DY CIT-CC-1(1), MUMBAI vs. SHREE MANGAL JEWELS P. LTD., MUMBAI

The Revenue has filed this appeal challenging the order dated 31.5.2021 passed by the learned CIT(A)-47, Mumbai and it relates to A.Y. 2017-18. The Revenue is aggrieved by the decision of the learned CIT(A) in deleting the addition of Rs. 4.85 crores made by the Assessing Officer as unexplained cash credit on account of failure of the assessee to satisfactorily explain cash sales.

3. The assessee explained that the cash deposits were made out of cash sales effected by it prior to announcement of demonetisation of Rs. 500/- and Rs. 1000/- notes on 8.11.2016. The assessee submitted that it has sold gold bar and diamond ornaments to the retail customers by cash on 8.11.2006 and earlier dates. It was stated that the cash received on such sales have been deposited into the bank account. It was further submitted that the cash sales have been duly reflected in the books of account and stock register. It was submitted that the stock book and regular books of account have been audited by its auditor and they did not find any fault or error in them. It was also submitted that sales figures have been reported to the Sales tax authorities also through VAT return and the sales have been accepted by the sales tax authorities. The assessee also submitted that the survey team has also verified the physical stock and compared the same with the book stock at the time of survey operations. They have also not found any discrepancy in the stock register and further they did not doubt sales recorded in the books of account. The assessee also submitted that the income tax provisions require collection of PAN number, when the value of bill exceeds Rs.2.00 lakhs and it has duly collected the PAN numbers. The assessee also furnished details of customer names along with the PAN numbers given by them. Accordingly, it was submitted that the sources of cash deposits were the cash balance available with the assessee in the books of accounts, which was accumulated out of cash sales.

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4. The Assessing Officer, however, did not accept the explanations given by the assessee. He noticed that the assessee has not carried out any cash sales prior to 2nd November 2016 and there have been sudden increase in cash sales from 2nd November 2016. The Assessing Officer also observed that the concerned cash sale bills have not been signed by the customers. Further the assessee has not given any reason as to why it kept cash of Rs. 4.85 crores with him and deposited the same in a staggered manner from 10.11.2016 to 30.11.2016. The Assessing Officer also verified the PAN data of the customers and noticed that most of the customers have not filed their return of income. The Assessing Officer also issued summons under section 131 of the Act to some of the parties on random basis and the summons were returned back by the postal authority stating as “party not available/unknown”. Accordingly the Assessing Officer took the view that the assessee has not actually sold the gold and it has only fabricated the sale bills in order to create source for unaccounted money available with it. Accordingly, the Assessing Officer rejected the claim of cash sales and held that the cash deposits aggregating to Rs. 4.85 crores made by the assessee are liable to be assessed as unexplained cash credit under section 68 of the Act. Accordingly, the Assessing Officer assessed the above said amount under section 68 of the Act. In the alternative, the Assessing Officer took the view that the assessee could not properly explain the source for the cash of Rs. 4.85 crores available with it and hence the same is assessable under section 69A of the Act also.

8. The Learned AR further submitted that an identical issue has been considered by the Vishakhapatnam Bench of the ITAT in the case of M/s. Hirapanna Jewellers (ITA No. 253/Viz/2020 dated 12.5.2021)(128 taxmann.com 291) and has deleted the identical addition made in that case

5 Shree Mangal Jewels Private Limited on identical reasoning. The Tribunal noted the fact that the sale bills were duly supported by outgo stocks; there were no abnormal profits and further the survey team also did not find any defect in the sales and stock. He submitted that the facts prevailing in the instant case are also identical. Accordingly the learned AR submitted that the decision rendered by Vishakhapatnam Bench of the ITAT shall squarely apply to the facts of the present case. He further submitted that identical view has been taken by the Chandigarh Bench of the ITAT in the case of M/s. Kalaneedhi Jewellers LLP (ITA No. 311/Chd/2021 dated 25.3.2022). The learned AR further submitted that the assessee has complied with the provisions of Income tax Act in collecting PAN number of customers and there was no necessity for the assessee to collect the address of the customers. However, the observations of the AO that the customers did not respond to the notice issued by him nor did they file their return of income are not relevant in the assessment of the assessee, since the assessee has proved sale of gold/diamond ornaments vis- à-vis the stock register. In support of this proposition, the learned AR relied on the decision rendered by Hon'ble Bombay High Court in the case of R.B.Jessaram Fatehchand (Sugar Dept) Vs. CIT (75 ITR 33).

6 Shree Mangal Jewels Private Limited on the reasoning that the AO was not satisfied with the explanations given by the assessee. However, in the instant case, sale of jewellery in cash is explained and it is not an unusual activity. Further the said sales are duly supported by the stock register. The books of accounts and stock registers were verified by the survey officials and they did not find any deficiency therein. The auditors, who audited the accounts also did not find any fault therein. Hence, it is not a case of rejection of explanations furnished by the assessee on valid reasons. On the contrary, the AO did not accept the explanations only on suspicious and surmises, that too, without bringing any material on record to disprove the books of accounts and stock register of the assessee. Accordingly, the learned AR submitted that the above said decision will not apply to the facts of the present case.

7 Shree Mangal Jewels Private Limited rendered by Hon’ble High Court of Calcutta in the case of Daulatram Rawatmull vs. CIT (1967)(64 ITR 593)(Cal.).

“9.3 Coming to the cash sales made by the assessee, I agree with the assessee that no discrepancy in the stock of the assessee as such was found by the investigating officer or by the AO. In fact, this group consisting of a few entities engaged in jewellery business was searched/surveyed and at the time of the search, no discrepancy in the stock of jewellery of any of the entities was found. If there was no discrepancy in the stock, the sales and purchases made by the aseessee till the date of search or the year end should have been in order. If the contention of the Ld. A.O. is to be accepted then there should have been some excess stock in possession of the assessee as on date of search, which the search team really did not find.

9.4 Further, it is not the case that the assessee did not have sufficient stock of gold and diamond jewellery to make the above sales. In fact, the assessee was maintaining huge stock of over 52078gm as on 31.03.2016, 54028gm as on 31.03.2017 and 48506gm of gold as on 08.04.2017, on the date of survey. In fact, sales of the assessee are of the order of over 40crs., during the year as also in earlier years, as against these cash sales are of only Rs. 4.85 cr. Which is a small portion of overall sales. Therefore, it is not the case that the assessee could not have made the cash sales in the instant case. I also agree with the contention of the assessee that as on 08/11/2016, a lot of sales were made by the jewellers, late in the night and there were huge crowd outside the shop of the jewellers on the said date, as per the media reports. The reason is simple that there was panic in the public on account of declaration of demonetization and they had only four hours time to do whatever they could do with the banned currency notes. So, the cash sales have been made by the assessee in unusual time and in unusual circumstances and if viewed from that perspective, it does not look unusual.

9.5 is father seen that the assesee has already disclosed these sales, in their sales tax returns/VAT returns and it appears that these returns were filed much before the search and seizure action carried out in the group of the assessee. It is also seen that there is no revision of sales/VAT returns of the assessee.” ……….. 9:8 Further, there was no discrepancy found between physical stock and stock in books of accounts while stocks were physically-verified by the Survey team, which means physical sale of gold during the year & sale recorded in the books are not in divergence. If based on AO allegation, the sale would have been bogus then how could the stock during the Survey

8 Shree Mangal Jewels Private Limited operation would have been tallied with the stock in books of accounts upon physical stock verification done by Survey team & valued by government authorized valuer. It appears that proper sales were recorded in the books of accounts & VAT also paid on the same & the same is also shown in VAT return as well as statutory audit & tax audit report along with quantitative details of stocks, hence it clearly shows that the books of accounts are properly maintained by the company SMJPL as per prescribed method in section 145.”

A perusal of the decision rendered by Ld CIT(A) would show that the Ld CIT(A) has taken note of an important fact in this case, viz., the sale of gold has been duly recorded in the stock register also. Hence it is not a case of declaring sales out of non-existing stock, which may attract addition of entire sales amount as income. With regard to the genuineness or veracity of entries made in the books of account and stock register, we notice that the survey officials who conducted survey in the hands of the assessee did not find any discrepancy either in the sales recorded in the books of account or in the entries made in the stock register with regard to the said sales. The auditors, who audited the accounts also did not find any fault with regard to these records. Accordingly, the Ld CIT(A) held that, if there was no discrepancy in the stock, the sales and purchases made by the assessee till the date of search or the year end should have been in order. We notice that the AO did not give credence to this important fact.

“2. Now, the Income-tax Officer in not accepting the book results of the assessee proceeded mainly on the ground that in respect of the cash sales entered in the books of account of the assessee the assessee was unable to supply the addresses of the customers to whom sugar was sold. The assessee had supplied an explanation for his inability to do so, but the said explanation was not accepted by the Income-tax Officer. There was no other reason for the Income-tax Officer to discard the book results. He, no doubt, pointed out that it appeared that other wholesale traders in the market had shown a higher gross profit of their turnover but it appears that no explanation had been called for from the assessee in that connection by any questions having been specifically put to him in that connection. The Income- tax Officer had scrutinised closely the account books of the assessee and had found no fault with them excepting that the addresses of the customers for the cash sales of sugar had not been entered. It was not found by him that there were any other reasons for not accepting the said cash sales, such as, for instance, the sales being at lower rates than what were prevailing in the market or that they were not comparable with the other verified sales, which the assessee had made during the material time. In these circumstances, the reason given by the Income-tax Officer for rejecting the book results shown by the assessee's accounts or for not accepting the cash transactions as genuine cannot be accepted as good and sufficient unless there was an obligation on the part of the assessee to keep a record of the addresses of the cash customers. It could not, therefore, be said that the failure on his part to maintain the addresses was a suspicious circumstance giving rise to a doubt about the genuineness of the transactions entered into by the assessee.

occurred at the material time in the present case as is obvious from the Sugar Market Reports produced by the assessee, which show that the demand for sugar was slack and the rates, in the market were declining. According to the Tribunal, although the entries in the account books of the assessee appeared to be all right ostensibly, the assessee could not merely rely on the said entries but had further to show that the transactions as entered in these accounts were true and genuine. Since, in the present case, by reason of its failure to give the addresses of the customers, it had failed to establish adequately the genuineness of the transactions, the Income-tax Officer was right in taking the view that the book results shown by the assessee were not acceptable.

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12 Shree Mangal Jewels Private Limited In the instant case, the assessee has declared the cash sales as its income in the profit and loss account. Hence it is not a case of cash credits, which were not shown as income, in order to attract the provisions of sec.68 of the Act.

“7. We have heard both the parties and perused the material placed on record. In the instant case, the assessee has admitted the receipts as sales and offered for taxation. The assessing officer made the addition u/s 68 as unexplained cash credit of the same amount which was accounted in the books as sales. In this regard, it is worthwhile to look into section 68 which reads as under:

From the perusal of section 68, the sum found credited in the books of accounts for which the assessee offers no explanation, the said sum is deemed to be income of the assessee. In the instant case the assessee had explained the source as sales, produced the sale bills and admitted the same as revenue receipt. The assessee is engaged in the jewellery business and maintaining the regular stock registers. Both the DDIT (Inv.) and the AO have conducted the 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. The assessing officer accepted the sales and the stocks. He 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 paper book clearly shows the reduction of stock position and matching with the sales which goes to say that the cash generated represent the sales. The assessee has furnished the trading

13 Shree Mangal Jewels Private Limited account, P& L account in page No. 7 of paper book 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. Suspicion however strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence.

7.1 In the case of CIT v. Associated Transport (P.) Ltd. [1996] 84 Taxman 146/[1995] 212 ITR 417 (Cal.) the Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, therefore, held that there was no reason to treat this amount as income from undisclosed sources and it was not a fit case for treating the said amount as concealed income of the assessee. The revenue moved to Calcutta High Court against the order of the tribunal and the Hon'ble High Court has confirmed the order of the Tribunal while deleting the penalty, Hon'ble Calcutta high court held as under: "8. The Tribunal was of the view that the assessee had sufficient cash in hand. In the books of account of the assessee, cash balance was usually more than Rs. 81,000. There is no reason to treat this amount as income from undisclosed sources. It is not a fit case for treating the amount of Rs. 81,000 as concealed income of the assessee and consequently imposition of penalty was also not justified in this case."

In the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC), the Hon'ble Apex Court decided the matter in favour of assessee of the ground that it was clear on the record that the assessee maintained the books of accounts according to the mercantile system and there was sufficient cash balance in its cash books and the books of account of the assessee were not challenged by the Assessing officer. If the entries in the books of accounts are genuine and the balance in cash is matching with the books, it can be said that the assessee has explained the nature and source of such deposit.

In the case of Lakshmi Rice Mills v. CIT [1974] 97 ITR 258 (Pat.) Hon'ble Patna High court held as under: "It is, in my view, a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination notes subsequently demonetised and even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within the meaning of the law."

All the decisions cited supra suggest that 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. Hon'ble Delhi High court considered the issue of taxing the opening stocks in the case

14 Shree Mangal Jewels Private Limited of CIT v. Akshit Kumar [2021] 124 taxmann.com 123/277 Taxman 423 (Delhi), and upheld the order of the ITAT in deleting the addition related to sales. The Hon'ble High Court has extracted the relevant part of the order of the ITAT which reads as under:

"17. Thus, in our opinion the sale made by the assessee out of his opening stock cannot be treated as unexplained income to be taxed as 'income from other sources'; firstly, the stock was available with the assessee in his books of account and trading in such stock including purchase, sale, opening and closing stock (quantity wise and value wise) has been accepted by the department year after year and in some years under scrutiny proceedings, therefore, non existence of stock or business cannot be upheld; secondly, the sale of stock in the earlier years and the sale of balance left out stock in subsequent years has been accepted or has not been disturbed, then to hold that no stock was sold in this year and remained with the assessee will be difficult proposition; thirdly, inquiry and inspection by the AO done much after the closure of business may not be persuasive for the past events especially in wake of facts as discussed above; and lastly, once neither any item in the trading account, nor gross profit has been rejected, then one part of credit side of the trading account, that is, sales cannot be discarded completely so as to hold that it is unexplained money."

7.2 In the instant case the assessee has established the sales with the bills and representing outgo of stocks. The sales were duly accounted for in the books of accounts and there were no abnormal profits. In spite of conducting the survey the AO did not find any defects in sales and the stock. Therefore 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 9-11-2016 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 announcement of demonetization through the country.

15 Shree Mangal Jewels Private Limited credits were found, thus, the case law relied upon by the Ld.DR is also distinguishable on the facts of the case. The Ld.DR relied on the decision of P. MohanaKala (supra), Devi Prasad Vishwanath Prasad (supra) both the cases refer to the sums found credited in the books of account but not offered as income, whereas in the instant case the assessee admitted the same as sales and offered for taxation, hence, the case laws has no application in the assessee's case. The Ld.DR also relied on the decision in Naresh Kumar Tulshan (supra), the decision was related to the addition u/s 69A representing huge deposit of cash in bank for which the initial source was declared as past profits and subsequently explained as withdrawal from partnership firm without relevant matching entries in the banks, therefore, the coordinate bench of ITAT held that withdrawal of such huge amount in high denomination was not practicable. The Ld.DR also relied on the decision of J.M.J. Essential Oil Company (supra) in the cited case, the assessee effected large sales in one month of each year continuously for two years and the assessee is eligible for deduction u/s 80IC and the AO observed that the assessee was inflating the sales and claiming the huge deductions. No such cash inflow is involved due to demonetization. Whereas in the assessee's case there were no such deduction or the exempt income and the profits were also not abnormal. The assessee explained the reason for huge sales with evidence and thus the case law relied up on by the DR is distinguishable. The Ld.DR relied on various case laws and all the case laws more or less are related to the additions made u/s 68 as unexplained cash credit and in none of the cases the assessees have admitted the same as income. Therefore, we find that the case laws relied up on by the Ld.DR has no application in the instant case and the same are distinguishable.

9. In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case, we have no hesitation to hold that the cash receipts represent the sales which the assessee has rightly offered for taxation. We have gone through the trading account and find that there was sufficient stock to effect the sales and we do not find any defect in the stock as well as the sales. 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. This view is also supported by the decision of Hon'ble Delhi High Court in the case of Kailash Jewellery House (ITA No.613/20109) and the Hon'ble Gujarat High Court in the case of Vishal Exports Overseas Ltd. (ITA 2471 of 2009), Hence, we do not see any reason to interfere with the order of the Ld. CIT(A) and the same is upheld.”

16 Shree Mangal Jewels Private Limited Taking support of all these decision, the Chandigarh bench of ITAT held as under:- “10.13 In the present case also the cash deposited post demonitisation by the assessee was out of cash sales which had been accepted by the Sales tax/VAT department and not doubted by the AO, there was sufficient stock available with the assessee to make cash sales and there was festive season in the month of October 2016 prior to the making of cash deposit in bank account out of the sales. So respectfully, following aforesaid referred to orders by the various Hon’ble High Courts and the coordinate benches of ITAT, we are of the view that the impugned addition made by the AO and sustained by the Ld CIT(A) was not justified, accordingly the same is deleted.”

Order pronounced in the open court on 11.10.2022.