Heavy cash deposits during Demonetization: ITAT Visakhapatnam gave relief to the taxpayers


Heavy cash deposits during Demonetization: ITAT Visakhapatnam gave relief to the taxpayers



There are few provisions in the income tax Act which are too harsh & the tax rate/ penal consequences are abnormally high. More particularly, Section 115BBE provides for a special tax rate of 60% (effective rate is 78%) for unexplained credits, unexplained money etc covered by section 68 & 69. The rate was enhanced from 30% as a measure to control the malpractices & fraudulent activity of cash deposits during the period of demonetization.

Almost all the cases of heavy cash deposits during the period of demonetization were selected for scrutiny & investigation. In majority of cases, additions were done by the Assessing Officers (AO) u/s 68 or 69 and were taxed @ 60% plus surcharge & cess. The amount was taxed even though the taxpayers have duly explained the source of cash deposits.  Here is a judgment by ITAT, Visakhapatnam in the case of ACIT Vs Hirapanna Jewellers [I.T.A.No. 253/Viz/2020, Order Dated 12/05/2021] which has come as a relief to such taxpayers. Though this case was related to the jewellers, the ratio laid down could be applied to various other cases. Let us know about it.

Facts of the Case:

Assessee was a firm engaged in the business of jewellery & filed its return with total income of Rs. 95,59,210/-. As assessee had deposited Rs. 5.72 Cr of high denominations specified bank notes (SBNs) post demonetization, Income Tax survey was carried out in the business premises of the assessee u/s 133A. The source of cash deposits was explained as cash sales and advances received on 08.11.2016 against sales. In support of cash deposits, Assessee produced the sale bills and books of accounts before the authorities. However, income tax authorities rejected the explanations offered by the assessee for the following reasons:

1. Assessee could not furnish proper KYC documents of the buyers during the course of survey,

2. Average sales of the firm were not matching with peak and non-peak seasons.

3. Even on special occasions like Akshaya Tritiya, Dhanteras, Ugadi etc. the average sales were Rs. 1.50 to 2.0 crores and whereas on 08.11.2016, on a single day, the sales were increased by Rs. 4.72 crores during 7.50 pm to 12 am consisting of 270 bills and the cash was received only in high denomination notes which were hitherto banned by Govt. of India from 09.11.2016.

4. There were no details of the customers like phone number, address etc.

5. No signatures were obtained in sale acknowledgements of the ornaments.

6. There were no tag number details for some bills

7. CCTV footage was also not available to support the entry of a large number of customers on 08.11.2016.

Authorities opined that the assessee has taken shelter of sales to divert the black money of the assessee as well as his friends & treated Rs. 4.72 as income unexplained credit u/s 68.

Against the addition done by the AO, assessee filed an appeal before the Commissioner of Income Tax (CIT-Appeal) which has decided the appeal in favour of the assessee with following observation:

1. We have gone through the trading account and found that there was sufficient stock to affect the sales and we do not find any defect in the stock as well as the sales.

2. Assessee has established the sales with the bills and representing outgo of stocks & has duly accounted for it in the books of accounts.

3. In spite of conducting the survey the AO did not find any defects in sales and the stock.

4. It is observed from the newspaper clippings that there was undue rush in various jewellery shops immediately after the announcement of demonetization throughout the country.

5. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again.


Appeal before Income Tax Department (ITAT):

Aggrieved by the order of the CIT(A), department preferred an appeal before ITAT with following arguments:

It is impossible to believe that the assessee had prepared 270 bills in short span of time and made the sales to the extent of Rs. 4.71 crores when the daily sales of the assessee was Rs. 10 – 16 lakhs in normal period and Rs. 40-50 lakhs per day in the peak time and Rs. 1.5 to 3 cores on specific occasions like Dhanteras etc.  Amount of Rs. 4.72 crores deposited is nothing but a sham transaction to bring unaccounted money in the guise of jewellery, sales and paper work is nothing but a device.


Judgment by Income Tax Appellate Tribunal (ITAT):

ITAT decided the appeal in favour of the assessee by deleting the addition. The judgment delivered by ITAT, Visakhapatnam is summarized as under:

1. Suspicion however strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence.

2. Income Tax Authorities have conducted two surveys on different dates, independently and no difference was found in the stock register or the stocks of the assessee. Purchases, sales and the Stock are interlinked and inseparable. Every purchase increases the stock and every sale decreases the stock. To disbelieve the sales either the assessee should not have the sufficient stocks in their possession or there must be defects in the stock registers/ stocks. Once there is no defect in the purchases and sales and the same are matching with inflow and the outflow of stock, there is no reason to disbelieve the sales. AO accepted the sales and the stocks & has not disturbed the closing stock which has direct nexus with the sales. The movement of stock is directly linked to the purchase and the sales. Audit report u/s 44AB, the financial statements furnished in the paper book clearly shows the reduction of stock position and matching with the sales which goes to say that the cash generated represents the sales. The assessee has furnished the trading account, P&L account and we observe that the reduction of stock is matching with the corresponding sales and the assessee has not declared the exorbitant profits. Though certain suspicious features were noticed by the AO as well as the DDIT (Inv.), both the authorities did not find any defects in the books of accounts and trading account, P&L account and the financial statements and failed to disprove the condition of the assessee.

3. Once the assessing officer accepts the books of accounts and the entries in the books of accounts are matched, there is no case for making the addition as unexplained.

4. We do not find any reason to suspect the sales merely because of some routine observation of suspicious nature such as making sales of 270 bills in the span of 4 hours, non availability of KYC documents for sales, non writing of tag of the jewellery to the sale bills, non-availability of CCTV footage for huge rush of public etc. The contention of the assessee that due to demonetization, the public became panic and the cash available with them in old denomination notes becomes illegal from 09.11.2016 and made the investment in jewellery, thereby thronged the jewellery shops appear to be reasonable and supported by the newspaper clippings such as The Tribune, The Hindu etc. It is observed from the newspaper clippings that there was undue rush in various jewellery shops immediately after the announcement of demonetization throughout the country.

5. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again.

Above judgement & observation is surely of great help for all the taxpayers, not only jewellers but also other taxpayers, where heavy demand has been raised by making addition u/s 68 & 69.


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1 Comment

  1. May 31, 2021
    Gurpreet Singh Grover

    Really wonderful efforts to update public and Tax Professionals Please keep it up


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