ANAGHA JEWELS,KOLHAPUR vs. INCOME TAX OFFICER WAR 2(1), KOLHAPUR

Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of trading in gold, jewellery, silver and diamonds operating from Kolhapur, Maharashtra. It filed its return of income on 30.10.2017 declaring total

Accordingly, statutory notice u/s 143(2) of the Act was issued and served on the assessee. Thereafter, notice u/s 142(1) along with a questionnaire was also issued and served on the assessee in response to which the assessee filed various details from time to time. The Assessing Officer in the meantime issued notices u/s 133(6) to The ICICI Bank Ltd, Branch : Rajarampuri, Kolhapur and Shree Warna Sahakari Bank Ltd, Branch : Market Yard, Kolhapur. From the reply submitted by the above banks, the Assessing Officer noted that the assessee, during the demonetization period, has deposited huge cash amounting to Rs.2,49,96,500/-. He, therefore, asked the assessee to substantiate the same. The assessee in response to the same filed copy of ITR along with computation of total income, copy of financial statements i.e. Balance sheet, Profit & Loss statement, copy of Audit report, copy of all bank account statements, ledger of expenses, Form no 26AS, details of addition of fixed assets with bills/vouchers, details of creditors & their confirmation, copy of MVAT return, details of cash sales for F.Y 2015-16 and 2016-17, month wise details of sales & purchase, details of month wise cash in hand for F.Y 2015-16 and 2016-17, source of investment made in ICICI prudential

The Assessing Officer, therefore, was of the opinion that the prevalence of the above abnormalities and lack of any plaustible justification on the part of the assessee leads to only one conclusion that the assessee firm has failed to establish the genuine source of cash amounts credited by it in its books under the guise of cash sales. According to him, it is practically difficult to believe the very proposition that the assessee makes cash sales amounting to Rs.2,36,99,866/- just on the day of demonetization i.e. 08.11.2016 against total cash sales of Rs.2,60,77,145/- for the whole year. It is against the human probabilities. In view of the above, the Assessing Officer was of the opinion that the cash balance with 4 the assessee as on 08.11.2016 which was accumulated out of undisclosed source has been introudced by it under the guise of cash sales just before 09.11.2016 to somehow justify through fabricated incomplete evidences regarding the source of cash deposits. He, therefore, made addition of Rs.2,60,77,145/- as unexplaiend cash credit u/s 68 r.w.s. 115BBE of the Act.

Before the Ld. CIT(A) / NFAC it was submitted that the genuine cash sales have been added u/s 68 by the Assessing Officer as unexplaiend despite submission of documentary evidences, books of account, MVAT etc. It was argued that the books of the assessee were not rejected u/s 145(3). Further, treating the sales as unexplaiend would result in an absurd busienss loss of Rs.2,52,89,295/- making order of the Assessing Officer as bad in law. It was submitted that the assessee is required to obtain PAN only where the invoice value is more than Rs.2 lakhs. However, in the instant case the individual invoices are less than Rs.2 lakhs. Therefore, the assessee is not required to obtain PAN of the customers.

However, the Ld. CIT(A) / NFAC was not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer in making addition of Rs.2,60,77,145/-.

Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal.

The Ld. Counsel for the assessee submitted that the provisions of section 68 cannot apply to the disclosed sales forming part of regular audited books. He submitted that the firm has disclosed total sales of Rs.3,77,73,480/- in its Profit and Loss Account for financial year 2016-17. The cash receipts were deposited in disclosed bank accounts whose statements were furnished before the Assessing Officer. The cash sales were reflected in MVAT returns filed with the Government of Maharashtra and VAT on cash sales was duly paid to the State Government. He submitted that item-wise daily stock registers and purchase invoices establishe the physical movement of goods. He submitted that the firm has not only offered an explanation but has also proved the nature and source of cash credits. The nature of deposits is sales receipts and the source is trading activity corroborated by external third party material (MVAT cross matching) and internal records (stock registers, purchase invoices, sales bills). He submitted that merely because the firm could not produce every retail customer for personal verification, it cannot be said that the assessee has not discharged the onus cast on it u/s 68. He submitted that the retail jeweler in a B2C cash market cannot be expected to produce every walk-in customer years later. Referring to Rule 114B of the I.T. Rules, 1962, he submitted that the said Rule mandates PAN collection only for the transactions above Rs.2 Lakhs and the firm has complied with that obligation for all high value transactions.

He submitted that the Assessing Officer has accepted purchases and closing stock but rejected the sales which is not correct. Referring to page 5 of his written

The Ld. Counsel for the assessee in his next plank of argument submitted that the demonetization of 8th November, 2016 is a very extraordinary national event. From that moment, Specified Bank Notes (SBN) ceased to be legal tender w.e.f. midnight of 8/9 November, 2016 giving citizens approximately 4 hours to utilize their SBN holdings. The gold and jewellery market was one of the primary avenues for such utilization. The Ld. Counsel for the assessee drew the attention of the Bench to the following factual matrix in his written submission:  The Reserve Bank of India (RBI) reported that domestic demand for gold spiked suddenly after demonetisation, with buyers paying significant premiums to dispose of old currency notes with jewellers Gold imports surged in November 2016.  All India Gems and Jewellery Manufacturers Association had projected gold demand of 380-400 metric tonnes in the second half of 2016, driven by good monsoon income, 7th Pay Commission implementation, and festive demand.  It is estimated that approximately 15 metric tonnes of gold was sold across India immediately after the demonetisation announcement.  Diwali for FY 2016-17 fell on 30 October 2016 and the festive period extended into the first week of November 2016. 7

So far as the Assessing Officer’s comparison of 01.11.2016 to 08.11.2016 in assessment year 2016-17 with the same period in financial year 2015-16 is concerned, he submitted that the same is wholly inappropriate. He submitted that Diwali in financial year 2015-16 fell on 10th to 13th November, 2015 i.e. after the compared period and there was no extraordinary demand driver during that corresponding window. The two periods are simply not comparable. This is a fundamental factual error that vitiates the entire analysis.

So far as the allegation of the Revenue that 100% cash payment on 08.11.2016 was commercially implausible is concerned, he submitted that this reasoning is not correct. He submitted that because of the extraordinary circumstances prevailing on that night everybody came specifically to convert SBN cash into gold. Therefore, to treat the logical outcome of a demonetization rush as evidence against the firm’s case is to misread the entire episode.

So far as the allegation of the Revenue that there was deficient customer identification is concerned, he submitted that as per Rule 114B, PAN collection is mandatory only for transactions above Rs.2 lakhs. Since in the instant case wherever the sales were above Rs.2 lakhs, the assessee has obtained PAN and address details and in other cases where the invoice value is less than Rs.2 lakhs, the assessee has not obtained any proof from the customers because it was not mandatory, therefore, rejecting the explanation of the assessee is not justified.

So far as the allegation of the Revenue that the assessee has raised 138 invoices on the evening of 08.11.2016 versus 68 for October, 2016 is concerned, he submitted that October, 2016 was a low sales month. A retail jewellery store with multiple staff serving customers from 8 pm to 2 am can process 138 transactions at the rate of one per 15 minutes per sales person which is entirely within operational capacity. He submitted that the Ld. CIT(A) / NFAC did not examine the average transaction value comparison. He submitted that many demonetization day transactions were for lower value items, naturally producing more invoices for a given total revenue.

The Ld. Counsel for the assessee submitted that the firm’s MVAT compliance constitutes the most powerful corroboration of genuine sales. He submitted that Quarterly MVAT returns for all four quarters of FY 2016-17 were filed. Total sales as per MVAT returns (Rs.3,77,73,485/-) has been reconciled exactly with the Profit & Loss Account (Rs.3,77,73,480/- difference of Rs. 5/- is because of rounding). Further, the J-1/J-2 cross-matching statement obtained directly from the MVAT department independently confirmed all purchase transactions with approximately 33 suppliers. This is an independent government database, not created by the Firm. He submitted that VAT was paid on sales. Q1 (April-June 2016): Rs.11,095/-, Q3 (October-December 2016). Rs.55,210/- plus interest. If the sales were fictitious, there would be no occasion to pay VAT on them. He submitted that the Maharashtra Sales Tax department accepted the MVAT returns, audit report and J-1/J-2 without any objection. He submitted that 9 when an independent State Government tax authority has accepted the same sales then it is not correct for the Central Government AO to term the same as fictitious.

The Ld. Counsel for the assessee submitted that the Assessing Officer has not rejected the books u/s 145(3) and therefore, he cannot selectively accept all favourable entries i.e. purchases, stock, expenses and reject only the sales receipts.

So far as the observation of the Assessing Officer that the tax auditor has mentioned that the day-to-day stock was not maintained by the firm is concerned, he submitted that this is a plain misreading of the audit report. He submitted that during the course of assessment proceedings the assessee has submitted item-wise daily stock registers and monthly stock registers to the Assessing Officer who accepted them and accepted the closing stock.

Referring to the decision of the Visakhapatnam Bench of the Tribunal in the case of ACIT vs. M/s. Hirapanna Jewellers vide ITA No.253/VIZ/2020 order dated 12.05.2021 for assessment year 2017-18, he submitted that the Tribunal in the said decision has held that where a jeweller maintained proper books of accounts, had stock registers corroborating sales and had paid VAT/sales tax on the turnover, the addition made under Section 68 treating demonetization period cash sales as unexplained cash credit was not sustainable. The Tribunal specifically held that the identity of retail customers in a B2C jewellery business cannot be established for every transaction and the failure to do so does not discharge the Revenue's burden

Referring to the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. M/s Ramlal Jewelers Pvt. Ltd. vide ITA No.1600/MUM/2023 order dated 26.07.2023 for assessment year 2017-18, he submitted that the Tribunal in the said decision has held that when a jeweller produces (i) purchase invoices and creditor confirmations establishing genuine stock: (ii) quantity-wise stock registers: (iii) MVAT/GST returns corroborating sales; and (iv) sales invoices for the relevant period, the burden on the assessee under Section 68 is discharged. The Tribunal further held that the standard of proof required for retail cash sales is materially different from the standard applicable to unaccounted credits from third parties.

Referring to the decision of the Delhi Bench of the Tribunal in the case of DCIT v. Bawa Jewellers Pvt. Ltd. vide ITA No.352/DEL/2021 order dated 09.06.2023 for assessment year 2017-18, he submitted that the Tribunal in the said decision has held that (a) the existence of genuine stock proved through stock registers and purchase records: (b) the consistency of VAT returns with income tax returns and (c) the industry-specific context of demonetisation collectively discharge the assessee's onus under Section 68. The Tribunal also noted that the implausibility of large sales on a single day must be assessed against the unprecedented national event of demonetisation and not against ordinary trading conditions.

Referring to the decision of the Kolkata Bench of the Tribunal in the case of ITO v. JKJ Jeweller (HCM) vide ITA No.420/KOL/2024 order dated 16.12.2024 for assessment year 2017-18, he submitted that the Tribunal in the said decision has reaffirmed that when a jeweller establishes the source of cash deposits through a corroborated chain of evidence including stock reconciliation, purchase verification and VAT compliance, the AO's addition under Section 68 cannot be sustained merely on the ground of large deposits during the demonetisation period. The Tribunal emphasized that the characteristic spike in jewellery sales on 8 November 2016 was a well-documented national phenomenon and cannot be treated as inherently suspicious.

Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of Bhaumik Jewelers (P.) Ltd. v. ITO, Ward-1, Ahmedabad reported in (2026) 183 taxmann.com 107 (Ahmedabad-Trib.), he submitted that the Tribunal in the said decision has held that where the assessee engaged in business of trading in bullion and jewellery, deposited cash in its bank accounts during demonetisation period, since assessee had successfully explained source of such cash deposits as sales/advances duly recorded in its books of account and comparative sales data dispelled allegation of abnormal cash sales, Assessing Officer was not justified in treating same as unexplained cash credits under section 68. 24. Referring to the decision of Hon’ble Delhi High Court in the case of PCIT v. Agson Global (P.) Ltd. reported in 441 ITR 550 (Del), he submitted that the Hon’ble High Court in the said decision has held that Section 68 cannot be 12 mechanically applied to all cash credits found in the books of an assesses. Where the assessee demonstrates the source of the cash credit through documentary evidence, and the AO has not brought on record any material to affirmatively disprove the explanation, the addition under Section 68 is unjustified. The Hon’ble High Court emphasised that the AO's disbelief, without any concrete contrary evidence, does not suffice. This proposition has direct application to the present case where the AO has not pointed to a single piece of evidence affirmatively proving that the cash arose from undisclosed sources his case rests entirely on suspicion born of unusual sales quantum.

Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of V.R. Auto Services v. ACIT vide ITA No.42/PUN/2025 order dated 06.05.2025 for assessment year 2017-18, he submitted that the Tribunal in the said decision has held that where an assessee explains the source of cash deposits as sales proceeds, produces supporting records, and no contrary evidence is brought by the Revenue, the addition under Section 68 is not sustainable. The Tribunal reiterated that the AO must bring positive evidence of undisclosed income rather than relying solely on the improbability argument.

Referring to the decision of the Delhi Bench of the Tribunal in the case of Fine Gujaranwala Jewelers v. Income Tax Officer reported in (2023) 151 taxmann.com 340 (Delhi – Trib.), he submitted that the Tribunal in the said decision has held that where the assessee deposited substantial amount of cash in bank during demonetization period and claimed that same arose out of cash sales

Referring to the decision of the Jaipur Bench of the Tribunal in the case of ACIT v. Chandra Surana reported in (2023) 149 taxmann.com 379 (Jaipur – Trib.), he submitted that the Tribunal in the said decision has held that where assessee- jeweller claimed that cash deposited in bank account during demonetization period pertained to cash sale transaction of gold jewellery, since assessee had maintained regular books of account, bills, vouchers and day-to-day stock register having complete quantitative details of cash sale transaction of jewellery, addition under section 68 could not be made.

Referring to the decision of the Jaipur Bench of the Tribunal in the case of Mahesh Kumar Gupta v. ACIT reported in (2023) 151 taxmann.com 339 (Jaipur – Trib.), he submitted that the Tribunal in the said decision has held that where assessee-jeweller claimed that substantial amount of cash deposited in bank account was with respect to cash sales made during demonetization period, since sales made by assessee were supported by commercial invoice reported in VAT return and accepted by VAT authority, and moreover AO did not reject assessee's books of account by invoking section 145, AO erred in not accepting declared cash sales as not verifiable merely on ground that purchases detail could not be verified and, thus, addition made under section 68 could not be sustained.

Referring to the decision of the Hyderabad Bench of the Tribunal in the case of Ms. Lalitha Padmaja Thallapalli v. ITO reported in (2025) 181 taxmann.com 369 (Hyderabad – Trib.), he submitted that section 68 places an initial burden on the assessee to explain the nature and source of the cash credit, but once that explanation is corroborated by primary documents (purchase records, stock registers. VAT filings), the burden shifts to the Revenue to disprove the explanation with concrete material. Mere suspicion, however strong, is not a substitute for evidence.

Referring to the decision of the Lucknow Bench of the Tribunal in the case of ACIT v. Harshit Garg reported in (2025) 176 taxmann.com 243 (Lucknow- Trib.), he submitted that the Tribunal in the said decision has held that where assessee-jeweller deposited huge amount of cash in bank during demonetization period and had presented evidence of available stock and depletion of said stock on account of sales and Assessing Officer had not carried out any enquiry to show that any portion of receipts on account of sale of that stock were unexplained by such sales, no case for addition under section 68 was made out.

He accordingly submitted that the order of the Ld. CIT(A) / NFAC be set aside and the addition made by the Assessing Officer and sustained by the Ld. CIT(A) / NFAC be deleted.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. He submitted that the assessee has failed to 15 substantiate with evidence regarding the sale of Rs.2,60,77,145/- on 08.11.2016 within the period of 4 hours. Referring to the orders of the Assessing Officer and the Ld. CIT(A) / NFAC, he submitted that both the authorities have given justifiable reasons while rejecting the arguments advanced by the assessee. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be upheld and the grounds raised by the assessee be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.2,60,77,145/- u/s 68 r.w.s. 115BBE of the Act on the ground that the assessee made cash deposit in specified bank notes during the demonetization period and was unable to substantiate with evidence to his satisfaction regarding the cash sale on the night of 08.11.2016. According to the Assessing Officer there is abnormal increase in turnover of cash sales on the day of declaration of demonetization i.e. 08.11.2016 and the total such cash sales were at Rs.2,36,99,866/- by issuing 203 bills in a single day. Further, the assessee firm did not submit the complete details of the customers i.e. complete address, PAN, confirmation etc nor produced them for verification before him even after sufficient opportunities provided. The other allegation of the Assessing Officer is that increase in cash turnover is just matching the cash deposits during demonetization and that too in the denomination

It is the submission of the Ld. Counsel for the assessee that the Assessing Officer has accepted the purchases and the closing stock but rejected the sales which gives an absurd result showing loss of Rs.2,53,32,589/- which is not possible. It is also his submission that on the day of declaration of demonetization i.e. on 08.11.2016 it was an extraordinary national event and everybody wanted to exchange their high denomination notes by purchasing gold, jewellery or bullion or other costly items. It is also his submission that the assessee filed the VAT returns and paid due taxes which has been accepted by the VAT department. Therefore, once the state government authorities have accepted the MVAT returns, the audit report in J1 and J2, another arm of the government i.e. the Assessing Officer in the instant case should not have treated the same as fictitious. It is also his submission that the assessee has maintained regular books of account and complete stock records and the Assessing Officer has not rejected the books of account and therefore he cannot selectively accept all favourable entries i.e. purchases, stock, expenses and reject only the sales receipts. Further, according to the Ld. Counsel for the assessee the genuine sales cannot be treated as unexplained cash credit to be added u/s 68 r.w.s. 115BBE.

We find some force in the above arguments of the Ld. Counsel for the assessee. A perusal of the assessment order shows that the Assessing Officer has accepted the net purchases of Rs.4,28,32,749/-, opening stock of Rs.4,36,71,123/-,

We find the assessee in the instant case has maintained books of account including stock registers containing full details. The assessee has also paid VAT on the sales and the VAT authorities have accepted the VAT returns. Further, the Assessing Officer has not rejected the books of account. So far as the allegation of the Assessing Officer that the assessee has not given the details of customers with full address and PAN etc, we find merit in the argument of the Ld. Counsel for the assessee that when individual

Therefore, when each of the invoice is less than Rs.2 lakhs the assessee is not required to obtain PAN number as specified in Rule 114B and wherever the invoice has exceeded Rs.2 lakhs the assessee has filed the PAN details. We also find force in the argument of the Ld. Counsel for the assessee that with the existing staff of the assessee preparing 138 invoices within a period of 4 hours is not an impossibility.

It has been held in various decisions that where a jeweller maintains proper books of accounts, has stock registers corroborating sales and has paid VAT/sales tax on the turnover, the addition made under Section 68 treating

In the result, the appeal filed by the assessee is allowed.

The concerned Pr.CIT, Pune

DR, ITAT, ‘B’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, ////