JAI MA SATI NET LTD. ,KOLKATA vs. ITO, WD-2(2), DURGAPUR, DURGAPUR

The present appeal is directed at the instance of the assessee against the order of the National Faceless Appeal Centre, (hereinafter the “ld. CIT(A)”) dt. 31/03/2023, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2017-18.

Brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing of the mosquito nets. Return of income for Assessment Year 2017-18 filed on 13/10/2017. Case of the assessee selected for scrutiny by issuing notice under section 143(2) and 142(1) of the Act. During the course of assessment proceedings the ld. Assessing Officer asked the assessee to explain the source of cash deposit during the demonetisation period in 2 Assessment Year: 2017-18 Jai Ma Sati Net Ltd. the bank account held with Oriental Bank of Commerce amounting to Rs.61,51,000/-. It was submitted by the assessee that the assessee makes regular cash sales and the cash is received from its customers against the outstanding balances on account of sales made during the year and in the preceding years. The assessee also submitted the stock statements and books of accounts related to the manufacturing unit. The ld. Assessing Officer carried out the investigation about the genuineness of the sale transactions and sent notices to the customers but could not get satisfactory reply. The ld. Assessing Officer also observed that there is a considerable increase in cash deposit during the demonetisation period vis-à-vis the regular cash deposits and alleged that the assessee may have made some entries in the back date and created bogus debtors by creating bogus sales. The ld. Assessing Officer accordingly, added the sales amount of Rs.65,31,286/-, made by the assessee during the demonetisation period and assessed the income accordingly. 2.1. Aggrieved the assessee preferred appeal before the ld. CIT(A) and in detail submissions stated that all the purchases are duly verified and are made from registered dealers. Sales have also been made regularly during the preceding years and during the current year and the same are genuine. It was also submitted that ld. Assessing Officer did not dispute the sale transactions shown by the assessee on the credit account on which tax has been duly paid and returns have been filed with the sales tax authorities. Assessee also cited various decisions regarding acceptance of specified bank notes (SBN) up to 31/12/2016. However, the ld. CIT(A) was not satisfied Assessment Year: 2017-18 Jai Ma Sati Net Ltd. with the cash sales and purchases made by the assessee for want of necessary evidence and accordingly confirmed the action of the ld. Assessing Officer treating the total credit of Rs.65,31,286/- as unexplained credit u/s 68 of the Act.

Aggrieved the assessee is now in appeal before this Tribunal.

The ld. Counsel for the assessee referring to the detailed paperwork containing 179 pages, which includes the financials of preceding and current year, copy of bank statement, sample purchase/sale built, VAT audit report, month-wise cash deposit in bank and month-wise cash receipt during the year. He also took us through the detailed written submissions from page 162 to 179 of the paper book. It was submitted that the assessee has explained the cash deposit made during the demonetisation period with complete details and documentary evidences. It was also submitted that the assessee deals in mosquito net fabric wherein most of the transactions are done in cash. The sales made during the period were subjected to charging of sales tax and the same have been duly paid. The sundry debtors are mostly located in remote areas and small villages and small sales being made to them and payment received thereafter, it is quite possible that they have either not received the notice or have refrained from replying to the same. Further with regard to the major purchases during the year made through Sri Balajee Marketing, the ld. Counsel for the assessee drew our attention to page 139 to 161 of the paper book showing the copy of trade license, bank statement, ITRs and balance sheet of Sri Balajee Marketing to prove the genuineness of the concern and that the genuine purchases have been made from this 4 Assessment Year: 2017-18 Jai Ma Sati Net Ltd. party. Further it is submitted that there was no bar on receiving SBN till 31/12/2016. Further it is submitted that section 5 of the Specified Bank Notes (Cessation of Liabilities) Act 2017, which deals with the Prohibition on holding transferring or receiving specified bank notes in the said section states that “On and from the appointed day, no person shall, knowingly or voluntarily, hold, transfer or receive any specified bank note…”. Therefore, the SBN notes can be measured in the monetary terms since the liability of Central Government and RBI does not cease till 31/12/2016. In support of this contention, reliance was placed on the decision of the Co-ordinate Bench of ITAT Visakhapatnam Bench in the case of ITO v. Sri Tatiparti Satyanarayana in ITA No.76/Viz/2021 order dated 16.03.2022 and that of the ITAT Chennai Bench in the case of Mrs.Umamaheswari vs. ITO in ITA No.527/Chny/2022; Assessment Year: 2017-18, order dt. 14.10.2022.

On the other hand, the ld. D/R, vehemently argued supporting the order of both the lower authorities.

We have heard rival contentions and perused the material placed before us. The sole issue raised in the instant appeal by the assessee is that the ld. CIT(A) has erred in confirming the action of the Assessing Officer treating the cash sales of Rs.65,31,286/- during the demonetisation period as unexplained cash credit and adding it to the income of the assessee. We notice that the assessee is a private limited company and engaged in the business of manufacturing mosquito net fabric for the past many years. Audited financial statements for the year under appeal and the preceding years have been filed. The revenue from operation for financial year 2014-15 are Rs.2.45 Crores, Assessment Year: 2017-18 Jai Ma Sati Net Ltd. during financial year 2015-16 at Rs.2.20 Crores and during financial year 2016-17 are Rs.3.74 Crores approx.. The assessee company is registered under the VAT/GST Act. There has been VAT audit for the year under appeal. Books are also subjected to audit u/s 44AB of the Act. The assessee regularly makes sales in cash. During the year under appeal, the ld. AO specifically examined the transactions of cash deposit during the demonetisation period which is from 08/11/2016 to 31/12/2016. Cash of Rs.14,51,000/- and Rs.47,00,000/- have been deposited in the two bank accounts held with Oriental Bank of Commerce. The ld. Assessing Officer had observed that during the period April, 2016 to October, 2016, the average cash deposit were ranging from Rs.10,00,000/- to Rs.18,00,000/- but there was a spike in deposit of cash during November, 2016, which is the demonetisation period. Further, the ld. Assessing Officer noticed that there was an increase in sales during this period and cash has been deposited on account of sales and also the old outstanding debtors. The ld. Assessing Officer specifically examined the sale transactions during the period and after certain verification observed that in most of the cases addresses are insufficient and the sales could not be verified. On this account of non-verification of sales during demonetisation period, the ld. Assessing Officer added the total sales to the income of the assessee.

We notice that the ld. Assessing Officer on the one hand has accepted that the assessee makes regular cash sales but only disputed those made during the demonetisation period. The purchases made by the assessee are not in dispute and sufficient evidence have been filed Assessment Year: 2017-18 Jai Ma Sati Net Ltd. to explain the genuineness of the purchases. In respect of major vendor from whom the assessee made purchases i.e., Sri Balajee Marketing, complete details have been filed to show that it is a genuine concern and the purchases made from it are genuine. The major reason for the Assessing Officer to suspect the sales as well as the huge cash deposit are for the reason that there was a demonetisation scheme announced during this period. It is an admitted fact that there is an increase in cash deposit in the bank account of the assessee but this sudden spike in the cash deposit is attributable to two reasons. Firstly the recovery from the debtors and some special offers by the assessee to clear its stock by making cash sales. There is a sudden is increase in transactions during the demonetisation. But then announcement of such a scheme is also not a regular feature and once such scheme is announced there has to be counter effects to such schemes and business concerns have to arrange their affairs accordingly. For instance normally the period of receiving outstanding amount from debtors is 2 to 3 months but when such scheme is announced each person tries to get free from the liabilities and available cash in hand. In other words there is a chain reaction when such scheme is announced and there has to be an increase in the cash transactions of a business entity.

We notice that the assessee is making regular cash sales and as on 31/03/2016, as against sales of Rs.2.21 Crores, outstanding debtors are Rs.75.71 Lakhs. However, for the year under appeal i.e., 2016-17, even though the sales have increased to Rs.3.47 Crores, the outstanding debtors have scaled down to Rs.49 Lakhs only. In other Assessment Year: 2017-18 Jai Ma Sati Net Ltd. words debtors have come down from Rs.76 lakhs approx. from preceding financial year to Rs.49 Lakhs, even when the sales have increased from Rs.2.21 Cr. to Rs. 3.47 Cr. These figures in itself indicate that assessee has recovered its debts at a much higher speed than it normally does. The effect of the same is visible in the financial statement for the year under appeal. The assessee normally makes cash sales of small amounts to various customers which are in huge number. On going through the sample purchase and sale bills, VAT audit reports, month -wise cash deposit and banks month wise cash receipt during the year, we do not find any reason to doubt the genuineness of the cash sale transactions made during the demonetisation period. Therefore, since all the cash transactions have duly been reflected in the gross sales during the year, purchases are not in dispute, net profit has been offered as per the past trend, no other defect has been pointed out by the Assessing Officer in the books except the cash sales made during the demonetisation period, we thus do not find any reason to doubt the genuineness of the cash sale transactions and accordingly delete the addition of Rs.65,31,286/- made by the Assessing Officer u/s 68 of the Act. Thus, the finding of the ld. CIT(A) is set aside and Ground Nos. 1 & 2 raised by the assessee are allowed.

Alternative plea of the assessee regarding deposit of SBN being valid up to 31/12/2016, becomes merely academic in nature as we have deleted the impugned addition u/s 68 of the Act and hence the same is not dealt with.