Case Law Details
ITO Vs Shann Jewellers (ITAT Delhi)
Loan Repayments Explained from Stock Sales and Fresh Borrowings; Demonetisation Cash Sales Accepted as Genuine
The Assessing Officer made two major additions for AY 2017-18:
(i) ₹2.15 crore treating repayment of unsecured loans as unexplained under section 68, and
(ii) ₹1.74 crore treating part of demonetisation-period cash sales as unexplained cash deposits taxable under section 68 read with section 115BBE.
On the first issue, the CIT(A) analysed comparative balance sheets and cash flows and found that the firm had generated funds by reducing its closing stock by ₹1.98 crore and earning normal profit thereon (approx. ₹2.18 crore), besides receiving fresh unsecured loans of ₹3.36 crore. All repayments were made through banking channels, duly supported by confirmations, bank statements and tax audit report, and the AO had neither rejected the books nor shown any shortage of funds on the dates of repayment. Holding that the source of repayments stood fully explained, the CIT(A) deleted the addition of ₹2.15 crore, which the Tribunal affirmed.
On the demonetisation issue, the AO assumed that October–November 2016 sales should mirror the previous year and treated excess cash sales as fictitious, also suspecting invoice amounts were split to avoid KYC norms. The CIT(A), after verifying audited books, stock registers, purchase bills, VAT returns and quantitative records, found that sufficient stock was available and all sales were properly recorded. Historical comparisons also showed large natural fluctuations in monthly cash sales across years, disproving the AO’s uniform-pattern assumption. Since the AO found no defect in books and did not reject them, the entire addition of ₹1.74 crore was deleted.
The Tribunal upheld both deletions, holding that documented stock realisation and fresh borrowings explained the loan repayments, and that properly recorded, VAT-accepted cash sales could not be arbitrarily re-estimated or partly treated as unexplained merely on suspicion during demonetisation.
Accordingly, the Revenue’s appeal was dismissed in full.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Revenue is arising out of the Ld. CIT(A)/NFAC, Delhi in Appeal No. CIT(A), Delhi-12/10350/2019-20 dated 18.3.2025. Assessment was framed by the ITO, Ward 34(2), New Delhi for the AY 2017-18 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act) vide order dated 30.12.2019.
2. At the outset, it is seen that this appeal is barred by limitation by 131 days and Revenue has filed the condonation petition by stating the reasons that there is technical issue in ITBA Portal, which caused delay in filing the CSR before the PCIT, therefore, after disposal of these issues, the CSR was submitted and authorization was issued by the PCIT on 3.10.2025 and thereafter the appeal was filed on 09.10.2025 before the Tribunal. Ld. Counsel for the assessee has not objected to the condonation petition of delay and considering the reasons in the condonation petition, we condone the delay in dispute and admit the appeal.
3. The first issue in this appeal of Revenue is as regards to the order of the CIT(A) deleting the addition made by AO on account of unsecured loans of Rs. 2,15,02,308/- without appreciating the fact that addition was made as the assessee failed to furnish any details of fresh unsecured loan received.
4. Brief facts of the case are that during the course of assessment proceedings, AO noticed that there are repayment of unsecured loans and he required the assessee to explain the same. Assessee explained that the repayment is made out of the funds available with the firm and furnished cash flow statement. AO noted that assessee has not explained the source of repayment, as these payments are not from the assessee’s capital or loan taken. These are unexplained amounts, which have been repaid by the assessee during the year. AO noted that the cash flow statement submitted for financial year 2016-17 by the assessee, wherein incomings of funds introduced decrease in current assets of Rs. 198.22 lacs and fresh unsecured loans received Rs. 336.08 lacs, which is not explained. Accordingly, AO noted that repaid funds / repayment of loans to the extent of Rs. 2,15,02,308/- remains explained and added the same under section 68 of the Act. Aggrieved, assessee preferred appeal before the CIT(A).
5. Ld. CIT(A) deleted the addition after analysing the entire financial position comparing with the funds available as per the balance sheet for the financial years 2015-16 and 2016-17. The AO also verified the journal of cash and closing stock after the firm has sold the stocks having value of Rs. 1.98 crore. The Ld. CIT(A) noted that the firm was having closing stock as on 31.3.2016 which have come down to Rs. 6.53 lacs as on 31.3.2017, he accordingly, estimated the profit margin at Rs. 2.178 crores and also receipt of fresh loans of Rs. 3.36 crores, which is the source of repayment of Rs. 2,15,02,308/-. Accordingly, Ld. CIT(A) deleted the addition. Aggrieved, the Revenue is in appeal before the Tribunal.
6. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, Ld. Counsel for the assessee explained that the entire factum of repayment of loan is out of sale of stock sales, introduction of fresh loans to the extent of Rs. 3.36 crores. This has been examined by the CIT(A) rightly from the books of accounts and repayments are through banking channels. Ld. CIT(A) has held as under:-
“…… The appellant has explained the movement of funds.
All the payments have been made through RTGS on account payee cheques and the bank statements in this regard have been submitted by the appellant. The Assessing Officer has not controverted these arguments of the appellant in his order that sufficient funds were available with the appellant on the date of repayment whereas the Assessing Officer was at liberty to examine books of accounts as the appellant has claimed in its reply dated 23.01.2025 that the books of accounts were produced. However, the Assessing Officer has not brought any argument to deny this fact on record. Further, the cash flow statement submitted by the appellant has been verified with the copies of balance sheets available for the year FY 2016 and FY 2017. The closing stock in F.Y.2017 has come down by Rs. 1.98 crores in comparison to F.Y. 2016 which reflects a fund generation of Rs. 1.98 crores. The appellant has submitted confirmed copies of account from the persons to whom loans were repaid along with their respective bank statement and copies of ITR. It has also submitted the bank statements of the firm from where the payments have moved out to the loan creditors. Apart from this, the Tax Auditors also in their tax audit report have mentioned the repayment of loans giving party wise breakup and have also certified that payments have been made through banking channels. The Assessing Officer has not brought anything to controvert this certification or other documents as submitted by the appellant or has not pointed out any shortcoming in such documents. The Assessing Officer’s main argument is that since firm has earned profit of Rs. 7 lakh and since no fresh capital has been introduced by the partners, the firm could not have repaid such an amount of Rs. 2.15 crores. What the Assessing Officer has ignored is the fact that the firm was having a closing stock of Rs. 8.51 crores on 31.03.2016 which has come down to Rs. 6.53 crores on 31.03.2017. That means the firm has sold stocks having a cost value of Rs. 1.98 crore and adding to it the profit margin of only 10% to this value would have generated a fund flow of 2.178 crores. The Assessing Officer has raised doubts about the receipt of fresh loans of Rs.3.36 crores but got satisfied with appellant’s reply and therefore did not make any addition in the final order on that issue. However, while disallowing repayment of Rs. 2.15 crores he has stated that appellant has not furnished any detail of these fresh loans thus contradicting himself. If the Assessing Officer was not satisfied with source of repayments, he should have brought some cogent evidence on record and should have also rejected the books of accounts on the basis of those cogent evidences like lack of funds with the appellant on the date of repayment of loans or unexplained cash deposits before repayment of loan through banking channels. The appellant on the other hand has brought on records all the material to justify its contentions Under these circumstances, it is held that the addition on account of repayment of loans is not on sound footing and hence, not sustainable. Therefore, it is not possible to uphold the contentions and order of the Assessing Officer. I am unable to find myself concurring with the contention of the Assessing Officer and therefore, the Assessing Officer is directed to delete the addition of Rs. 2,15,02,308/- made in the income of the appellant on this account. As a result, the ground of appeal no. 1 is allowed.”
7. We noted from the above findings of the Ld. CIT(A) that CIT(A) has properly analysed the balance sheets, trading account and closing stocks vis-à-vis repayment of loans and source of the same profit arising out of the earlier years stock i.e. Rs. 2.178 crores and receipt of fresh loan of Rs. 3.36 crore, which will meet the requirement of repayment of Rs. 2,15,02,308/-. Even now the revenue could not point out any ambiguity in the findings of the Ld. CIT(A) and also could not controvert the fact situation, hence, we confirm the findings of the Ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is rejected.
8. The next issue in this Revenue’s appeal is as regards to the order of the CIT(A) deletion of addition made by the AO on account of unexplained sales recorded in the books of accounts for a sum of Rs. 1,74,56,504/-.
9. Brief facts are that the AO during the course of scrutiny proceedings noted that the assessee has cash deposit during demonetization period of Rs.4,00,14,000/-. The AO required the assessee to explain the cash deposit, which according to assessee is out of cash sales. Assessee before the AO has explained that source of this cash as out of its cash in hand as on 9.11.2016 emanating from its cash book for the period 1.4.2016 to 31.3.2017. During the assessment proceedings, the assessee has been making cash sales only and submitted copies of its cash book, sales, invoices, stock register, copies of purchase bills and other details in support of its claim, however, the AO noted that the sales of a particular month or period of 2016 should have been, more or less, the same for that particular month or period of 2015. AO further noted that since there is a huge increase in sales of October, 2016 as compared to sales of October, 2015 therefore, he has accepted the sales as appearing in the book as correct, and bifurcated the cash received against a part of sales as genuine and the rest as non-genuine or unexplained. Further, AO noted that there is a abnormal cash sale on 8.11.2016 to the tune of Rs. 88,47,600/- and sale bills are ranging from Rs. 1.80 lacs to Rs. 1.97 lacs in order to avoid the KYC norms. Therefore, the AO estimated the cash sales and made the addition of cash deposit of Rs. 1,74,56,504/- by observing as under:-
“In view of the above, it is clear that the assessee has made above said story after thought to introduced his undisclosed money of Rs. 2,39,99,999/- in his books of account by way of cash sales. However, in the interest of principle of natural justice and adopting judicious approach, it is appropriate to take average sale of Rs. 65,43,495/- (sale for the period 01.10.2015 to 08.11.2015 Rs. 62,31,900/- + 5% inflation of Rs. 3,11,595/-) for the period 1.10.2016 to 8.11.2016. Hence, the source of cash deposits of Rs. 1,74,56,504/- (Rs. 2,39,99,999 – Rs. 65,43,495) remains unexplained. Therefore, an addition of Rs. 1,74,56,504/- made in the income of the assessee for AY 2017-18 as his income for the FY 2016-17 u/s. 68 r.w.s. 115BBE of the IT Act, 1961 (Income is being taxed @ 60% applicable for this AY 2017-18. Further, penalty proceedings u/s. 271AAC of the Act in respect of unexplained income is initiated separately.”
10. Aggrieved, assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) after verifying the cash sales and comparative audited accounts for the Financial year 2015-16 and 2016-17 noted that the sales made by the assessee during the financial year 2016-17 comprising of value and quantities of every sales invoice, complete item wise and party wise detail of purchase, item wise detail of closing stock giving quantities and its value. It seems that all the sales are genuine. The details submitted shows that the assessee was having sufficient stock available with it against which the goods were sold by the assessee in the month of October and November, 2016. The CIT(A) also noted that sale bills issued by the assessee were duly reflected in the sale register and the entire stock is reflected in the stock ledger and quantities of stock. Purchase of goods were also recorded and the AO has not rejected the books of accounts or could not find any defect in the books of accounts. Therefore, the Ld. CIT(A) noted from the chart submitted by the assessee of comparison of last 3 years to justify its stand on sales as under:-
“Cash sales for the month of July 2014 was Rs. 17.76 lakh which jumped to Rs. 35.58 lacs in July, 2015, almost 100% increase and again fell to Rs. 34.60 in July, 2016.
Cash sales for the month of June 2014 was Rs. 22.79 lacs which jumped to Rs. 12.79 lacs in June 2015, almost 44% decrease and again jumped to Rs. 43.30 lacs in July 2016, approx 238% increase over last year.
Cash sales for the month of Aug 2014 was Rs. 18.22 lakh which jumped to Rs. 53.34 lakh in Aug 2015, almost 193% increase and again fell to Rs. 16.69 in July, 2016.
Cash sales for the period 1.10.2014 to 8.11.2014 (as taken by the AO for comparison) was Rs. 34.98 lakh which jumped to Rs. 62.32 lakh in same period of 2015, almost 78% increase.
Cash sales for the month of March 2015 was Rs. 4.26 lakh which jumped to Rs. 17.23 lakh in March 2016, almost 304% increase and again fell to Rs. 3.81 in March 2017.”
10.1 Ld. CIT(A) also noted that all the details including sales, purchase bills, quantities stock records, opening stock, closing stock, bank statement, name of the parties from whom purchases were made, VAT returns filed by the assessee and accepted by the VAT authorities and also the audited accounts, therefore, he deleted the addition made by the AO amounting to Rs. 1,74,56,504/- as unexplained cash deposits. Aggrieved, revenue is in appeal before us.
11. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that assessee has filed complete documentation before us i.e. the details including sale, purchase bills, quantities stock records, opening stock, closing stock, bank statement, name of the parties from whom purchases were made, VAT returns filed by the assessee alongwith Form 2A and 2B filed with the VAT authorities. We note that the AO could not find any discrepancy and even not rejected the books of accounts. Under these facts and circumstances, we find that Ld. CIT(A) has rightly deleted the addition, accordingly, we confirm the finding of the Ld. CIT(A) on this issue and thus reject this ground of appeal raised by the Revenue.
12. In the result, the Revenue’s appeal is dismissed.
Order pronounced in the Open Court on 28.01.2026.
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