INCOME TAX OFFICER WARD-1(1)(3), AHMEDABAD, INCOME TAX VEJALPUR OFFICE NEAR SACHIN TOWER vs. ARVINDBHAI JEWELLERS PRIVATE LIMITED, OPP LAL BANGLOW AHMEDABAD

2.5 The explanation of the assessee that the higher cash sales were due to Diwali festival and wedding season was not accepted by the Assessing Officer, who observed that the pattern of sales and deposits was highly irregular and inconsistent with normal business practice. According to him, the assessee had inflated cash sales with the motive of explaining unaccounted cash deposits during the demonetisation period. He therefore rejected the books of account under section 145(3) of the Act and held that the cash deposits of Rs.9,37,76,500/- were not supported by genuine sales and represented income from undisclosed sources. The said amount was added under section 68 read with section 115BBE.

2.6 Besides the above, the Assessing Officer also disallowed a sum of Rs.1,92,970/- being personal expenses, as reported in Form 3CD, which according to him was not offered to tax in the return of income. Consequently, the total income was assessed at Rs.9,42,63,970/- as against returned income of Rs.2,94,500/-. The Assessing Officer also initiated penalty proceedings separately under section 271AAC of the Act.

2.7 Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). The assessee contended that the cash deposits during the demonetisation period represented genuine 4 cash sales duly recorded in its books of account. It was submitted that the sales were supported by day-to-day stock register, quantitative tally, and VAT returns, which had been duly accepted by the Department. It was further urged that the Assessing Officer had not pointed out any defect in the maintenance of books or quantitative records and had made the addition merely on the basis of doubts and suspicions regarding the timing and volume of sales. The assessee submitted that rejection of books of account under section 145(3) was not justified when no discrepancy was established in the stock records and when the accounts were duly audited.

2.8 The learned CIT(A), after considering the submissions, examined the material on record and deleted the addition. The relevant para from the order of CIT(A) is reproduced as follows:

5.1.8 The appellant has explained the cash deposits during demonetization as being from cash sales in the preceding months, and such sales are duly recorded in the books and evidenced by sale bills. The appellant has, before the A.O, furnished sales and purchase registers, stock registers, cash book, bank statement, purchase bills, month-wise purchase details, sales bills, monthly VAT returns and explanation for sale during the demonetization period etc and has maintained audited books u/s 44AB, in which no discrepancy has been pointed out by the A.O other than as discussed in the preceding paragraph regarding the details not seen in sale bills/ invoices. Further the appellant’s explanation that higher sales was on account of Diwali season also holds some merit and cannot be dismissed without giving due credence. In such a scenario, the drastic increase in cash sales as compared to the preceding F.Y cannot be the sole basis to reject the appellant’s explanation nor for rejection of books without bringing any concrete facts on record as to the defect in the books or shortcomings in the evidence produced.

In view of the above, I find that the addition u/s 68 made by the A.O and the rejection of books are not justified on the basis of the material evidence and facts on record. Accordingly, the addition of Rs.9,37,76,600/- made u/s 68 is deleted.

1. Whether, on the facts and circumstances of the case and in law, Hon’ble ITAT has erred in deleting the addition of Rs.9,37,76,500/- made u/s 68 of the Act on account of unexplained cash credits, without considering the facts brought out by the Assessing Officer that the assessee had fabricated the books of accounts and has inflated the cash sales to explain the source of unaccounted money deposited during demonetization period? 2. Whether, on the facts and circumstances of the case and in law, Hon’ble ITAT has erred in holding that the rejection of books of accounts by the AO was not in accordance with law, without adequately considering the facts brought out by the Assessing Officer in the assessment order that the AO was not satisfied about the correctness of books of accounts and the rejection of books of accounts was well within the provisions of section 145 of the Income Tax Act? 3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. 2.10 It is observed that in the grounds of appeal reproduced hereinabove, the Revenue has, at certain places, referred to the “Hon’ble ITAT” while challenging the findings of the first appellate authority. On perusal of the context, it is evident that such reference is a typographical error, and the grievance of the Revenue is in fact directed against the order of the learned Commissioner of Income Tax (Appeals). Accordingly, wherever the expression “ITAT” occurs in the grounds, the same shall be read as “CIT(A)”.

4.1 The learned DR then invited our attention to the observations recorded by the Assessing Officer at para 4, page 25 of the assessment order, wherein it was specifically noted that cash sales in the month of October 2016 amounted to Rs.9,78,70,287/-, constituting more than 85% of the total cash sales for the entire year, as against only Rs.48,19,330/- in October 2015. He submitted that this abnormal and sudden increase in cash sales just prior to demonetisation was wholly unsubstantiated and itself established that the assessee had inflated sales to explain unaccounted cash deposits.

4.2 The learned DR further relied on para 7.10 at page 28 of the assessment order to emphasize that the Assessing Officer had found most of the invoices for cash sales to be below Rs.2,00,000/- so as to avoid the requirement of quoting PAN. He argued that these invoices were deficient in all material particulars such as the full name and address of the customers, delivery challans, transport details, and signature of buyers, thereby clearly indicating that the so-called sales were manipulated entries.

4.3 The learned DR also took us through the detailed discussion by the Assessing Officer contained in paras 8 to 8.6 at pages 29 and 30 of the assessment order, where the AO examined the case threadbare. The AO, after analysing the facts, found that the assessee’s explanation of higher sales due to festival season was not acceptable; that despite higher turnover the assessee had declared lower profits, which was commercially illogical; that the sudden surge in October 2016 was inconsistent with past records and unsupported by credible evidence; and that the assessee had failed to produce confirmations of debtors and creditors or furnish supporting documents such as stock registers and transport slips. Ultimately, the AO concluded that the books of account were not reliable and rejected the same under section 145(3), holding that the cash deposits of Rs.9,37,76,500/- represented income from undisclosed sources introduced in the guise of cash sales.

4.4 The learned DR contended that in light of such detailed findings of the Assessing Officer, the order of the learned CIT(A) was wholly unsustainable. He submitted that the CIT(A), while granting relief to the assessee, deleted the addition merely on the basis of brief observations recorded in para 5.1 to 5.18 at pages 42 and 43 of his order, without adequately rebutting or addressing the detailed findings of the AO or without calling for a remand report from the AO.

4.5 According to the learned DR, the CIT(A) accepted the assessee’s version of maintaining stock register and VAT compliance at face value, and simply held that suspicion cannot replace evidence, while ignoring the cogent reasoning advanced by the AO. The learned DR thus urged that the order of the CIT(A) be set aside and the assessment order passed by the AO be restored.

5.1 The learned AR further contended that the rejection of books of account by the AO was made merely on the basis of suspicion that the sales recorded during the month of October 2016 were inflated or fictitious, without pointing out any specific defect in the maintenance of books or the quantitative stock records. He emphasized that the assessee maintained day-to-day stock register and quantitative tally, and that the AO had not brought on record any discrepancy therein.

5.2 Referring to the findings of the learned CIT(A) contained in para 5.1 to 5.18 of his order (pages 42 and 43), the learned AR submitted that the CIT(A) had duly considered the submissions of the assessee and had rightly observed that the cash deposits made during the demonetisation period were in line with the cash sales recorded in the books of account; that no defects were pointed out in the stock register; and that VAT returns duly corroborated the sales declared. He argued that the CIT(A) was correct in holding that suspicion, however strong, cannot take the place of evidence, and therefore the addition made by the AO was not sustainable. 5.3 The learned AR, while supporting the order of the learned CIT(A), submitted that the issue in dispute is squarely covered by several 9 decisions of the Coordinate Benches. The AR placed reliance on the decisions in Kshetrapal Gold Pvt. Ltd. vs. ITO (ITA No. 105/Ahd/2024, order dated 22.10.2024), DCIT vs. Damodardas Mohanlal Chokshi (ITA No. 554/Ahd/2023, order dated 01.01.2025), ACIT vs. Radhika Jewellers (ITA No. 201/Ahd/2023, order dated 13.06.2024) and G.S. Bullion vs. ACIT (ITA Nos. 76 & 107/Ahd/2021, order dated 08.03.2024).

6.1 At the outset, we note that the assessee, in the course of assessment and appellate proceedings, had specifically placed before the CIT(A) all details of sales, purchases, stock registers, VAT returns and audited accounts. The assessee also highlighted that quantitative details of stock as appearing in Form 3CD, at page 44 of the paper book, clearly demonstrate availability of stock for effecting sales. This quantitative tally has not been doubted by the Assessing Officer at any stage. The AO has merely reproduced the comment of the auditor from Form 3CD without bringing any contrary evidence on record. Thus, the very foundation of rejection of books was based on suspicion and surmise, rather than on identification of any defect in quantitative records.

6.2 The learned CIT(A), after examining the submissions and evidences, recorded detailed findings in para 5.1 onwards of his order. In particular, the following observations are noteworthy:

5.1.6 On due consideration of the facts on record, the A.O’s observations in the assessment order as well as the appellant’s submissions, it is noted that the A.O had rejected the appellant’s books under Section 145 stating that there were defects and discrepancies in books of account. However, no specific observations have been brought on record in the assessment order as to what these defects and discrepancies are. It is appreciated that there was abnormal increase in the cash sales made by the appellant especially in the month of October 2016 (as compared to the preceding F.Y) which accounted for the substantial cash deposits during demonetization. However, as seen from the record, the appellant has produced all the documentary evidence called for including ITRs, Tax audit reports, monthly sales and purchase details, stock register and invoices/ sale bills etc.

5.1.7 The only specific defect in the evidence produced by the appellant seen discussed in the assessment order is as under:” On perusal of the duplicate invoices submitted by the assessee, it is noticed that the assessee has raised all the invoices mentioned only name of the buyers. The assessee has not mentioned any details regarding the quality of goods, counter signature of the buyer, proof of cash receipt etc. The assessee has submitted random invoices of purchases/sales, without any delivery note, Mode/terms of payment, order No. date/terms of delivery etc. vide reply dated 24-12-2019. Hence, the assessee company failed to establish any authentic documentary evidence regarding cash deposit made during the demonetization period.”

It is noted that the details stated by the A.O to be missing from the sale bills/invoices such as counter signature of buyer, quality of goods, delivery note etc., are not details that are mandated to be recorded in a sale bill, and the absence of such details cannot be the reason to reject such evidence unless it is brought on record that the details are false or incorrect, which is not the case.

6.13 We find ourselves in agreement with the above reasoning of the learned CIT(A). The rejection of books of account under section 145(3) is permissible only when the AO demonstrates defects or discrepancies rendering the accounts unreliable.

11 6.14 In our considered view, the rejection of books of account under section 145(3) is permissible only where the Assessing Officer records dissatisfaction with reference to the correctness or completeness of the accounts, or where the method of accounting has not been regularly followed, or income is not computed in accordance with notified standards. The power cannot be exercised in a subjective or whimsical manner, as serious consequences follow once books are rejected and assessment is made to the best of judgment. For such rejection, it is incumbent on the Assessing Officer to point out patent, latent or glaring defects in the books, such as omission of transactions, absence of supporting vouchers, lacunae in the system of accounting, unverified stock, bogus purchases or other material discrepancies. In the present case, however, no such defect has been pointed out. The Assessing Officer has merely proceeded on the basis of comparative financial data of the current year and the preceding year, and on the abnormality of cash sales prior to demonetisation, to presume that the sales were inflated to justify the cash deposits. All the books of account, vouchers and stock register were produced before him, and not a single entry or transaction has been shown to be incorrect. The assessee also demonstrated that sales were backed by corresponding purchases and supported by quantitative stock records. Yet, instead of identifying defects, the Assessing Officer proceeded purely on surmise and conjecture.

6.14 These observations are fortified by the fact that the quantitative stock details, as reflected in Form 3CD at page 44 of the paper book, clearly demonstrate availability of stock with the assessee, which has not been disputed by the Assessing Officer at any stage. The AO has only reproduced the auditor’s comment from the tax audit report in his order without undertaking any independent verification. Thus, the 12 rejection of books and the consequential addition rest solely on suspicion. It is a settled principle that suspicion, however strong, cannot take the place of evidence. In absence of any defect in the books or quantitative records, the action of the AO cannot be upheld. We find that similar findings have been recorded by the Coordinate Bench in Kshetrapal Gold Pvt. Ltd. vs ITO (ITA No. 105/Ahd/2024, order dated 22.10.2024), wherein it was held that books of account cannot be rejected unless patent defects are demonstrated and that mere financial analysis and presumptions regarding abnormality in cash sales do not justify rejection of books or addition of cash deposits as unexplained.

6.15 In the light of the foregoing discussion, we find that the learned CIT(A) has examined the matter in detail and has recorded categorical findings that the Assessing Officer has not pointed out any specific defect in the books of account or in the quantitative stock records, and that the entire addition has been made merely on suspicion arising from the abnormal increase in cash sales. The assessee had placed all relevant evidences including audited accounts, quantitative stock registers and VAT returns, which have not been found defective by the AO. The quantitative stock position reflected in Form 3CD at page 44 of the paper book further corroborates the genuineness of sales and availability of stock. The observations of the learned CIT(A) in para 5.1.6 to 5.1.8 of his order are well reasoned, and we concur with the same. It is also settled law, as consistently held by the coordinate benches including in Kshetrapal Gold Pvt. Ltd. vs. ITO (ITA No. 105/Ahd/2024, order dated 22.10.2024), that books of account cannot be rejected unless specific and glaring defects are established, and that mere financial analysis or presumption of abnormal sales cannot justify an addition under section 68. We therefore see no

Order pronounced in the Court on 13th October, 2025 at Ahmedabad.