Is addition u/s 68 of the Income Tax Act justified in case of Cash Sale duly credited in P & L Account and offered for taxation?
During the Demonetization period (i.e. 09/11/2016 to 31/12/2016), there has been a huge deposition of cash in old demonetized currency (or SBN) notes in various Bank Account. It was claimed by several assesses that the SBN was genuine sales proceeds i.e. Cash Sales made by them before Demonetization announced.
While CBDT has come up with the standard operating procedure dated 09/08/2019 in F.no.225/145/2019 – ITA.II. — which is a guiding principle at the kind of investigation, inquiry, evidence that the AOs are required to take into consideration, to assess such cases. It specifically mentions at making a comparative analysis of cash deposits, cash sales, month-wise cash sales, and cash deposits. It also references whether in such cases the books of accounts have been rejected or not, where substantial evidence of wide variation is found between these statistical analyses.
The instruction also suggest indicators for suspicious backdating of cash sales/ fictitious sales, look for incidences where there is
- An abnormal jump in the cash sales during the period November to December 2016 as compared to an earlier year
- any abnormal jump even on the percentage of cash trails of identifiable persons as compared to earlier times
- Non-availability of stock or attempts to inflate stock by introducing fictitious purchases
- Any sudden transfer of deposit of cash to another account or entity, which seems inconsistent
In many cases, it seems that AO has added cash deposited during the Demonetization period, on the pretext that Assessee has created an artificial scenario in its books of account. Where unaccounted income was introduced by showing them as cash sales or cash in hand which was then deposited into the bank account conveniently and craftily on future dates. Such cash deposited and shown in Profit & Loss account has also been offered for taxation. This question was tested in the legal forum in the past, the gist of said rulings is given herewith:
In the favour of revenue:
| Sr. No | Citation | Relevant Para | Findings |
| 1 | Kale Khan Mohammad Hanif v. CIT (SC) 1963 50 ITR 1 SC | Page No. 3 & 4 |
We are in some difficulty in appreciating the point of this question also. The question would seem to suggest that because the income from a disclosed source has been computed on the basis of an estimate and not on the basis of the return filed in respect of it, an income represented by a credit entry in the books of account of that source cannot be held to be income from another and undisclosed source. We do not see why it cannot be so held. It appears from the judgment of the High Court that the reason given in support of the suggestion was that if that income was held to be income of an undisclosed source, the result would be double taxation of the same income which the Income-tax Act does not contemplate. Apparently, it was said that there would be double taxation because it was assumed that the same income had once been earlier taxed on the basis of an estimate. This reason is obviously fallacious, for if the income is treated as one from an undisclosed source which the question postulates, it is not treated as income of the disclosed source which had previously been assessed to tax and, therefore, there is in such a case no double taxation. It is not a case where the income sought to be taxed was held to be undisclosed income of a disclosed source, the income of which source had previously been taxed on the basis of an estimate. If it were so, the question of double taxation might have been legitimately raised. That, however, is clearly not the case here as the question as framed itself shows. We concede that the question as to the source from which a particular income is derived is one which has to be decided on all the facts of the case. Hence the question whether income represented by an entry in the books of a business is income of that business or of another business would have to be decided on the facts which showed the business to which it belonged. But quite clearly the answer to that question would not depend on whether the income from the first mentioned business had been computed on the basis of a return filed or of an estimate of the income made by the taxing authorities. This, however, is what the question as framed suggests, and that suggestion is in our view wholly without foundation. Therefore, it cannot be said that the taxing authorities were precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appear in the books of a business whose income they had previously computed on a percentage basis. That is why we think that the answer to the question as framed must be in the affirmative. |
| 2 | CIT v. Devi Prasad Vishwanath Prasad (SC) 1969 72 ITR 194 SC | 9 | 9. The High Court, in disposing of the application under section 66(2), expressed the view that because the amount of Rs. 20,000 was entered in the books of account of the business, there was some material to hold that the amount was income of the assessee from the business and not from some other source. But it was not open to the High Court to direct the Tribunal to state a case on a question which was never raised before or decided by the Tribunal at the hearing of the appeal. The question again assumes that it was for the Income-tax Officer to indicate the source of the income before the income could be held taxable and unless he did so, the assessee was entitled to succeed. That is not, in our judgment, the correct legal position. Where there is an explained cash credit, it is open to the Income-tax Officer to hold that it is income of the assessee and no further burden lies on the Income-tax Officer to show that that income is from any particular source. 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.
10. We discharge the order recorded by the High Court and allow the appeal. We decline to answer the question did not arise out of the order of the Tribunal. The assessee will pay the costs of the Commissioner in this court and in the High Court. |
In favour of Assessee:
| Sr. No | Citation | Relevant Para | Findings |
| 1 | Shree Sanad Textiles Industries Ltd. V. DCIT (Ahmedabad ITAT) ITA No. 1166/Ahd/2014
|
9.6 & 9.7 |
9.6. We also note that the provisions of section 68 cannot be applied in relation to the sales receipt shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income at the time of sale only. 9.7. We are also aware of the fact that there is no iota of evidence having any adverse remark on the purchase shown by the assessee in the books of accounts. Once the purchases have been accepted, then the corresponding sales cannot be disturbed without giving any conclusive evidence/finding. In view of the above we are not convinced with the finding of the learned CIT(A) and accordingly we set aside the same with the direction to the AO to delete the addition made by him. |
| 2 | New Pooja Jewellers v. ITO (Kolkata ITAT) ITA No. 1329/Kol/2018 | 15 | 15. Be it as it may, in the normal course, we would have restored the issue to the file of the AO for fresh verification of the claim of the assessee that it had received advances from customers on the occasion of Ramnavami Nayakhata. In other words, we would have given the AO more time to conduct enquiries and investigation. In this case we find that these advances have subsequently been recorded as sales of the assessee firm and that these sales have been accepted as income by the AO during the year. He has not disturbed the sales of the assessee. When a receipt is accounted for as income, no separate addition of the same amount as income of the assessee under any other Section of the Act can be made as it would be a double addition. In the result, we delete the addition made and allow its claim of the assessee. |
| 3 | ACIT v. Dewas Soya Limitd (Indore ITAT) ITA No. 336/Ind/2012 | of accounts. Even otherwise, the goods were supplied to the parties after receiving the advance payments which were credited through cheques/DDs/RTGs, etc. Therefore, we hold that the CIT(A) has rightly come to the conclusion that the addition made by the Assessing Officer u/s 68 of the Act by considering the sale proceeds as cash credits cannot be sustained. Likewise, the | |
| 4 | CIT v. Vishal Exports Overseas Limited (Gujarat High Court) Tax Appeal No. 2471 of 2009 | 5 & 7 | 5. Revenue carried the matter in appeal before the Tribunal. The Tribunal did not address the question of correctness of the C.I.T. (Appeals)’s conclusion that amount of Rs.70 lakhs represented the genuine export sale of the assessee. The Tribunal however, upheld the deletion of Rs.70 lakhs under section 68 of the Act observing that when the assessee had already offered sales realisation and such income is accepted by the Assessing Officer to be the income of the assessee, addition of the same amount once again under section 68 of the Act would tantamount to double taxation of the same income.7. In view of the above situation, we do not find any reason to interfere with the Tribunal’s order. |
| 5 | CIT v. Smt. Harshil Chordia v. ITO (Rajasthan High Court) 2008 298 ITR 349 Raj | 23 | 23. So far as question No. 2 is concerned, apparently when the Tribunal has found as a fact that the assessee was receiving money from the customers in hands against the payment on delivery of the vehicles on receipt from the dealer the question of such amount standing in the books of account of the assessee would not attract Section 68 because the cash deposits becomes self-explanatory and such amounts were received by the assessee from the customers against which the delivery of the vehicle was made to the customers. The question of sustaining the addition of Rs. 6,98,000 would not arise. |
| 6 | AGONS GLOBAL P LTD v/s ACIT (Delhi ITAT) Appeal No 3741 to 3746/Del/2019 | 116 | The whole purpose of the Departmental Authorities in singling out the cash deposited during the demonetization period as arising out of unexplained sources(as against the accepted position in the past and the subsequent periods) is to somehow trigger the provisions of section 115BBE read with section 68 of the Act to the income already offered for tax by the Assessee (as cash sales) at a higher rate of tax of 77.25% (i.e. flat rate of 60% plus surcharge @ 25% on such tax and cess as applicable) on gross basis (without any deduction/allowance). In fact the treatment of the cash deposits as unexplained cash credits u/s 68 by the A.O has resulted in double taxation of the same amount, once in the form of cash sales already offered to tax by the Assessee at the rate of tax applicable to companies and again by way unexplained cash credit on deposits arising from such sales u/s 68 at higher rates specified u/s 115BBE.
116. In view of the above, it is prayed that the addition made by the A.O (and partly sustained by the CIT (A)) u/s 68 on account of cash deposited in banks during the demonetization period may kindly be deleted. |
Our Comments
Hon’ble Ahmedabad ITAT in case of Shree Sanad Textiles Industries Ltd. V. DCIT (ITA No. 1166/Ahd/2014) has given very logical findings at Para 9.7, once no question has been raised regarding purchase or opening stock, then corresponding sales cannot be questioned.
Author Bio
It’s very good coverage of settled case laws related to cash sales but we have to wait for the verdicts of High Courts on demonetization cases.
Good article on the issue of addition under section 68 of the Act on the amount of sales.