Loading judgment…
Facts
The assessee, engaged in manufacturing and trading cotton, made a significant cash deposit of Rs. 3,50,10,500 during the demonetisation period. The Assessing Officer treated Rs. 1,56,96,312 of these cash sales as bogus under Section 68 due to alleged discrepancies in cash books, invoices, and lack of complete buyer addresses. However, the CIT(A) deleted the addition, finding that the assessee's explanation of cash sales of 'Khol' (a by-product) was supported by sufficient stock and consistent market rates, as per a remand report.
Held
The Income Tax Appellate Tribunal upheld the CIT(A)'s order, concluding that the cash sales represented a regular business practice of the assessee, backed by proper stock, and no exact discrepancy in the cash book was definitively established. Therefore, the Assessing Officer was not justified in treating the cash sales as bogus.
Key Issues
Whether the Assessing Officer was justified in treating cash sales made during the demonetisation period as bogus and making an addition under Section 68 of the Income Tax Act, despite the assessee's explanation and the CIT(A)'s finding of sufficient stock and regular business practice.
Sections Cited
68, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
O R D E R
PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
This appeal is filed by the Revenue against the order of the National Faceless Appeal Centre, Delhi (in short “the CIT(A)”) dated 14.02.2025 for the Assessment Year (A.Y.) 2017-18.
The brief facts of the case are that the assessee company is running business of manufacturing, pressing and trading of cotton. The return of income for the A.Y. 2017-18 was filed on 07.10.2017 declaring total income of Rs.10,19,670/-. The case was selected for scrutiny under CASS. The Assessing Officer found that the assessee had made cash deposit of Rs.3,50,10,500/- during the demonetisation period from 8th November, 2016 to 30th December, 2016 in specified bank notes. The (Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 2 of 8 Assessing Officer found that the assessee had made cash sales of Rs.156.96 Lakhs during the period from 01.04.2017 to 08.11.2017 whereas cash sales of Rs.69.86 Lakhs only was made in the corresponding period of F.Y. 2016-17. The Assessing Officer was not convinced with the explanation of the cash deposits in the bank account of the assessee. He, therefore, treated the entire cash sales of Rs.1,56,96,312/- as bogus and accordingly made addition under Section 68 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The assessment was completed under Section 143(3) of the Act on 29.12.2019 and on total income of Rs.1,67,15,980/-
Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the addition as made by the Assessing Officer was deleted.
Now the Revenue is in appeal before us. The following grounds have been taken in this appeal: -
(a) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.1,56,96,312/- made by AO on account of excess cash deposit in bank account in SBN Notes treated as unexplained cash credit u/s.68 of the Act despite the fact that: - (i) There were discrepancies in cash book submitted by assessee company during enquiry before investigation wing and during assessment proceeding & various discrepancy were noticed in copy of invoices submitted, weigh bridge receipts and delivery challans etc. during the course of assessment proceedings. (ii) the assessee has failed to provide complete address of the parties to whom goods were sold in cash during the year. (iii) During the course of remand proceedings, the AO has observed that there are discrepancies in closing stock as reported in submission during remand report and details as per audit report & there was a discrepancy in Khol sales/outwards as mentioned in monthly stock movement summary and submission made during remand proceedings.
(Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 3 of 8 (b) The appellant craves leave to add, alter and/or to amend all or any the ground before the final hearing of the appeal.”
Shri Hargovind Singh, the Ld. Sr. DR submitted that there were discrepancies in the cash book submitted by the assessee company during enquiry before the Investigation Wing and during the assessment proceedings and various other discrepancies were also noticed in the copy of invoice, weigh bridge receipts and the delivery challans etc. submitted during the course of assessment proceeding. He further stated that the assessee had failed to provide complete address of the parties to whom goods were sold in cash during the year. Further, in the remand proceedings, the Assessing Officer had pointed out certain discrepancies in the closing stock. Considering these facts, the Ld. CIT(A) was not correct in deleting the addition of Rs.1,56,96,312/- in respect of excess cash deposit in the bank account.
Per contra, Shri Chetan Agarwal, the Ld. AR of the assessee submitted that the assessee has been regularly showing cash sales in all the years and when the Department had accepted the cash sales in the earlier years, it was not correct in rejecting the cash sales in the current year. He further submitted that the cash sales were also corroborated with the stock statement and no discrepancy was found in this regard. Further, that the Ld. CIT(A) had considered all the discrepancies as pointed out by the Assessing Officer and, thereafter, has rightly allowed relief to the assessee. He, therefore, strongly relied on the order of the Ld. CIT(A).
We have carefully considered the rival submissions. The total cash deposit in the bank account of the assessee during the demonetisation period was Rs.3,50,10,500/-, the source of which was explained by the assessee in the course of assessment proceeding. The Assessing Officer (Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 4 of 8 was not convinced with the explanation that there were cash sales of Rs.1,56,96,312/- during the period from 01.04.2016 to 08.11.2016 and he treated the entire cash sales as bogus. We do not find any rationale to treat the entire cash sales of the assessee during this period as bogus. It is not that the assessee had shown cash sales only during the current year. The Assessing Officer had admitted in his order that the cash sales were made in the corresponding period of the preceding year as well. It is true that the cash sales during the year was much higher than the cash sales during the corresponding period of the earlier year. But, this cannot be taken as a basis to disallow the entire cash sales of the current year as bogus. In fact, the total sales of the assessee during the year was also much higher at Rs.91.03 crores as against sales of Rs.59.52 crores only in the preceding year. The Assessing Officer has referred to discrepancies in the cash book submitted by the assessee company during the enquiry before the Investigation Wing and during the assessment proceeding. However, exact difference in the cash book has not been discussed and brought on record. The Assessing Officer should have worked out the exact difference in the two cash books and addition should have been made on that specific basis rather than disallowing the entire cash sales. As regards complete address of the parties to whom goods were sold in cash, as per business practice, such details are normally not maintained and this cannot be adversely considered in the case of the assessee. The Assessing Officer has also pointed out certain discrepancies in the invoices, weigh bridge receipts and delivery challans which have been duly considered by the Ld. CIT(A) in his order. The entire cash sales can’t be held as bogus due to these few discrepancies, even if they existed. Further, the Ld. CIT(A) had also directed the AO, in the remand proceeding, to examine the availability of stock to justify the cash sales (Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 5 of 8 disclosed by the assessee. This exercise was carried out by the Assessing Officer in the course of remand proceedings which was duly considered by the Ld. CIT(A) in his order. The finding given by the Ld. CIT(A) is found to be as under: -
“5. I have carefully reviewed the assessment order, the grounds of appeal, and the written submission of the appellant. Additionally, I have considered the remand report as well as the appellant's submissions before the assessing officer, which are available in the e-proceeding on the e-filing portal/CPC 2.0. 5.1. The appellant submitted that the addition of Rs.1,56,96,312 under section 68 as unexplained cash is essentially cash sales made by the appellant, which is an item on the trading account and not on the balance sheet where section 68 could be applied. The appellant further contended that these cash sales were duly credited in the sales account and included in the profit disclosed by the appellant. Therefore, the same cannot be treated as undisclosed or unexplained income, referring to the decision of the Honourable Delhi High Court in the case of CIT vs Kailash Jewellery House, of 2010. Furthermore, the appellant argued that the assessing officer rejected the audited books of account without providing any reasons based on mere assumptions. It was highlighted that despite rejecting the books of account, the assessing officer accepted the turnover of Rs. 89,46,36,839 and the profit declared by the appellant, hence there is no justification for treating the amount of Rs.1,56,96,312 as unexplained cash credit under section 68 of the Act. 5.2. Regarding the assessing officer's finding of discrepancies between the cashbook submitted on 28/03/2017 during investigation proceedings and during assessment proceedings, the appellant explained that the cashbook submitted during the investigation was preliminary and unaudited. Nevertheless, the assessing officer presumed that the appellant manipulated its cashbook to explain the cash deposits made during demonetization. 5.3. I have carefully reviewed the appellant's submission and the findings of the assessing officer in the assessment order. The dispute in the assessment pertains to the cash sales of Khol, a byproduct in the cotton ginning process used as animal feed, amounting to Rs.1,56,96,312. The assessing officer did not accept the appellant's explanation for discrepancies in the cash book concerning the correction of vehicle numbers in copies of challans and transportation receipts produced for cash sales. However, the key question that remains is whether the appellant had sufficient stock of Khol and whether the sale price was in line with market rates.
(Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 6 of 8 5.4. The assessing officer was requested to inquire into this matter. The remand report indicates that the appellant had a sufficient quantity of Khol for sale, and the appellant's business could produce such a quantity of Khol output from cotton processing. Additionally, the sale prices on the invoices were consistent with market trends. The report also notes discrepancies in the quantum of raw cotton and cotton bales between the appellant's submission before the assessing officer and the audit report. The assessing officer identified a discrepancy in the average purchase price during the financial year 2015-16, finding it below the selling price. However, these discrepancies do not affect the findings regarding Khol output and the sales claimed by the appellant. 5.5. Moreover, I have carefully examined the cash book of the appellant for the financial year 2016-17, relevant to the assessment year 2017-18, as well as the cash book for the financial year 2015-16, and noted that most of the cash sales of Khol occurred in September. There are no discrepancies in the trend of Khol sales between these two years. 5.6. In view of the above, it is noted that the cash sales of khol, which explains the cash deposit of Rs.1,56,96,312, is supported by the fact that the appellant had sufficient stock of khol through purchases and processing by-product output in the ginning process. The rate charged by the appellant was also consistent with market trends. The appellant's claim of additional cash sales of khol during the year under consideration aligns with the previous year's cash sales of the same. 5.7. Further, the enquiry conducted by the investigation and the assessing officer did not bring on record any adverse material to suggest that the cash deposit amounting to Rs.1,56,96,312 remains unexplained. The discrepancies found in the cash book, corrections in the challan, transport receipts, and other discrepancies noted in the remand report might be attributable to human error and do not necessarily make the appellant’s claim of cash sales bogus or fictitious. 5.8. Based on the above, there is merit in the appellant's argument, and the cash deposit of Rs.1,56,96,312 is explained by the entries in the books of account as cash sales of khol. Accordingly, the addition made by the assessing officer is deleted.”
It is found that the Ld. CIT(A) had considered all the discrepancies and the issues flagged by the Assessing Officer and, thereafter, allowed relief to the assessee. The Revenue has been unable to controvert the findings of the Ld. CIT(A). Considering the fact that the cash sales was (Assessment Year: 2017-18) ITO vs. Root & Seed Orqanic Pvt Ltd Page 7 of 8 regular business practice of the assessee which was backed by proper stock and no exact discrepancy in the cash book was pointed out, the Assessing Officer was not correct in treating the cash sales of Rs.156.96 Lakhs during the period prior to demonetization, as bogus. Accordingly, the order of the Ld. CIT(A) deleting the addition of Rs.1,56,96,312/- in respect of bogus cash sales is upheld.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open Court on this 4th July, 2025.