MAYUR JOITKUMAR JAIN,MUMBAI CENTRAL vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 20(2), MUMBAI

Brief facts, relevant for the adjudication of the instant appeal, are that the Assessee, an individual engaged in the business of manufacturing and sale of LED products through his proprietary concern, namely, M/s. Rishabh Industries, had also carried on the business of trading in gold bars through another proprietary concern, namely, M/s. K. Metal Traders. During the course of scrutiny assessment, the AO noticed cash deposits aggregating to ₹49,95,955/-, made by the Assessee during the demonetisation period. The Assessee explained that the said cash represented the sale proceeds of gold bars, forming part of the opening stock carried forward from the earlier years, and duly recorded in the regular books of account.

The AO, though considered the explanation and documents furnished by the Assessee, however, did not find the same acceptable, principally, on the grounds that the Assessee had no regular history of trading in gold bars; the sales had been made through cash bills below ₹2,00,000/-; complete particulars of the purchasers were not available; VAT had not been charged; and the cash was deposited immediately after demonetisation. The AO, by invoking the principles laid down by the Hon’ble Supreme Court in CIT vs. Durga Prasad More [(1971) 82 ITR 540 (SC)], Sumati Dayal vs. CIT [(1995) 214 ITR 801 (SC)], and McDowell & Co. Ltd. vs. Commercial Tax Officer [(1985) 154 ITR 148 (SC)], rejected the books of account under section 145(3) of the Act, and treated the cash deposits of ₹49,95,955/- as unexplained cash credit under section 68 of the Act.

Thus, the Assessee, being aggrieved by the assessment order, preferred the first appeal before the Ld. Commissioner. The Ld. Commissioner concurred with the findings of the AO, by holding that the surrounding circumstances and the pattern of the transactions did not inspire confidence, and, accordingly, confirmed the addition made by the AO.

Before this Court, the Ld. Counsel submitted that the gold bars, admittedly, formed part of the opening stock accepted by the Department in the earlier years; the sales were duly recorded in the regular books of account; the corresponding stock stood reduced; and the cash receipts had been duly entered in the cash book, before being deposited into the bank account. It was further submitted that, once the receipts formed part of the recorded business turnover, the very same amount could not again be assessed as unexplained cash credit under section 68 of the Act.

The Assessee also placed reliance upon the judgments of the Hon’ble Bombay High Court in R.B. Jessaram Fatehchand (Sugar Dept.) vs. CIT [(1970) 75 ITR 33 (Bom.)], and the Hon’ble Patna High Court in Lakshmi Rice Mills vs. CIT [(1974) 97 ITR 258 (Pat.)].

On the contrary, the Ld. DR strongly relied upon the orders passed by the authorities below, and submitted that the cumulative surrounding circumstances clearly established that the alleged cash sales were merely arranged transactions, intended to convert demonetised currency into accounted money.

Having heard the parties, considered the rival submissions, and perused the material available on record, this Court observes that the short controversy involved in the present appeal is, whether the cash deposited by the Assessee during the demonetisation period, which had admittedly been recorded in the regular books of account as sale proceeds of gold bars forming part of the accepted opening stock, could nevertheless be assessed as unexplained cash credit under section 68 of the Act, merely on the basis of suspicion and surrounding circumstances.

This Court further observes that it is an admitted position that the gold bars, sold during the relevant previous year, formed part of the opening stock carried forward from the earlier assessment years. The Revenue neither disputed the purchase of the said gold bars, nor disturbed the opening stock accepted in the preceding years. Therefore, once the existence of the stock itself stood accepted, the corresponding sale thereof could not have been rejected merely on suspicion, unless cogent material was brought on record to establish that no such sale had, in fact, taken place.

This Court further observes that the impugned sales had been duly recorded in the regular books of account; the quantitative stock had correspondingly been reduced; and the sale proceeds had been credited in the books, before being deposited into the bank account. Thus, the source of the impugned cash deposits stood explained from the books regularly maintained by the Assessee.

The AO proceeded, principally, on the basis that the sales had been effected through cash bills below ₹2,00,000/-; complete particulars of the purchasers were not available; VAT had not been charged; and the cash had been deposited after demonetisation. Though these circumstances could have created suspicion, and warranted further enquiry, however, suspicion, howsoever strong, could not substitute legal evidence. Neither the AO, nor the Ld. Commissioner, brought any independent material on record to demonstrate that the gold bars never existed, that the opening stock was fictitious, or that the recorded sales were sham transactions. Further, no defect was pointed out in the quantitative stock records maintained by the Assessee.

This Court also finds considerable force in the submission of the Ld. Counsel Sh. Rajiv Khandelwal that the impugned receipts had already formed part of the business turnover reflected in the books of account. Once the sales had been duly recorded as business receipts, the very same amount could not again be assessed under section 68 of the Act, unless the Revenue first established that the underlying sales themselves were fictitious. Otherwise, the same receipt would effectively be subjected to tax twice.

It is settled that, where the sales are duly recorded in the books of account, and accepted as business receipts, the same amount cannot again be brought to tax under section 68 of the Act. Further, merely because the cash sales had been effected below the prescribed monetary limit, or during the demonetisation period, the same could not be treated as bogus, in the absence of cogent material disproving the recorded transactions.

This Court further observes that the Hon’ble Bombay High Court in R.B. Jessaram Fatehchand (Sugar Dept.) vs. CIT (supra), and the Hon’ble Patna High Court in Lakshmi Rice Mills vs. CIT (supra), have laid down that, in the case of cash sales, where the delivery of goods is effected against immediate cash payment, the seller cannot ordinarily be expected to maintain the names and addresses of every purchaser. Further, where the books of account, and the cash balance recorded therein, explain the availability of cash with the Assessee, no further burden can ordinarily be cast upon the Assessee to establish the source of each individual cash receipt.

The books of account also could not have been rejected, merely because the Assessee was unable to furnish complete particulars of the cash purchasers, when the sales had been duly recorded in the books, supported by the corresponding reduction in stock, and no material had been brought on record by the Revenue to establish that such sales were fictitious, or that the books of account were otherwise unreliable.

This Court is also conscious of the principles laid down by the Hon’ble Supreme Court in Durga Prasad More (supra), Sumati Dayal (supra), and McDowell & Co. Ltd. (supra), that the Revenue is entitled to examine the surrounding circumstances, and apply the test of human probabilities. However, the aforesaid decisions do not authorise the rejection of duly maintained books of account and documentary evidence, merely on suspicion, without any corroborative material. The doctrine of human probabilities supplements the appreciation of evidence; it does not dispense with the requirement of evidence itself.

Thus, considering the peculiar facts and circumstances in totality, and respectfully following the aforesaid judgments, this Court holds that the Revenue failed to establish that the recorded sales were fictitious, or that the cash deposited by the Assessee represented income from any undisclosed source. Consequently, the rejection of the books of account under section 145(3) of the Act, and the addition of ₹49,95,955/- made under section 68 of the Act, could not be sustained.

Accordingly, the addition of ₹49,95,955/-, made by the AO and confirmed by the Ld. Commissioner, is directed to be deleted.

In the result, the Assessee’s appeal is allowed.