THE ITO, WARD-1(1)(1), AHMEDABAD vs. M/S. ADINATH ORNAMENTS PVT. LTD., AHMEDABAD

This appeal by the Revenue is directed against the order dated 21.10.2022 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], for the Assessment Year 2017–18, arising from the assessment order dated 30.12.2019 framed under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] by the Income Tax Officer, Ward 1(1)(1), Ahmedabad [hereinafter referred to as “AO”] ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 2 Facts of the Case: 2. The assessee is a private limited company engaged in the business of trading in gold, diamond and jewellery. It filed its return of income on 27.10.2017 declaring a loss of Rs. 31,402/-. The assessee's case was selected under CASS for the reason that “abnormal cash deposits during the demonetisation period” were reported. As per the information available to the AO, the assessee had deposited an amount of Rs. 2,32,00,000/- in cash into its bank account during the window permitted for SBN deposits. This deposit was found to be disproportionately high when compared with cash transactions and bank activity in the preceding periods, thereby triggering scrutiny. The AO, in the assessment order, observed that during the demonetisation period, many assessees across the country adopted certain common methods to bring unaccounted money into the books of account by showing Bogus cash sales, allegedly made in the days or weeks preceding demonetisation; Cash advances or loans from untraceable persons; Suppressed or back-dated entries in books to justify sudden cash availability; showing recycling of earlier bank withdrawals, with no credible explanation as to how the funds were kept in custody for several months. In the present case, the assessee claimed that the cash deposits were sourced from:

Rs.1.20 crore withdrawn from bank in July 2016, which was  purportedly retained in cash and deposited back during demonetisation, and Cash sales aggregating Rs.1.12 crore in October 2016, which were said  to have been received from identifiable buyers. The AO questioned the credibility of both sources, noting that the cash withdrawal had occurred nearly four months before the date of deposit, with no reasonable explanation as to why such large cash was retained. Further, ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 3 the alleged cash sales were claimed to have occurred almost entirely within a span of two days, and no supporting evidence in the nature of buyer details, delivery challans, or confirmations was furnished. The AO formed the view that the assessee had accommodated unaccounted income under the guise of cash sales and earlier withdrawals and proceeded to treat the cash deposit of Rs. 2.32 crores as unexplained cash credit under section 68, taxable under section 115BBE. The books of account were also rejected under section 145(3), and GP was estimated on a higher rate, resulting in an additional addition of Rs. 4,51,379/-. Further, disallowance of Rs. 2,10,430/-was made under section 40A(3) in respect of cash labour payments exceeding the prescribed limit.

3. Aggrieved by the additions made, the assessee carried the matter in appeal before the CIT(A). The Learned CIT(A) partly allowed the appeal. The addition of Rs. 2,32,00,000/- u/s 68 was deleted. The CIT(A) observed that the assessee had explained the source of cash deposits by pointing to cash withdrawals from its bank account and cash sales duly recorded in the books. The AO had not brought any material to establish that the deposits were from undisclosed sources. The rejection of books u/s 145(3) and estimation of GP were held to be unjustified. The CIT(A) held that books were audited, maintained regularly, and no specific defect was pointed out. The addition of Rs.4,51,379/- on account of GP difference was accordingly deleted. The disallowance of Rs. 2,10,430/- u/s 40A(3) was sustained, as the assessee failed to provide a breakup or documentary evidence to show that cash payments were made in compliance with the monetary limits prescribed.

4. The Revenue has preferred this appeal against the relief granted by the CIT(A) and has raised the following grounds:

ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 4 1. Whether the CIT(A) has erred in facts and law in deleting the addition made u/s 68 rws 115BBE of Rs.2,32,00,000/- without appreciating the facts of the case.

5. During the course of hearing before us the Departmental Representative (DR) strongly opposed the order passed by the learned CIT(A) and submitted that the learned CIT(A) has erred both on facts and in law in deleting the addition of Rs. 2,32,00,000/- made under section 68 read with section 115BBE of the Act and further erred in deleting the addition of Rs. 4,51,379/- made on account of low gross profit. The DR submitted that the AO had carried out detailed examination and brought on record significant abnormalities in the books of account of the assessee, including— but not limited to—the following:

- No cash sales were reported by the assessee during the Financial Years 2015-16 and 2016-17 up to the month of September 2016, which clearly reflects that the business of the assessee was not generating cash sales in the normal course of its operations. However, the assessee suddenly claimed cash sales of Rs. 1,12,43,647/- in the month of October 2016 alone—just days before demonetisation was announced. This, according to the AO, created a strong suspicion and pointed towards manipulation in the books to justify subsequent cash deposits during the demonetisation period. - The assessee had shown withdrawal of Rs. 1,20,00,000/- from the bank, which remained unutilised for business purposes for over four months. The same amount was later deposited during the demonetisation window. The AO had rightly questioned why the said cash was withdrawn if there was no corresponding expenditure, and why it was not used for unregistered (URD) purchases made in the same month of July. This contradicted normal business behaviour and was a pointer towards accommodation entries or colourable device to explain cash deposit.

ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 5 5.1 It was further submitted that despite repeated opportunities, the assessee did not furnish complete and verifiable evidence during the assessment. The AO, therefore, rightly proceeded under section 68 to treat the cash deposits as unexplained. The DR contended that the learned CIT(A) not only failed to appreciate the findings of the AO but also accepted fresh evidence submitted by the assessee without calling for a remand report or independent verification from the AO, which was a serious lapse in appellate adjudication. The DR also emphasized that instead of verifying the core issues raised by the AO—including the nature of sales, genuineness of cash transactions, and conduct of the assessee during the demonetisation period— the learned CIT(A) devoted his efforts to finding procedural or factual lapses in the assessment order and held the AO to be at fault. No independent enquiry or investigation has been carried out by the CIT(A), especially regarding the so-called identifiable persons from whom the cash of ₹1.12 crores was claimed to have been received. Therefore, the DR submitted that the learned CIT(A) has erred in law and facts by setting aside the additions made by the AO without proper enquiry, and hence, the matter deserves to be restored to the file of the AO for fresh verification and adjudication in accordance with law, especially in light of the sensitive context of demonetisation and the cash deposits made during that period.

ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 6 were already submitted during the course of assessment proceedings and form part of the assessee’s paper book filed before the lower authorities. The AR took the Bench through the paper book and pointed out specific submissions and documentary evidence filed before the AO, including:

Ledger account of Ratnakar Bank Ltd. from which cash withdrawals were made.  Details of cash deposits during the demonetisation period.  Monthly stock statement showing description of goods, quantity, rate, and value.  Copy of VAT returns.  Purchase register with quantity-wise details.  Cash book and bank book.  6.1 In particular, the AR addressed the specific allegation raised by the DR regarding unregistered (URD) purchases in the month of July. It was clarified that the URD purchases were made during July, and the payments for the same were not made in cash but through banking channels. The AR demonstrated this by referring to the purchase register, bank book, and bank statement for July, all of which were already part of the record before the AO and were duly considered by the CIT(A). With respect to the availability of cash, the AR submitted that the cash book showing the cash balance position was submitted to the AO. The AR asserted that despite being in possession of the cash book, the AO had not raised any specific defect or discrepancy therein and had proceeded to reject the books without detailed analysis or confrontation. The AR further submitted that the stock records clearly showed that the assessee had sufficient stock available with it, and the claim of cash sales was duly supported by stock movement and purchase history. The AO’s rejection of books was, therefore, arbitrary and without cogent reasoning. On the legal aspect, the AR placed strong reliance on the reasoned ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 7 findings of the CIT(A), who had meticulously considered the facts and documentary evidence on record and also placed reliance on various judicial precedents. The AR submitted that the CIT(A) had taken a plausible and judicially tenable view based on the documentary evidence and the AO had proceeded on assumptions and generalised inferences without linking the same with specific discrepancies in the books.

6.2 The AR placed reliance on following decisions of Co-ordinate Bench: - Hinima Atul Shah Vs. ITO (ITA No. 933/Ahd/2023) The ACIT, Circle -1(1)(1), Vadodara Vs. Radhika Jewellers (ITA No. 201/Ahd/2023) - Dipal Balubhai Patel (HUF) Vs. ITO (ITA No. 942/Ahd/2023) - - ITO Vs. Bela Kirtikumar Nahata (ITA No. 882/Ahd/2024)

7.1 The principal dispute concerns the cash deposits of Rs. 2.32 crores made by the assessee during the demonetisation period, which the Assessing Officer treated as unexplained under section 68 of the Act. The AO was of the view that the cash withdrawals of Rs.1.20 crores from the bank made in July 2016 were not credibly explained and that the cash sales of Rs.1.12 crores in October 2016 appeared to be a post-facto justification. The learned CIT(A), however, examined the entire record and found that the assessee had explained the deposits through two sources: (i) cash withdrawn from bank in July 2016, and (ii) cash sales of gold ornaments during October 2016. The explanation was backed by entries in the cash book, ledger accounts of Ratnakar Bank, VAT returns, purchase register with quantity details, and ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 8 stock statements. It was further demonstrated by the AR that URD purchases made in July 2016 were paid through banking channels, and not from the withdrawn cash, which remained available in hand until redeposit. No adverse finding was recorded by the AO on the assessee's cash book, which showed adequate cash balance. The AO failed to point out any defect in the books of account or contradictions in the documentary record.

7.2 The Revenue contended that the CIT(A) failed to call for a remand report, and that the CIT(A) had simply faulted the AO without verifying the assessee’s evidence. However, the AR clarified that no new evidence was filed at the appellate stage, and all documents relied upon by the CIT(A) were already filed before the AO. The contention of fresh evidence, thus, stands factually incorrect.

7.3 In our considered view, where the documents and evidence were already on record and considered by the AO, the CIT(A) was not obligated to call for a remand report. Once the assessee provides a satisfactory explanation of the source of cash deposit supported by books and evidence, the burden shifts to the AO to disprove the same, which the AO has failed to do in this case.

7.4 The AO rejected the assessee’s books of account under section 145(3) of the Act and estimated the Gross Profit at 0.36% based on the succeeding year, as against 0.13% declared by the assessee. The CIT(A), however, held that the books were audited and regularly maintained, there was no finding of suppression of sales or inflation of purchases, no discrepancy in stock, cash book, or purchase register was pointed out and a mere fall in GP ratio, 7.5 We also observe that the AO, while suspecting the genuineness of cash deposits, failed to make any enquiries from the buyers named in the sales bills, did not call for cross-verification from Anmol Traders or examine the consistency of books with VAT returns. The principles of natural justice and burden of proof require the AO to conduct such verification before drawing adverse inference. Where no contradiction in books is found and cash sales are substantiated by quantity records and statutory filings, the addition under section 68 cannot be sustained.

7.6 Upon a comprehensive review of the judicial precedents and factual matrix, we observe that the burden of proof under section 68 was satisfactorily discharged by the assessee. The cash book, purchase register, stock details, and VAT returns were produced and formed part of the assessment record. The AO did not make any independent enquiry, did not call for cross-verification of sales, and did not find any contradiction in the stock position or method of accounting. The CIT(A) rightly relied on existing records, and did not admit or rely upon any fresh evidence. The allegation regarding URD purchases was adequately addressed with purchase register and bank statement showing payment through banking channels in July 2016, much before demonetization period. The additions made by the AO were based on presumption and suspicion and not supported by evidence. The judicial precedents collectively support the proposition that where the assessee has explained the source of cash deposits with reference to books of account and supporting documentation, and no defect or adverse finding is recorded by the AO, no addition under section 68 can be sustained.

ITO vs. M/s. Adinath Ornaments Pvt. Ltd. Asst. Year : 2017-18 10 7.7 In light of the consistent judicial view of the coordinate Benches, we find no legal or factual infirmity in the order passed by the CIT(A). We find no merit in the grounds raised by the Revenue.

Order pronounced in the Open Court on 9th April, 2025 at Ahmedabad.