JATINDER SINGH HUF,KALBADEVI vs. ITO MUMBAI 23 1 6, PIRAMAL CHAMBER

During the assessment proceedings, the Assessing Officer called upon the assessee to explain cash deposits aggregating to ₹44,85,500 made in its bank account during the demonetisation period. The assessee stated that the deposits were sourced from cash generated in the regular course of its business and cash balances reflected in its books. In support, it furnished details of cash sales, cash deposits and withdrawals, cash and credit purchases and sales, stock in hand, and the relevant cash book, sales and purchase records, stock records and bank particulars. The Assessing Officer, however, considered the ratio of cash sales to total sales for September to November across three financial years and observed that it stood at 9.72% for FY 2014–15, 6.11% for FY 2015–16 and 29.32% for FY 2016–17. Treating this increase as abnormal, he took the simple average of the three ratios 15.05% as the permissible ratio for FY 2016–17, including in that average the very year’s ratio which was

Before the learned CIT(A), the assessee contended that its books were regularly maintained and audited, and that no specific defect had been identified in the cash book, sales register, purchase register, stock records or bank entries. It was submitted that cash sales were a regular feature of the textile business, particularly in dealings with small traders and buyers in the grey market, and that the sales were duly recorded in the books and supported by the stock and other business records. The assessee also disputed the Assessing Officer’s method of estimating cash sales by applying a ratio drawn from earlier years, submitting that sales patterns could vary with demand, supply, market conditions, seasonal factors and the nature of the goods. It relied, inter alia, on the comparative chart showing cash in hand of ₹46,03,311.60 as at 8 November 2016 and bank deposits of ₹44,85,500 from 9 November to 31 December 2016. As regards the vehicle-

The learned CIT(A), after setting out the Assessing Officer’s reasoning and the assessee’s submissions, sustained the addition under section 68. The appellate authority observed that the ratio of cash sales to total sales during September to November of FY 2016–17 was markedly higher than the ratios for the two preceding years and considered the increase significant in the context of the demonetisation period. It held that the explanation that the deposits represented cash sales and cash balances could not be accepted merely by reference to entries in the books, but had to be tested against the surrounding circumstances and normal business conduct. Referring to the decisions of the Supreme Court in CIT v. Durga Prasad More (82 ITR 540) and Sumati Dayal v. CIT (214 ITR 801), the learned CIT(A) considered the test of human probabilities relevant and found that the assessee had not furnished independent corroborative material demonstrating a corresponding increase in business activity, a change in market conditions specific to its business, or an alteration in its business model. Although the books had not been formally rejected under section 145(3), the learned CIT(A) held that individual entries could nonetheless be examined where their nature and source were not

At the hearing before us, the learned counsel did not press the ground relating to the ad hoc disallowance of ₹55,021. The said ground is accordingly dismissed as not pressed. The principal issue requiring adjudication is therefore the addition of ₹17,37,823 made under section 68 in respect of the alleged inflation of cash sales.

We have considered the rival submissions and examined the material referred to in the orders below, including the comparative chart furnished by the assessee. To appreciate the explanation for the deposits, it is useful to view the cash sales, bank deposits and cash in hand together:

The chart records cash in hand of ₹46,03,311.60 as at 8 November 2016 and deposits of ₹44,85,500 from 9 November to 31 December 2016. The cash balance immediately before demonetisation thus exceeded the subsequent deposits by ₹1,17,811.60. The chart also records cash sales of ₹41,21,801 up to 8 November and further cash sales of ₹2,87,500 thereafter. Considered with the cash book, sales records and corresponding bank entries furnished by the assessee, these

The chart also shows why the timing of deposits should not be considered in isolation. In FY 2015–16, the assessee deposited ₹14,00,000 between 1 April and 8 November and ₹17,00,000 between 9 November and 31 December. In FY 2016–17, deposits during the first period were nil, while ₹44,85,500 was deposited in the latter period. That difference in timing is accompanied by a substantial cash balance recorded immediately before 9 November 2016. The chart further records higher cash sales in FY 2016–17 than in the preceding year. Although such variation may warrant verification, a month-wise or period-wise comparison of cash sales and deposits does not, without tracing the opening cash balance and intervening cash receipts and payments, establish that the source of a deposit is unexplained.

The Assessing Officer’s estimate was based on the cash- sales ratios for September to November: 9.72% for FY 2014– 15, 6.11% for FY 2015–16 and 29.32% for FY 2016–17. He

The learned CIT(A)’s observations concerning the higher ratio, the surrounding circumstances and the test of human probabilities have been duly considered. A departure from an earlier pattern may call for scrutiny, and the decisions in CIT v. Durga Prasad More (82 ITR 540) and Sumati Dayal v. CIT (214 ITR 801) permit the authorities to look beyond the form of entries and assess the surrounding circumstances. Those principles, however, do not dispense with an appraisal of the particular records and explanation before the authorities. Here, the assessee relied on its cash book, sales and stock

On the material before us, the increase in the cash-sales ratio prompted an enquiry but does not establish that the assessee’s recorded sales were fictitious or that the deposits lacked an explained source. The cash balance shown immediately before demonetisation was sufficient to cover the deposits made thereafter, and the orders below do not bring on record cogent material displacing that explanation. We accordingly delete the addition of ₹17,37,823 made under section 68. The ground relating to this addition is allowed. The ground relating to the disallowance of ₹55,021 having been dismissed as not pressed, the appeal is partly allowed.

In the result, appeal of the assessee is partly allowed.