Whether Provisions of Section 68 are applicable in case of sales receipt shown in trading and profit and loss account?

It has been observed that while passing an order for scrutiny assessment for cash deposited by the assessee during demonetization period, various assessing officers have made addition under various sections of the Income Tax Act, 1961. In which large chunk of assessing officers applied provisions of section 68 by treating cash sale made by the assessee during the year or sales made just before demonetization period i.e before 08/11/2016 on the basis of deviation in ratio as set out in various SOP issued by CBDT. Addition made under this scenario is discussed briefly hereunder:

1. It has been noted that in such cases additions have been made by the assessing officers by treating cash deposited on account of sales made by the assessee during the normal course of business as unexplained cash credit without bringing any information on record by taking the view that the particular amount received by the assessee from the party represents the unexplained cash credit under section 68 of the Act which is entirely based on the guesswork of the AO.  

To understand the provision of section 68, of IT, Act, is reproduced hereunder:

“Cash Credits.

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

1. On a plain reading of the above section, provisions of section 68 applied only if following conditions are being fulfilled:

2. Any sum found credited in the books of accounts maintained by the assessee.

3. Assessee offers no explanation about such credit,

4. The explanation of the assessee is not found satisfactory by AO.

As per the language of the section, the maintenance of books of accounts is MUST for invoking provisions of section 68. There may be a situation where the assessee was required to maintain books of accounts as per section 44AA but NO books of accounts were maintained then provision of section 68 can not be invoked. Therefore, addition under section 68 cannot be made for the assessee who is not required to maintain books of account as per the provision of section 44AA of the Income Tax Act, 1961.

Section 44AA of the Income Tax Act cast responsibility on the assessee for maintenance of books of accounts in the following situation only:

(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

(2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall,—

(i) if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year; or

(ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during such previous year; or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE or section 44BB or section 44BBB, as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such previous year; or

(iv) where the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,

keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act:

Provided that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words “one lakh twenty thousand rupees”, the words “two lakh fifty thousand rupees” had been substituted :

Provided further that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words “ten lakh rupees”, the words “twenty-five lakh rupees” had been substituted.”

1. The second ground that can be taken by the assessee in appellate proceedings is based on the judgment given by the Hon’ble Income Tax Appellate Tribunal (Ahmedabad) in the case of Shree Sanand Textiles Industries Ltd Vs The Dy.CIT (OSD), Circle-8, Ahmedabad (ITA 995 / AHD / 2014) dated 06/01/2020 where the Hon’ble ITAT held that the amount of sale as claimed by the assessee was already offered to tax by the assessee by reflecting the same in its trading and profit and loss account. This fact had not been doubted by the authorities below. The Tribunal further noted that the impugned amount had been taxed twice firstly the same was treated as sales and secondly the same was treated as unexplained cash credit under section 68 of the Act.

The Tribunal observed that the provisions of section 68 of the Act can be attracted where there is a credit found in the books of accounts and the assessee failed to offer any explanation or the offer made by the assessee is not satisfactory in the opinion of the assessing officer. Whereas in the instant case, the assessee had explained that the impugned amount represented the sale which had not been doubted by the authorities below. Therefore, the impugned amount could not be treated as unexplained cash credit under section 68 of the Act merely on the ground that the assessee failed to furnish the details of the existence of the parties.

The Tribunal also opined that the provisions of section 68 could not be applied in relation to the sales receipt shown by the assessee in its books of accounts. It was because the sales receipt had already been shown in the books of accounts as income at the time of sale only and once the purchases had been accepted by the authorities, then the corresponding sales could not be disturbed without giving any conclusive evidence/finding.

Similar views have been taken by the following Hon’ble ITAT and courts:-

♦ The Hon’ble Delhi ITAT in the case of Agons Global (P.) Ltd. v. ACIT [Appeal No 3741 to 3746/Del/2019] has held that mere addition made on this ground that there is a deviation in a ratio is not proper. When the assessee had regular cash sale and deposit of cash in bank accounts and if nothing incrementing is found contrary then addition u/s 68 of such cash sale would tantamount to double taxation.

The Hon’ble Indore ITAT in the case of Dewas Soya Ltd. v. Income Tax [Appeal No 336/Ind/2012] has held that ” The claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit & loss account) and on the other hand amounts received from above parties has also been added u/s. 68 of the Act. This view has been held by the Hon’ble Supreme Court in the case of CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 that “It is for the assessee to prove that even if the cash credit represents income, it is income from a source, which has already been taxed”. The assessee has already offered the sales for taxation hence the onus has been discharged by it and the same income cannot be taxed again.

♦ Reliance can be placed on the decision of Hon’ble Rajasthan High Court in the case of Smt. Harshila Chordia v. ITO [2008] 298 ITR 349 in which it was held that “Addition u/s 68 could not be made in respect of the amount which was found to be cash receipts from the customers against which delivery of goods was made to them”.

♦ Reliance can also be placed on the decision of Hon’ble M.P. High Court in the case of Addl. CIT v. Ghai Lime Stone Co. [1983] 144 ITR 140. It is evident from these judicial rulings that trade advances or cash received against which goods is supplied subsequently is not a cash credit as contemplated by section 68.

♦ Reliance can further be placed on the decision of the ITAT, Mumbai Bench in the case of ITO v. Surana Traders [2005] 92 ITD 212, the relevant observation of the Mumbai Bench was as under, “So merely because for the reasons that the purchaser parties were not traceable, the assessee could not be penalized. ———– It is the burden of the department to prove the correctness of such additions. When, in such lie cases, a quantitative tally is furnished, even if purchases are not available no addition is called for.”

Therefore, in demonetization cases, though addition on account of cash sales has been made by the Income Tax department under section 68 of the Income Tax Act, 1961 but it is very hard for them to stick in an appellate proceeding.

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10 Comments

  1. Rahul says:

    Wow never expected this from CA article so clearly written even the laymen will understand by reading at one go.

    Truly moving ahead with a path of global CFO

  2. Anuj gupta says:

    The article in itself resolves many issues and also gives a glimpse that how can an assessee shall proceed in case of unexplained credit. Well written sir..

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