit made by the Assessing Officer modified by the Commissioner of Income-tax (Appeals), the Tribunal has rightly held that when the books of account of the assessee had not been rejected and assessment having not been framed under section 144 of the Income-tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of account of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in section 145(3) of the Act are satisfied for rejection of the books of account. Thus, when the books of account are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, the same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) have rejected the books of account maintained by the assessee in the course of the business. As such the Tribunal has rightly rejected or set aside the partial addition made by the Assessing Officer for arriving at gross profit and sustained by the Commissioner of Income-tax (Appeals) and rightly held that the entire addition made by the Assessing Officer was liable to be deleted. The said finding is based on sound appreciation of facts and it does not give rise for framing substantial question of law.”

[Emphasis supplied]

22. In another case of Pr. CIT v. Marg Ltd. [2017] 84 com 52/249 Taxman 521/396 ITR 580 (Mad.)/2017 SCC OnLine Mad 37852, the Division Bench of the High Court of Madras has held that the rejection of books of account is sine qua non before the AO proceeds to make his own assessment. Paragraph 4(c) of the said decision is reproduced as under:-

“4(c). Therefore, it is sine qua non that the Assessing Officer to come to a conclusion that the books of account maintained by the assessee are incorrect, incomplete or unreliable and reject the books of account before the proceeding to make his own assessment. In the instant case, there is no reference in the assessment order of the Assessing Officer regarding rejection of books of account.”

[Emphasis supplied]

…….

24. The series of judgments referred to hereinabove clearly allude to the settled position of law that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act. The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income of an assessee.

25. In the present case, the ITAT has made a categorical finding that despite the fact that the AO was provided with the requisite bills, vouchers and addresses of the transacting parties, it did not make any effort to confirm the veracity of the alleged bogus or inflated bills.

……

29.. Admittedly, the addition of income as discussed in questions (B), (C) and (D) on estimate basis has been done without rejecting the books of account. In view of the aforesaid, we find that no substantial question of law arises in the present appeals.

The Hon’ble HC of Andhra Pradesh in the case of CIT vs Margadarsi Chit Funds (P.) Ltd [1984] 19 Taxman73 (AndhraPradesh)has held that,

“As the ITO’s power to substitute a system of accounting for the one followed by the assessee, flows from section 145, it is, therefore, imperative that, before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account. The ITO’s view that there could be a better system of accounting is no answer to the application of the provisions of section 145, especially if a particular system has been followed by the assessee uniformly and regularly for the past several years, and was accepted by the department. It is not open to the ITO to intervene and substitute a different system of accounting on the ground that the system which commends to the ITO, is better.

In the instant case, the assessee had been following a consistent system of accounting and regularly employing the same system of accounting for declaring its income from year to year. It was also not in dispute that this system of accounting was not found to be defective by the ITO in the past years. There was no material to indicate why the ITO considered the system of accounting regularly followed by the assessee as defective, or such that correct profits could not be deduced there from. It was not open to the ITO to intervene and substitute a different system of accounting than the one which was followed by the assessee, on the ground that the system which commended to the ITO was better. The ITO was, therefore, not justified in rejecting the assessee’s method and substituting his own method for it.”

10. In the present case, the learned CIT(A) rejected the books of accounts of the assessee u/s 145 of the Act on the pretext that,

i) the stock register is not maintained by the assessee and

ii) the purchases/sales is not substantiated with sale bills/cash receipts or names and address of the customers/confirmation not provided by the customers.

10.1 W.r.t the allegation of the learned CIT(A) that stock register was not maintained by the assessee, it is humbly submitted that the assessee deals in a number of general purpose machinery items and maintaining stock register of all these items on a daily basis was practically not possible. However, as a common practice followed every year the assessee duly takes physical stock at the year end and item wise quantity of stock at the yearend is duly reported in the Tax Audit Report and the value of such closing stock is duly recorded in the audited accounts. The opening stock or the closing stock of the assessee has not been disputed in the present case. It is a trite law that mere fact of non-maintenance of stock register could not be basis for rejection of books of accounts especially when the trading results are not disputed. Reliance in this regard is placed on the judgment of the Hon’ble Ahmedabad in the case of DCIT vs Asian Grantio India Ltd [2020] 113 taxmann.com 445 (Ahmedabad – Trib.) wherein on identical facts it was held that,

“Taking up the matter further, as per section 145 of the Act, the Assessing Officer is empowered to reject the books of account of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter alia satisfied with the completeness or correctness of the books of account of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting. [Para 18.7]

However, the Assessing Officer cannot use this power as a tool to reject the books of account merely due to non-maintenance of the stock register, variation in gross profit and non-furnishing of certain vouchers or its explanation or non-confirmation of sundry creditors. Anyway, before rejecting the books of account, the Assessing Officer must record the specific reason for rejecting the books of account. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings. [Para 18.8]

In the given case, the Assessing Officer has rejected the book results of the assessee based on the finding that there was less production of tiles in comparison to the companies available in the public domain and non-maintenance of production registers properly. In the light of the above facts, the Assessing Officer invoked the provisions of section 145(3) of the Act and thereby he has made certain upward additions on account of suppressed production which was sold outside the books. [Para 18.9]

The books of account cannot be rejected if the assessee does not maintain the stock registers until and unless it is coupled with other defects such as sales/ purchase outside the books of account. But in the instant case, there was no such conclusive finding by the Assessing Officer. [Para 18.12]

In view of the above, we opined that the Assessing Officer cannot reject the books of account for the reasons as discussed above in a situation where the assessee does not maintain the stock register. Accordingly, the reasons which were based by the Assessing Officer for rejecting the books of account are not sufficient enough and cogent to reject the books of accounts. Accordingly, once the books of account of the assessee are not liable to be rejected then its book profit should be accepted in the given facts and circumstances.

In view of the above and after considering the facts in totality, there is no reason to interfere in the order of the Commissioner (Appeals). Hence, the ground of appeal of the revenue is dismissed.

In the result, the appeal of the revenue is dismissed. [Para 18.12]”

> Reliance is also placed on the judgment of the Hon’ble ITAT, Chandigarh Bench in the case of Paramount Index vs ACIT [2020] 117 taxmann.com 802 (Chandigarh – Trib.) wherein it was held that,

“10. In the present case, undisputedly the only basis for rejecting the books of account is non-maintenance of stock register and the incorrect method of valuation of stock adopted by the assessee. No other defect has been pointed out by the Revenue authorities for rejecting the books of account. As for the non-maintenance of stock register the assessee has explained the non-feasibility of maintaining it considering the fact that it was dealing in a large number of small items. It was also explained that the assessee was consistently following the method of physically verifying its stock at the end of the year.

11. Considering the above facts, we are not in agreement with the Revenue that the non-maintenance of stock register was sufficient for exercising the power of rejecting the books of the assessee. It is not unusual for businesses dealing in large number of small items and operating at a small or medium scale to do away with the maintenance of any stock register since it is not feasible maintaining movement of stock of every such item. Such businesses usually verify physically their stock at the end of the year and all wastages, pilferages and other losses therefore get automatically accounted for in the process, reflecting thus the true profits earned by the assessees. In the present case the assessee has been doing the same consistently, following the method of determining its stock at the end of the year by physically verifying the same and not maintaining any stock register since it was dealing in a large number of small items. We fail to understand how the non-maintenance of stock register has affected the determination of true and correct profits of the assessee in the circumstance. The Revenue has found no other defect in the books of the assessee. All purchase and sale vouchers and other records have been found to be in order. The Revenue has not demonstrated before us as to how the non-maintenance of stock register has been a hindrance in determining the true and correct profits earned by the assessee and also what was the infirmity in the method adopted by the assessee of physically verifying its stock at the end of the year. Therefore in our opinion the mere fact of non-maintenance of stock register cannot be the basis for rejection of books of account.”

11. W.r.t the allegation of the learned CIT(A) that neither the purchases is substantiated nor sales is substantiated with sale bills/cash receipts or names and address of the customers, it is submitted that purchases and sales made by the assessee during the year was not disturbed by the learned CIT(A) in his order which suggest that the same was accepted by him. W.r.t the names and address of the customers, it is submitted that the daily cash sales bill register was duly placed before him, refer page 68-104 of the paper book. Monthly cash sales, monthly purchases and monthly sales were duly submitted. Since the cash sales made to individual retail customers was of a minimal amount (less than Rs.20,000) their names and addresses were not maintained by the assessee since it was not required to maintain the same. In total, there were 1655 cash sales transactions during the year of amounts less than Rs.20,000/-. Non-maintenance of names and address of customers to whom goods were sold in cash cannot lead to the inference that the cash sales are not genuine, particularly when the cash sales were not disturbed. Here, it may also be noted that names and addresses of customers to whom goods were sold on credit was duly maintained by the assessee and the same was also given during assessment. Since the sale proceeds was immediately realized at the time of cash sale, the assessee did not maintain the names and addresses of retail cash customers. In the appellate order, the learned CIT(A) also alleged that confirmation from regular customers was not provided. However, as evident from the notices issued during appellate proceedings, no such confirmation was ever asked for by the assessee. Even otherwise, taking confirmation from almost 1655 retail cash customers was practically impossible. It is not uncommon that retail cash customers do not give any such confirmation and that too when the sale amount was less than Rs.20,000/-

In this regard, reliance is placed on the judgment of the Hon’ble Bombay High Court in the case of R.B. Jessaram Fatehchand vs CIT [1970] 75 ITR 33 (Bombay) wherein it was held that,

“The ITO had scrutinised closely the account books of the assessee and had found no fault with them excepting that the addresses of the customers for the cash sales of sugar had not been entered. It was not found by him that there were any other reasons for not accepting the said cash sales, such as, for instance, the sales being at lower rates than what were prevailing in the market or that they were not comparable with the other verified sales, which the assessee had made during the material time. In these circumstances, the reason given by the ITO for rejecting the book results shown by the assessee’s accounts or for not accepting the cash transactions as genuine could not be accepted as good and sufficient unless there was an obligation on the part of the assessee to keep a record of the addresses of the cash customers. It could not, therefore, be said that the failure on his part to maintain the addresses was a suspicious circumstance giving rise to a doubt about the genuineness of the transactions entered into by the assessee.

Since, having regard to the nature of the transactions and the manner in which they had been effected, there was no necessity whatsoever for the assessee to have maintained the addresses of cash customers, the failure to maintain the same or to supply them as and when called for could not be regarded as a circumstance giving rise to a suspicion with regard to the genuineness of the transactions. The Tribunal, therefore, was not right, in setting aside the order of the AAC and restoring that of the ITO. There were no circumstances disclosed in the case nor was there any evidence or material on record which would justify the rejection of the book results.”

12. Here, it is interesting to note that in this scenario of rejecting the books of accounts, the learned CIT(A) ought to have rejected the cash sales corresponding to the cash deposits added u/s 69A of the Act. However, the cash sales or the trading results as per the audited accounts were not disturbed by him. Even the purchases reported by the assessee in the audited accounts were not disputed. It is not uncommon to say that there cannot be any sales without purchases. These facts suggest that the addition was made by him for the sake of making addition and to tax the genuine deposits at a higher rate of interest.In this regard, it is humbly submitted that the treatment of these deposits as unexplained money u/s 69A of the Act by the learned CIT(A) has resulted in double taxation of the same amount, once in the form of sales already offered to tax by the Assessee at the applicable rates of tax and again by way unexplained money u/s 69A of the Act at higher rates specified u/s 115BBE of the Act.

13. In rejecting the books of accounts u/s 145(3) of the Act, the Ld. CIT(A) has ignored the fact that the appellant is a private limited company and is required to maintain its books of account as per Companies Act’ 2013 and the same were audited by an Independent Chartered Accountant u/s 44AB of the Income Tax Act, 1961. None of the condition mentioned in section 145(3) of the Act were met in the present case as discussed in the preceding paras. In the present case, as evident from the appellate order, page 36, the addition made u/s 68 of the Act were found to be inconsistent with facts and addition was made u/s 69A of the Act as unexplained money.

At this juncture, it is relevant to quote section 68 of the Act of the Act which reads as follows:

“68. Cash credits.–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.

The following provisos shall be inserted in section 68 by the Finance Act, 2012, w.e.f. 1.4.2013:

Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited ; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory :

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

A bare reading of Section 68 of the Income-tax Act, 1961, suggests that for a sum so credited to be charged to income-tax as the income of the assessee of that previous year by the A.O. the following have to be present:

(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 that the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

In the present case, the learned CIT(A) has accepted that the assessee has offered a satisfactory explanation for cash sales credited in the books during the year and held that the addition made by the learned AO u/s 68 of the Act is not consistent with the facts of the case.

However, with a prejudiced mindset to sustain the addition made by the learned AO, the learned CIT(A) purposefully, without any basis and without affording an opportunity of being heard to the assessee, made the addition u/s 69A of the Act. In doing so, he treated the cash deposits, the source of which was explained cash sales, as unexplained money. It is not understood as to how the addition has been made by the learned CIT(A) when the source of such cash deposits, being cash sales, was duly accepted by him. Even no discrepancy was pointed out by the VAT department in respect of purchases and sales made by the assessee. At no point of time, the assessee was intimated that addition will be made u/s 69A of the Act after rejection of books of accounts by the learned CIT(A). Apart from addition made u/s 69A of the Act, no other additions/adjustments were made by the learned CIT(A).

14. Here, it is imperative to discuss section 69A of the Act. The said section read as follows:

69A. UNEXPLAINED MONEY, ETC

“Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”

On a plain reading of the above section, it would be evident that the following conditions must be fulfilled for applicability of section 69A:

1. Assessee is found to be owner of any money, bullion, jewellery etc, and

2. Such money, bullion, jewellery is not recorded in the books of accounts for any source of income, and

3. The assessee either offers no explanation or explanation is found not satisfactory by AO.

In other words, a reading of section 69A of the Act makes it clear that the prime condition for addition u/s 69A of the Act is that the assessee is found to be in possession of money, bullion jewellery, etc., not recorded in its books of account.

In the present case, the cash deposits in the Bank A/c of the assessee was on account of retail cash sales made by the assessee and the same was duly recorded in the audited accounts and was also reported in the VAT returns. The assessee maintains regular books of account which were audited by an independent Auditor as per the requirement of Companies Act and also audited u/s 44AB of the Act. The cash sales and the corresponding cash deposits in banks are duly reflected in books of the Assessee. Thus, section 69A of the Act could not have been invoked in the present case since cash deposits and its source, being cash sales, was duly recorded in the audited accounts and one of the mandatory requirement of section 69A of the Act is that such money etc is not recorded in the books of accounts for any source of income.

15. Moving further, it is further submitted that the assessee was never informed about any outside material adverse for the present case which was used by the learned CIT(A) before rejecting the books of accounts and making the impugned addition u/s 69A of the Act. Here, reference is made to section 142(2) and 142(3) of the Act which reads as under:

Section 142(2) of the Act reads as under:

(2) For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such inquiry as he considers necessary.

Section 142(3) of the Act reads as under:

(3) The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub- section (2) or any audit under sub- section (2A) and proposed to be utilised for the purpose of the assessment.”

Section 142(2) of the Act stipulates that Assessing officer is required to make all such inquiries as he considers necessary for the purpose of obtaining full information in respect of the income or loss of the Assessee. In immediate succession is section 142(3) of the Act which lays down that in respect of the material gathered on the basis of the said inquiry made u/s 142(3) of the Act and which is proposed to be utilized for the purposes of the assessment, the Assessing Officer has to give the Assessee an opportunity of being heard on the same. However, in the present case, as evident from the facts of the case, no independent enquires was conducted by the learned CIT(A) and no adverse material against the assessee was provided to us which even remotely suggest that the cash deposits was unexplained money of the assessee. Before making the impugned addition u/s 69A of the Act, no opportunity of being heard was given to the assessee.

Here, reliance is placed on the judgment of the Hon’ble ITAT, Kolkata in the case of M/s SPML Infra Ltd vs DCIT (ITA No.1228/Kol/2018) pronounced on 17/01/2020 wherein on identical facts it was held that,

“14. To conclude: We note that none of the statements were recorded by the assessing officer of the assessee company, and no opportunity for cross examination has been provided to the assessee company. The mandate of law to conduct enquiry by the Assessing Officer on due information coming to him to verify authenticity of information was not done as per section 142 of the Act. Therefore, mere receipt of unsubstantiated statement recorded by some other officer in some other proceedings more particularly having no bearing on the transaction with the assessee does not create any material evidence against the assessee. This is because section 142(2) mandates any such material adverse to the facts of assessee collected by AO u/s 142(1) has to be necessarily put to the assessee u/s 142(3) before utilizing the same for assessment so as to constitute as reliable material evidence through the process of assessment u/s 143(3) of the Act.”

Further reliance is placed on the recent judgment of the Hon’ble ITAT Delhi in the case of ACIT vs M/s Sur Buildcon Pvt Ltd (I.T.A No.6174/Del/2013) pronounced on 15-07-2021 wherein relying on the above judgment of the Hon’ble Kolkata ITAT in the case of SPML Infra (supra) it was held that,

“7.11 Applying the law to the case at hand, it is evident that the Inspector Reports, that had been relied upon by the A.O., have been reproduced in length for the first time in the Assessment Orders only. The A.O.,by failing to confront the assessees with the evidence he had gathered u/s 142(2) Act, has, therefore, erroneously skipped the mandatory intermediary step prescribed u/s 142(3) of the Act. Thus, when the A.O. has directly gone on to pass the Assessment Orders u/s 147/143(3) of the Act to make the impugned additions u/s 68, the same is in direct violation of the procedure of enquiry prescribed in the Statute that inherently encompasses the Principle(s) of Natural Justice. We derive support to our line of reasoning from the decision of the coordinate Bench of the Hon’ble Kolkata Tribunal in M/s. SPML Infra Ltd. vs. DCIT, ITA No. 1228/Kol/2018 wherein it has been held as under:

“14. To conclude: We note that none of the statements were recorded by the assessing officer of the assessee company, and no opportunity for cross examination has been provided to the assessee company. The mandate of law to conduct enquiry by the Assessing Officer on due information coming to him to verify authenticity of information was not done as per section 142 of the Act. Therefore, mere receipt of unsubstantiated statement recorded by some other officer in some other proceedings more particularly having no bearing on the transaction with the assessee does not create any material evidence against the assessee. This is because section 142(2) mandates any such material adverse to the facts of assessee collected by AO u/s 142(1) has to be necessarily put to the assessee u/s 142(3) before utilizing the same for assessment so as to constitute as reliable material evidence through the process of assessment u/s 143(3) of the Act.” 7.12 We also draw support from the judgment of the Hon’ble Apex Court in Swadeshi Cotton Mills v. Union of India, AIR 1981 SC 818, where the Hon’ble Supreme Court has clearly held that “Where authority functions under a statute and the statute provides for the observance of the principles of natural justice in a particular manner, natural justice will have to be observed in that manner and no other. No wider right than that provided by the statute can be claimed nor can the right be narrowed.

It was further held that,

7.14 Since the results of the enquiries conducted by the A.O. u/s 142(2) of the Act have not been confronted to the assessees, we are inclined to agree with the Ld. A.R. that there has been a violation of the Principle(s) of Natural Justice implied within Section142 (2) of the Act and such statutory non-compliance vitiates the entire assessment proceedings, therefore, rendering it to be null and void. Thus, the Cross Objection taken on the violation of the Principle(s) of Natural Justice is also allowed in favour of the assessees.”

Thus, the order passed by the learned CIT(A) in the present case without affording an opportunity of being heard w.r.t his findings and observations during the course of appellate proceedings is not as per law and in violation of principles of natural justice

16. Having said that, at this juncture, your kind attention is invited to the audited accounts of the assessee, placed at page 1-27 of the paper book. On perusal of the Balance Sheet of the assessee, it may kindly be noted that the own funds of the assessee as on 31-03-2016 was Rs.62,98,902/- and as on 31-03-2017 was Rs.67,27,274/-. This means that the assessee is not a cash rich person and works with a very little capital. The assessee normally runs his business on trade credits and loans. To reduce the hardship on account of trade payables and loans, the assessee resorted to cash sales during the year. The trade payables of the assessee was Rs.4,86,01,152/- in the immediately previous year which was reduced to Rs.2,50,04,952/- in the current year. Thus, trade payables was reduced by Rs.2,35,96,200/- during the year. Furthermore, the bank overdraft of the assessee was reduced to zero from Rs.96,91,210/- in the current year. Moreover, the assessee also decided to reduce his stock by resorting to cash sales. The stock of the assessee was reduced to Rs.6,23,92,800/- from Rs.7,80,06,540/- during the year. The primary objective of resorting to cash sales was to reduce the dependency on trade payables and loans.

17. Here, it may also kindly be noted that the sales of the assessee has reduced to Rs.22,14,02,684/- from Rs.26,24,25,159/- reported in the immediately preceding year. Has the assessee not resorted to cash sales, the sales and the profits of the assessee would be even lower. The assessee has already demonstrated in the preceding paras that there was no major change in the GP and NP ratio of the current year compared to the earlier years.

18. It is worthwhile to mention here that on the one hand the Ld. Assessing Officer had accepted the books of accounts maintained by the appellant as well as the opening balance as on 01.04.2016 and on other hand rejected the availability of cash as on 08.11.2016 which is illogical and absurd. The trading results of the assessee was also accepted by the Ld. AO as it is and no specific defect was pointed out during the assessment proceeding. The appellant begs to further submit that on what basis the Ld. AO has observed that the cash was deposited out of unexplained source when entire cash deposits are duly recorded in books of account. The same was duly substantiated by submitting VAT returns, monthly purchase and sales, daily summary of cash sales which was in agreement with the Audited Financial Statements.

19. As evident from the assessment order and the appellate order, purchases, sales, closing stock and financial results of the assessee were not disputed by the lower authorities. For the mere sake of making addition, the cash deposits during demonetization period was added. In doing so, the lower authorities lost sight of the fact that the source of such cash deposits was cash sales which was duly credited to the Profit and Loss A/c and accordingly offered to taxation. Thus, adding the same again tantamount to double addition of the same amount. In the present case, additions have been made on the basis of suspicions, surmises and conjectures.

20. Here, please note that once an assessee has offered his sales as business income, then again taxing the cash deposits made out of this accounted cash sales as unexplained cash credits/unexplained money amounts to double taxation, which is not permissible as per the canons of Income Tax Law. In this regard, the assessee places reliance on the judgement of Jurisdictional Delhi ITAT in case of Harisons Dismonds Pvt. Ltd. vs ACIT(ITA No. 1426/Del/2021) reported in [2024] 161 com 669 (Delhi – Trib.) wherein the Honorable Delhi ITAT has held that ‘where cash sales have already been offered as income, same cannot be taxed in the garb of inflation sales to cover up demonetization currency’. The relevant extract of the judgment is quoted below:

“There is no dispute that the assessee was maintaining proper books of account which were produced before the Assessing Officer during the assessment proceedings. Month-wise details of cash deposited out of cash sale submitted during the assessment proceedings. [Para 15]

The entire quarrel revolves around the period 1-10-2016 to 8-11-2016 and cash sales during this period have been held to be unexplained credit under section 68.

It is failed to understand how the cash sales for the period 1-10-2016 to 7-11-2016 be treated as inflated sales pursuant to demonetization, as not a single soul was aware that on 8-11-2016, the higher currencies will be demonetized. It was only on 8-11-2016 the Prime Minister announced the demonetization. [Para 16]

The only return which was revised was for the period 1-7-2016 to 30-9-2016 in which period there was no question of anybody being aware of demonetization. [Para 19]

The most peculiar fact is that on 23-12-2016, a survey operation under section 133A was carried out at the business premises of the assessee-company and not a single defect/discrepancy was found in the physical stock vis-a-vis book stock of the assessee. [Para 20]

If the allegation of the Assessing Officer is accepted that the assessee has inflated its sales during 1-10-2016 to 8-11-2016, then there has to be some discrepancy in the book stock vis-a-vis physical stock, but no such discrepancy was found because no such sales were inflated by the assessee. [Para 21]

Merely because there was a minor variation in the cash sales during the alleged period compared to previous year would not mean that the assessee has inflated its sales to cover up demonetized currency. [Para 22]

During the year under consideration, Diwali was on 31-10-2016 and it is common knowledge that in our society, festival runs 15 days after Diwali and it is also a common fact that once the demonization was declared by the Prime Minister, there was frenzy in the market and people were purchasing goods they never intended to purchase just to get rid of demonetized currency. [Para 23]

For the sake of repetition, the assessee had furnished month-wise purchases, month-wise details, stock register, valuation of closing stock, month wise details of cash sales, copies of VAT returns and not a single defect has been pointed out by the Assessing Officer in these clinching evidences. [Para 24]

The most important fact is that since the cash sales have already been offered as income, the same cannot be taxed in the garb of inflation sales to cover up demonetization currency. [Para 25]

In so far as the allegation of non-mentioning of names of the purchasers is concerned, it is not only baseless but without any backing of law as the assessee is not required to keep the names of purchasers for cash sales less than Rs.2 lakhs and not even one instance has been pointed out by the Assessing Officer where cash sales were more than Rs.2 lakhs. [Para 26]

Considering the vortex of evidences, there is no merit in the impugned addition made by the Assessing Officer and also in the part relief given by the Commissioner (Appeals). Therefore, considering the totality of facts, the Assessing Officer is to be directed to delete the impugned addition. [Para 27].”

> Reliance is also placed on the judgment of the Hon’ble jurisdictional ITAT,  Delhi in the recent case of Vijay Kumar Jain vs ITO (ITA 1730/Del/2024) wherein on identical facts it was held that,

“9. We have carefully considered the rival submissions and perused the assessment order and first appellate order. The material referred to and relied upon in the course of hearing was taken in to account as per Rule 18(6) of the Income Tax (Appellate Tribunal) Rules, 1963 together with case laws adverted to in the course of hearing.

9.1 It is the case of the assessee that the source of cash deposits in question bears direct nexus to cash sales made prior to such deposits. The cash sales are stated to be out of purchases made which are predominantly import goods. The cash sales, when seen in the context, is quite negligible hovering in the vicinity of about 4% of the total sales. The assessee is engaged in trading of fabric which are prone to be obsolete and perish over a period of time. Having regard to the very low capital invested in the business and operations being carried out on working capital debt, the assessee was compelled to save reputations and indulge in cash sales for immediate redemption of stark paucity of financial resources and also to get rid of perishable component of stock. It is thus the case of the assessee that in the context of peculiar factual matrix, there is no warrant to make such additions solely on suspicion, surmises and conjectures.

9.2 It is thus alleged that the additions were carried out disregarding the facts and are coloured by irrelevant considerations. The assessee has broadly discharged the onus to explain the proprietary of credits by way of cash deposits on the counters of Section 68 of the Act.

10. The issue involved is essentially a question of fact and depends on appraisal of all relevant evidences on record on cumulative basis. As contended, it is a matter of record that cash sales giving rise to cash deposits have been duly recorded in the ‘statement of profit and loss’ and the resultant profits have been admittedly declared in the return of income. The income thus arising from cash sales has been duly subjected to taxation. The cash sales under cloud are also declared in the VAT returns filed before the concerned Govt. agencies. The cash and other sales are inseparable from imported purchases. No aspersions have been cast on purchases reported in the books for which the payments have been made through banking channel and custom duty have also been paid. Similar is the pattern in the earlier years as well as the subsequent years. Thus, where the propriety of purchase and stocks have been endorsed, casting aspersion on a minuscule cash sale gives infallible impression that the action of the AO is driven by suspicion, conjecture and surmises.

10.1 Needless to say, sale of goods has corresponding effect on the closing stock as well as the profitability. These aspects have not been questioned. The Assessing Officer has picked up the amount declared by way of cash sales and treated that as non-existent to hold the corresponding cash deposits as unexplained. The assessee, on the other hand, has demonstrated the factum of cash sales to be genuine by the direct and circumstantial evidences as noted above.

10.2 The Revenue, in our view, has based itself findings on suspicion and conjectures and on improper rejection of tangible material. The assessee on the other hand has successfully demonstrated the propriety of cash sales by corresponding purchases, reduction in stock and declaration of profits on sales.

10.3 Having assessed a credit of revenue character as income, it is outside the remit of the AO to subject the same credit under different provision i.e. section 68 yet again, inflicting double whammy on the assessee. Besides, the books of accounts and book results have been not rejected per se. No defect has been pointed out on the declarations made towards purchases, the closing stock and the profits either. The additions made have resulted assessment of cash sales twice which is not permissible in law.

11. It is trite that suspicion, howsoever strong, cannot take the place of proof as held in Umacharan Shaw & Bros. vs. CIT (1959) 37 ITR 271 (SC). The Hon’ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd v. Commissioner of Income Tax (1954) 26 ITR 775 (SC) has observed that powers given to the Revenue authority, howsoever, wide, do not entitle him to make the assessment on pure guess without reference to any evidence or material. The assessment cannot be framed only on bare suspicion. The assessment should rest on principles of law and one should avoid presumption of evasion in every matter. The assessee, in the instant case, has sufficiently demonstrated the source of cash deposits. On a broader reckoning, the apprehension raised by the Revenue authorities militates against the tangible material and is thus extraneous. The additions made under section 68 of the Act is thus unsustainable in the facts of the case. The order of CIT(A) is thus set aside and vacated on this count. The Assessing Officer is directed to cancel the impugned additions towards cash deposits.

12. In the result, the appeal of the assessee is allowed.

> Further reliance is placed on the judgment of the Hon’ble ITAT, Delhi in the case of J. R. Rice India (P.) Ltd vs ACIT [2023] 157 taxmann.com 337 (Delhi – Trib.) wherein it was held that,

“At the cost of repetition, to the extent of sales made, the stock position is also correspondingly reduced by the assessee which goes to prove the genuineness of the claim of the assessee. On examination of the cash book of the assessee, it is found that the assessee had cash balance of Rs. 55.94 lakhs as on 8-11-2016, i.e., the date on which demonetization was announced, which sufficiently explains the source of deposit of Rs. 52.60 lakhs in specified bank notes. Apart from this, the assessee had duly furnished the month wise details of sales, month wise details of purchase, corresponding freight charges incurred month wise, month wise power and fuel expenses and month wise selling expenses in the form of rebate and discount. The assessee also furnished the quantitative details of goods month wise for rice, sugar, chana dal and wheat flour before the Assessing Officer. All these facts clearly go to prove the genuineness claim made by the assessee that cash deposits of Rs.52.60 lakhs has been made out of cash balance available with the assessee and, hence, there is absolutely no case made out by the revenue for making addition under section 68.”

> Further, reliance is also placed on the judgement of the Hon’ble Delhi Tribunal in the case of Agson Global (P.) Ltd. v. Asstt. CIT [2020] 115 taxmann.com 342 (Delhi – Trib.) wherein it was held that the addition made on the sole ground of deviation in ratio of cash sales and cash deposits during the demonetisation period with that of earlier period, is not proper and lawful. The case was affirmed by the Hon’ble Delhi High Court in 2022 134 taxmann.com 256 (Delhi).

21. Further, the appellant begs to submit that the Ld. AO had made the addition u/s 68 of the Act accepting the books of accounts. On the contrary, the Ld. CIT(A) affirmed the said addition by invoking section 69A of the Act and rejecting the books of accounts of the assessee. As per the Income Tax hierarchical structure, the order of CIT(A) supersede the order passed by the Ld. AO. Thus, the section 69A invoked by the CIT(A) will prevail and the assessee has duly explained as to how the provisions of section 69A could not be invoked in the present case.

22. Having said as above, it is further submitted that the Ld. AO has made the impugned addition u/s 68 of the Act merely on the basis of surmises and conjectures without conducting any specific enquiry whatsoever in this regard to substantiate his findings and alleging that the money deposited into the bank account was out of bogus sale while making the impugned addition u/s 68 r.w.s 115BBE of the Act. The CIT(A) too confirmed the addition u/s 69A of the Act r.w.s 115BBE of the Act without conducting any specific enquiry to substantiate the impugned addition. Furthermore, it is pertinent to note that the lower authorities in making the impugned addition, has not provided any specific rationale nor has demonstrated any reasonableness in treating the cash deposits as unexplained. The deposit was necessitated by the demonetization announcement, which rendered currency notes of rupees five hundred and one thousand to become invalid as legal tender, thus requiring their deposit into banks. Simply asserting that the explanation or source of the cash deposit constitutes the undisclosed income of the Appellant and attributing it to demonetization lacks substantive evidence. It appears that addition was made solely on suspicion, conjecture, and unsubstantiated assumptions which is clearly not unsustainable not as per law. It has been repeatedly held by the Hon’ble Apex Court and other High Courts that additions cannot be made on mere surmises, suspicions and conjectures Here, reliance is placed on the judgment of the Hon’ble Apex Court in the case of Omar Salay Mohamed Sait vs CIT reported in [1959] 37 ITR 151 (SC) wherein it was held that,

“The Tribunal had not applied its mind to the evidence which was there on the file of the appellant in the shape of information gathered subsequently and it had improperly rejected that evidence. That being the position the revenue could not very well resist the order which the Supreme Court proposed to made, setting aside the order of the Tribunal and remanding the matter back to it for dealing with the same in accordance with law, after taking into consideration all the circumstances, the whole evidence which was available in the file of the appellant and such further evidence as the parties might be advised to lead before it. The Tribunal is a fact finding Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it the Supreme court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due case and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached on the evidence on record before it. The conclusion reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which required to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicion, conjectures or surmises and if it does anything of the sort, its findings even though on questions of fact, will be liable to be set aside by the Supreme Court. In the result, the order of the Tribunal was set aside and the matter was remanded back to the Tribunal to reconsider the same in accordance with law.”

Further reliance is placed on the judgment of the Hon’ble Apex Court in the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) wherein relying upon the judgment of Hon’ble Apex Court rendered in the case of Omar Salay Mohamed Sait [1959] 37 ITR 151 (SC) it was held that:

“It is, therefore, clear that the Tribunal in arriving at the conclusion it did in the present case indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found, or- the finding was, in other words, perverse and this court is entitled to interfere,”

23. Here, it is humbly reiterated that rejection of books of accounts by the learned CIT(A) u/s 145(3) of the Act was patently wrong. Further, addition made by the learned CIT(A) u/s 69A of the Act is clearly not as per law since the cash deposits of Rs.1,62,46,533/- was duly reported in the audited accounts and the source of such cash deposits was cash sales made by the assessee which forms part of total sales and was accordingly offered to tax. Therefore; the order passed by the Ld. CIT(A) is totally unsustainable in law.

In view of the above, it is humbly requested before Your Honours to direct the lower authorities to delete the addition made of Rs.1,62,46,533/- u/s 69A of the Act.”

11. On the other hand, Ld DR submitted that the assessee has made cash deposits specially during the Demonetization period by manipulating the cash sales declared in the books of account, he brought to our notice page 68 of the Paper book and submitted that the cash sales has increased only during Oct’2016 to Dec’2016. He also brought to our notice findings of AO at para 7 of the Order and relied on the same. Further submitted that the assessee has inflated the cash sales. In this regard, he brought to our notice page 77 of the Paper book to submit that the daily cash sales were increased only during the demonetization period. He fully relied on the findings of Ld CIT(A) and on the submissions of the Ld AR, he submitted that the discrepancies highlighted are rectifiable and can be sent back to CIT(A) to rectify the mistakes highlighted by the Ld AR.

12. In rejoinder, Ld AR objected to the submissions of the Ld DR for remitting the issue back to the file of CIT(A), he submitted that several hearings were happened before AO/CIT(A) and once again remitting the same issue back to them will not pay any dividend and will cause injustice to the assessee in terms of money and time.

13. Considered the rival submissions and material placed on record. We observed that the assessee had deposited the cash out of cash sales recorded during the period Oct, Nov and Dec’2016. The reasons recorded by the AO to reject the reasons for such cash deposits are out of cash sales by observing that the cash is nothing but undisclosed funds of the assessee and it has manipulated the cash sales to make such cash deposits. From the records we observe that the AO neither rejected the book results or method of account adopted by the assessee. The AO or CIT(A) has not found any discrepancies in the method of accounting, margin declared by the assessee which are in consonance with the previous periods. Since the AO did not have any material against the assessee but made the addition merely on the basis his perception that the same is only out of assessee’s undisclosed income.

14. On the other hand, Ld CIT(A) had also sustained the addition made by the AO by observing that the stock register is not maintained and purchase/sales are not substantiated with sales bills or names and address of the customers or not provided confirmations from the customers. Further, he has proceeded to sustain the addition u/s 69A against the additions made by the AO u/s 68 of the Act. Let us first address the findings of Ld CIT(A) that the assessee has not maintained the stock register, we observe that the assessee is engaged in trading of general purpose machinery parts/bearings. The method of maintenance of stock registers and other related records depends upon the nature of business, particularly in the line of business the assessee is into, it is dealing with the spare parts and bearings, which the assessee is purchasing from the industries and selling the same in the retail market. The value of each bills may be less than Rs. 20,000/-. It is difficult to maintain the stock register item wise and considering the frequent movement of stocks, it may not be practical for the assessee to maintain the same. As submitted by the assessee that it reconciles the stock movement at the end of each month with the physical quantity. It cannot be denied based on the nature of industry it is into. What is important and relevant, is the stock reconciliation of each items and whether the same is certified by the statutory auditor before finalizing the accounts. In this case, we observed that the same was submitted before the authorities below. Ld CIT(A) has not found anything suspicious in the method of accounting in the recording of sales nor stock keeping but merely expressed his view on the contrary but failed to appreciate the nature of business and how difficult to maintain the several stock keeping units(sku) involved in this industry. If we consider the bearing itself, it may run into several hundred sku’s. Therefore, the observation of the Ld CIT(A) is impractical.

15. Coming to the other issue of non-substantiation of sale bills with the names and address of the customers, we observed from the sale bills and cash register submitted by the assessee that each cash bills are with the value varies from Rs. 5000 to 18000. When the value is less than Rs. 20,000/- there is no requirement for any assessee to maintain such details like name of the customer and address. This requirement raised by the Ld CIT(A) is also not practical, mere his opinion.

16. Now let us discuss the actual issues raised by the AO that the assessee has recorded sales only during the demonetization period and there is no history of such cash sales in the earlier period. Based on the above observation, he was of the view that the assessee has introduced its own undisclosed cash into the system and booked the cash sales without there being any cash sales. This can be traced if at all the assessee has introduced such unaccounted money into the system, it will show from the financial results or parameters where it can be deducted with:

a. Abnormal profit

b. No stock movement

c. Recording of excess sales

From the information submitted before us, all the purchase and sales are properly recorded in the books and also substantiated by the information submitted before the GST officials and relevant quarterly reports. There is absolutely no discrepancies found by the lower authorities either in the stock registers submitted or quarterly reports submission before the GST authorities.

17. Let us analyze the financial results declared by the assessee in the last three years:

AY	GP Ratio	NP Ratio
2015-16	7.10%	0.35%
2016-17	7.14%	0.40%
2017-18	7.27%	0.31%

From the above, it is clear that the results declared by the assessee is within the range of book results. The lower authorities has not made any adverse comments nor found any deviations in the book results.

18. Coming to the issue of stock movement and excess sales, we observed that the assessee has submitted relevant stock reconciliation and auditors report of stock movements and there is no negative stock movement which will indicate that the assessee has booked excess sales without there being proper purchases.

19. In our considered view, there are chances that during the demonetization period the regular customers may have chose to buy the spare parts and bearing by making payment by cash so that their excess SBN is transferred. We noticed that the credit sales has come down during this period and the sales of the assessee is more or less maintained during this period. Therefore, it shows that the changes in the patterns recorded in the sales are not abnormal.

20. Whether the recording of cash sales which is already declared in the books of account will attract the deeming provisions of sec.68 or 69A of Act. We observed that the assessee has declared all the cash transactions in its books of account and merely because the cash deposits are more during the demonetization period, whether the CIT(A) can invoke the provisions of section 69A of the Act. As per provisions of the section, it is necessary that the assessee be found with the money, the same is not recorded in the books accounts maintained by it for any source and not offers any explanation or such explanations are not found to be satisfactory to the AO. In this case, the assessee has already declared the cash sales in its books of account and offers the explanation as cash sales, which the lower authorities has accepted it as regular business transactions because they have not rejected the book results and brought to tax the total sales declared by the assessee in its books. Since the cash were already recorded and explanation is already part of the book results, there is no avenue for the CIT(A) to reject such explanations. This expression “explanation is found not satisfactory to the AO” is purely relates to the money found with the assessee which are not recorded in the books of account. In this case, the above expression has no relevance since the assessee had already declared the cash sales in its books. In the similar situation, the coordinate bench has held in the case of J.R.Rice India (P) Ltd as under:

“At the cost of repetition, to the extent of sales made, the stock position is also correspondingly reduced by the assessee which goes to prove the genuineness of the claim of the assessee. On examination of the cash book of the assessee, it is found that the assessee had cash balance of Rs. 55.94 lakhs as on 8-11-2016, i.e., the date on which demonetization was announced, which sufficiently explains the source of deposit of Rs. 52.60 lakhs in specified bank notes. Apart from this, the assessee had duly furnished the month wise details of sales, month wise details of purchase, corresponding freight charges incurred month wise, month wise power and fuel expenses and month wise selling expenses in the form of rebate and discount. The assessee also furnished the quantitative details of goods month wise for rice, sugar, chana dal and wheat flour before the Assessing Officer. All these facts clearly go to prove the genuineness claim made by the assessee that cash deposits of Rs.52.60 lakhs has been made out of cash balance available with the assessee and, hence, there is absolutely no case made out by the revenue for making addition under section 68.”

Further, in the case of Fine Gujaranwala Jewellers Vs.ITO (ITA No.1540/Del/2022 dated 27.03.2023, wherein it was held as under:

22. In the case in hand the reason for disbelieving the cash deposit is that the assessee has been deposited below Rs. 2 lakh in every transactions that lead to the conclusion of the Assessing Officer that the same has been done to avoid the application of provision of section 285BA read with Rule 114E of the Act. The said observation made by the Assessing Officer without any material in his hand. There is no prohibition under law to make sale transaction below Rs. 2 lakhs as such the assessee had at liberty to manage his own affairs. From the action of the assessee in raising the sales bill below Rs. 2 lakhs the Assessing Officer cannot interpret as the sale are bogus only to give color to non-genuine transaction as genuine transaction. 5The evidence brought on record by the Assessing Officer are not enough to hold that sales were not genuine. More so, the other wing of the Govt has already accepted the sale transaction under VAT, hence, the Assessing Officer is precluded from making contrary findings on the issue when the sales are not doubted. The other contention of the ld DR is that the assessee has not maintaining stock register properly and date wise stock position are not given. The Assessing Officer made the said observation without rejecting the books of account form which true profit and loss accounts could be ascertained and there is no quarrel on this issue. The lower authorities cannot place reliance on the circumstantial evidence which is only conjectures and surmises and the said approach of the ld CIT(A) is devoid of merit it deserves to be rejected. Further, the income of the assessee has to be computed by the Assessing Officer on the basis of available material on record and it is very important to have a direct evidence to make an addition rather than circumstantial evidence. When the assessee gives any reply or submission or any documents to the Assessing Officer, it is duty of the Assessing Officer to examine the same in the light of the available evidence. In the present case the Assessing Officer and the ld CIT(A) have concluded the findings on the basis of conjectures and surmises. The Assessing Officer has to establish the link between the evidence collected by him and the addition to be made. The entire case has to be dependent on the Rule of evidence, the assessee in this case explained the source of bank deposits are from cash sales. The Assessing Officer proceeded to disbelieve the explanation of the assessee on the presumption basis without bringing the corroborative material on record. The Assessing Officer is required to act fairly as reasonable person and not arbitrarily capriciously. The assessment should have been made based on the adequate material and it should stand on its own leg. The Assessing Officer without examining any parties to whom the goods are sold by the assessee, came to conclusion that the sales are not genuine, without even rejecting the books of account which is in our opinion is erroneous.

21. Respectfully, following the above decisions, we are inclined to allow the grounds raised by the assessee with the observation that the AO/CIT(A) cannot invoke the provisions of section 68 or 69A when the assessee is already declared the source for cash deposits in the books of accounts and the lower authorities without their being any material to support on their contrary view, the provisions of section 68 or 69A cannot be invoked.

22. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on this 25^th day of September, 2024.