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Facts
The Assessing Officer (AO) added Rs. 5,61,85,000/- to the assessee's income under Section 69A of the Income Tax Act, 1961, treating cash deposits as unexplained money. The assessee, a gold and diamond jewellery trader, claimed these deposits represented cash sales made on November 8, 2016, the day of demonetization.
Held
The Commissioner of Income Tax (Appeals) deleted the addition, holding that the cash sales were duly recorded in the assessee's books, supported by documentation, and therefore, Section 69A could not be invoked. The Tribunal upheld the CIT(A)'s order, finding that the AO failed to provide substantive evidence to disprove the genuineness of the sales and relied on suspicion rather than facts.
Key Issues
Whether the cash deposits made by the assessee from alleged cash sales on the demonetization date could be treated as unexplained income under Section 69A of the Income Tax Act, 1961, despite being recorded in the books of account.
Sections Cited
69A, 143(1), 143(2), 142(1), 271AAC, 145(3), 68
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
O R D E R
PER MAKARAND V. MAHADEOKAR, AM:
This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the CIT(A)”], dated 06.12.2023, for the Assessment Year (AY) 2017-18, whereby the CIT(A) deleted the addition of Rs.5,61,85,000/- made by the Assessing Officer (AO) under Section 69A of the Income Tax Act, 1961 [hereinafter referred to as “the Act”]. Asst.CIT vs. Jewel World Asst. Year : 2017-18 2 Facts of the case:
The assessee is a partnership-firm engaged in the business of trading gold and diamond jewellery. The assessee filed its return of income on 08.08.2017, declaring an income of Rs.42,67,860/-, which was processed under Section 143(1) of the Act. The case was selected for complete scrutiny under CASS, and notices under Sections 143(2) and 142(1) of the Act were issued. During the assessment proceedings, the AO observed that the assessee deposited Rs.5,61,85,000/- in cash into its bank account during the demonetization period (November 2016). The assessee claimed the deposits represented cash sales, primarily on 08.11.2016, the day demonetization was announced.
The AO observed that the assessee recorded more than 350 cash sales on 08.11.2016, with each transaction ranging between Rs.1.75 lakh and Rs.1.99 lakh. The structured nature of these transactions, where all sales were below the PAN disclosure threshold of Rs.2 lakh, was found to be highly suspicious. The AO noted that there is no instance of sale in cash after 08.11.2016, making it unusual that such a high volume of cash sales occurred on a single day. Further, the assessee failed to provide any details of the buyers, such as names, addresses, or PANs, despite being specifically asked to furnish them. Based on these observations, the AO issued a Show Cause Notice on 23.12.2019, requiring the assessee to substantiate the source of cash deposits. The assessee requested an adjournment until 27.12.2019 but failed to submit any explanation or additional documents before the finalization of the assessment order. The AO applied the principle of human probability, as laid down by the Hon’ble Supreme Court in the case of Sumati Dayal v. CIT (214 Asst.CIT vs. Jewel World Asst. Year : 2017-18 3 ITR 801), where it was held that the apparent must be considered real until the contrary is proved, and tax authorities are entitled to look beyond the apparent transactions to examine their real nature. Applying this principle, the AO concluded that the assessee’s explanation was not genuine. The AO found the transactions suspicious and treated the deposits as unexplained money under Section 69A of the Act. Consequently, an addition of Rs.5,61,85,000/- was made, and penalty proceedings under Section 271AAC of the Act were initiated.
Aggrieved, the assessee filed an appeal before the CIT(A), who deleted the entire addition. Before the CIT(A) the assessee highlighted that during the year under consideration, it achieved gross turnover of Rs.45,91,62,952/-, with a Gross Profit (G.P.) margin of 9.99%, which was higher than the G.P. margin of 8.92% in the preceding year. The assessee contended that the entire cash deposits of Rs.5,61,85,000/- were from legitimate cash sales made on 08.11.2016, the day demonetization was announced. The assessee submitted that on 08.11.2016, following the announcement of demonetization, a large number of customers rushed to its two jewellery showrooms from 8:30 PM onwards to purchase gold jewellery using their demonetized currency notes, which remained valid until midnight. The assessee explained that due to the overwhelming crowd, both showrooms operated at full capacity, with all staff and additional helpers managing the influx of customers. The assessee emphasized that there was no space to stand in the shop, as people were eager to buy jewellery before the deadline. Since a large number of customers entered the showroom within a short span of 4 to 5 hours, the assessee made necessary arrangements to attend to them efficiently. Given the urgency of the situation, many customers purchased jewellery below Rs.2,00,000/- to Asst.CIT vs. Jewel World Asst. Year : 2017-18 avoid PAN disclosure requirements. The assessee further submitted that due to the rush, additional details which were not mandatory, such as PAN and addresses, could not be recorded. However, all sales were duly recorded in the books of account and offered as revenue in the return of income. The assessee also submitted that the AO, while doubting the genuineness of the sales, made presumptive observations in the assessment order, particularly regarding the feasibility of conducting 350 sales transactions within 3.5 hours. The AO’s assumption that each jewellery purchase would take approximately 45 minutes per customer was arbitrary and unrealistic, as the customers were already prepared to make quick purchases, selecting available items within minutes. The assessee strongly refuted the AO’s conclusion that it was "humanly impossible" to conduct such a volume of sales within the given timeframe. The assessee submitted that both showrooms were operational until midnight, with full staff and additional family members assisting in sales transactions. Customers were aware of the PAN threshold limit and structured their purchases, accordingly, limiting their individual purchases below Rs.2 lakh. Customers were not allowed to remain in the shop for more than ten minutes, ensuring quick transactions and immediate billing. The surge in sales on the night of demonetization was a nationwide phenomenon, as reported by multiple media sources. To substantiate this claim, the assessee referred to media reports, including an article published by The Economic Times, which stated that jewellers in Mumbai alone sold approximately 15 tonnes of gold ornaments and bars worth around Rs.5,000 crores on the night of demonetization. Similar reports indicated that jewellery stores across India experienced an unprecedented rush, as people attempted to convert their demonetized currency into gold before the deadline. The assessee submitted that it had sufficient stock Asst.CIT vs. Jewel World Asst. Year : 2017-18 available to support the cash sales made on 08.11.2016 and subsequent cash deposits in the bank. It was argued that out of a total stock of approximately 78 kgs of jewellery available on that day, only about 13 kgs was sold. This demonstrated that the sales were made out of existing stock and not from new purchases. The assessee also provided detailed stock records. The assessee stated that when the assessing officer has not doubted the genuineness of purchases or opening stock and has not rejected the books of accounts u/s.145(3) of the Act, then the assessing officer cannot deny the source of cash deposit out of cash sales and thus he cannot make any addition. The CIT(A) examined the legal provisions of Section 69A of the Act, which states that if money, bullion, jewellery, or valuable articles are not recorded in the books of account, and the assessee fails to explain their source satisfactorily, such amounts can be treated as income. The CIT(A) noted that for an addition to be made under Section 69A of the Act, the cash must be unrecorded in the books of account. The CIT(A) critically examined the AO’s assumptions regarding the feasibility of conducting 350 transactions in 3.5 hours. Based on the arguments of assessee as detailed above, the CIT(A) found the AO’s estimation of time constraints to be speculative and without factual basis. The CIT(A) also noted that the AO had not rejected the books of accounts under Section 145(3) of the Act nor pointed out any defects in stock registers, VAT returns, or financial statements. The AO had not conducted independent inquiries or summoned any customers to disprove the sales. Instead, the AO relied solely on assumptions and suspicions, which cannot form the basis for an addition under Section 69A of the Act. The CIT(A) also noted that when an assessee provides supporting documents, the burden shifts to the AO to disprove them through independent inquiry. Since the AO had failed to do so, the addition was not sustainable. Asst.CIT vs. Jewel World Asst. Year : 2017-18 4.1. The CIT(A) relied on various judicial precedents, including - - ACIT v. Hirapanna Jewellers (ITAT Vishakhapatnam, where it was held that once cash sales are recorded in books, they cannot be treated as unexplained income under Section 68 or 69A of the Act. - DCIT v. Bawa Jewellers Pvt. Ltd. (ITAT Delhi), where it was held that if purchases are accepted, corresponding sales must also be accepted unless proved otherwise. - CIT v. Associated Transport (P.) Ltd. [1996] 84 Taxman 146 (Cal.), where it was held that cash balances recorded in books cannot be treated as undisclosed income under Section 69A of the Act. - Lakshmi Rice Mills v. CIT [1974] 97 ITR 258 (Pat.), where it was held that when books of accounts are not rejected, and cash deposits align with business operations, they cannot be treated as unexplained money.
4.2. These rulings reaffirmed that cash sales cannot be disbelieved without proper evidence.
4.3. The CIT(A) observed that the AO’s approach effectively resulted in double taxation, as the sales were already offered to tax in the Profit & Loss Account. Taxing the same amount again under Section 69A of the Act would lead to unjust enrichment of the Revenue and violate the principles of fair taxation. The CIT(A) referred to the decision of Indore Bench in the case of Dewas Soya Ltd. v. ITO (ITA No.336/Ind/2012), where it was held that an addition leading to double taxation must be deleted. Asst.CIT vs. Jewel World Asst. Year : 2017-18
Aggrieved by the order of CIT(A), the Revenue preferred an appeal before us with following grounds of appeal:
1. Whether the CIT(A) has justified in law and on facts in deleting addition of Rs.5,61,85,000/- made u/s 69A of the IT Act without considering the facts of the case? 2. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 3. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored.
During the course of hearing before us, the Departmental Representative (DR) contended that the CIT(A) had erred in deleting the addition without properly appreciating the inadequacies in the assessee’s records and the lack of a thorough investigation into the genuineness of the cash sales. The DR first pointed out deficiencies in the invoices submitted by the assessee before the AO. It was argued that the invoices did not contain crucial details such as PAN, addresses, or identities of the customers, making it impossible to verify the transactions. The DR emphasized that all the invoices were structured in a manner where each transaction remained below Rs.2 lakh, thereby avoiding the mandatory PAN disclosure requirement. This pattern of transactions was highly suspicious and indicated an attempt to introduce unaccounted cash into the banking system under the guise of sales. The absence of a detailed stock register was another major issue raised by the DR. It was submitted that the assessee failed to maintain an itemized stock register, which made it impossible for the AO to verify whether the alleged sales actually occurred from the available stock. The specific details of stock items valued at less than Rs.2 lakh were also missing, preventing any effective Asst.CIT vs. Jewel World Asst. Year : 2017-18 reconciliation between stock movement and recorded sales. The DR argued that in the absence of a proper inventory record, the entire cash sales claim was unverifiable and unreliable. The DR further criticized the approach taken by the CIT(A) in deleting the addition, arguing that the CIT(A) failed to consider the AO’s findings and unexplained aspects of the assessee’s books of accounts, yet the CIT(A) did not record any independent findings on these issues. Instead, the CIT(A) merely relied on the fact that the cash sales were recorded in the books, without considering whether these entries actually reflected genuine transactions or were merely made to justify the cash deposits. The DR submitted that recording a transaction in the books does not automatically establish its authenticity, especially in cases involving large unexplained cash deposits during the demonetization period. To strengthen the Revenue’s case, the DR relied on the judgment of the Hon’ble Punjab & Haryana High Court in the case of Namdeo Arora (389 ITR 434), where the assessee failed to provide credible evidence to substantiate a loan of Rs.30 lakh, allegedly received from a third party. The High Court upheld the addition made under Section 69A of the Act, holding that the assessee had not discharged the burden of proving the source of funds and that the addition was justified, regardless of whether the AO had inadvertently mentioned Section 68 instead of 69A of the Act. The DR argued that the AO was justified in making an addition under Section 69A of the Act since the genuineness of the cash sales was highly doubtful. Further, even if the ITAT found that Section 69A of the Act was not applicable, the addition could alternatively be sustained under Section 68 of the Act, as the assessee failed to substantiate the identity and financial capacity of the customers who allegedly made these purchases in cash. The DR also sought to distinguish the judicial precedents relied upon by the CIT(A). It was contended that those Asst.CIT vs. Jewel World Asst. Year : 2017-18 cases were not comparable to the present one, as they did not involve cash deposits made during the demonetization period. Moreover, in those cases, the issue of missing itemized stock registers was not a point of contention, whereas in the present case, the absence of proper inventory records was a key concern. The DR argued that the CIT(A) erred in applying these decisions without considering the unique facts of the assessee’s case, where cash transactions were unusually structured, and proper stock reconciliation was absent. The DR contended that the CIT(A) failed to address the inadequate investigation conducted by the AO and overlooked key discrepancies in the assessee’s records. Given the serious concerns regarding the genuineness of cash sales, the deletion of the addition was unjustified, and the AO’s findings should be upheld.
In response to the arguments presented by the DR, the Authorized Representative (AR) of the assessee strongly defended the order of the CIT(A) and provided a detailed rebuttal to the Revenue’s contentions. The AR argued that the CIT(A) had rightly deleted the addition of Rs.5,61,85,000/- made under Section 69A of the Act, as the assessee had duly recorded the transactions in its books, furnished all necessary evidence, and complied with tax regulations.
7.1. The AR first challenged the DR’s arguments, stating that they were not based on the AO’s assessment order. It was contended that none of the issues raised by the DR, including the alleged non-maintenance of stock registers and the structuring of invoices to avoid PAN disclosure, were part of the findings in the AO’s order. Instead, the DR’s arguments were based on presumptions rather than actual findings recorded in the assessment Asst.CIT vs. Jewel World Asst. Year : 2017-18 proceedings. The AR asserted that the Revenue could not introduce new arguments at the appellate stage that were never part of the AO’s reasoning for making the addition.
7.2. The AR then addressed the AO’s presumption that completing over 350 sales transactions between 8:30 PM and midnight on 08.11.2016 was humanly impossible. It was argued that the AO had failed to appreciate the ground reality of how businesses, particularly jewellery shops, operated during the demonetization period. The assessee had two shops, not one, and both showrooms were operational till midnight. Due to the unprecedented rush of customers, all staff members were engaged in sales, and relatives were also assisting in managing the crowd and processing transactions efficiently. These facts were communicated to the AO during the assessment proceedings, but the AO failed to give due consideration to this aspect and arbitrarily concluded that the sales were fictitious.
7.3. With respect to the DR’s contention regarding the non-maintenance of a stock register, the AR categorically stated that the assessee had duly maintained a stock register and submitted it to the AO for verification. The stock details were also reported by the auditor in Annexure to Form 3CD (Tax Audit Report), and no discrepancies were pointed out in the audit findings. Therefore, the AO’s assertion that stock records were unavailable was factually incorrect and was merely an attempt to cast doubt on the genuineness of the sales without conducting any independent verification. The AR further submitted that the assessee had furnished all necessary documents to the AO to substantiate the genuineness of the cash deposits, including: Asst.CIT vs. Jewel World Asst. Year : 2017-18 11 • Stock-in-hand details as of 08.11.2016, demonstrating that there was sufficient inventory to support the sales. • Breakdown of stock movement, proving that the sales were backed by actual inventory and not fictitious transactions. • Increase in sales and resultant gross profit margin, which was higher than the previous year, reinforcing the commercial plausibility of the transactions. • Cash book reflecting cash sales, which fully reconciled with the bank deposits. • VAT returns disclosing the entire sales turnover, which were duly accepted by the Sales Tax Department without any adverse remarks.
7.4. The AR also highlighted that the AO did not reject the books of accounts under Section 145(3) of the Act, meaning that the sales recorded in the books were never formally disputed. Additionally, the AO accepted the purchases made by the assessee, which implied that the corresponding sales could not be arbitrarily disregarded. It was argued that once the books of accounts were not rejected and the purchases were accepted, the sales recorded therein had to be considered as genuine unless conclusively disproven by the Revenue.
7.5. Defending the CIT(A)’s order, the AR submitted that the CIT(A) had examined all relevant facts, considered the AO’s findings in detail, and passed a well-reasoned order deleting the addition. The CIT(A) had given a categorical finding that the cash deposits were duly recorded as sales in the books and that once an entry is recorded in the books, it cannot be treated as unexplained money under Section 69A of the Act. The Revenue failed to provide any contrary evidence to rebut this finding, making the AO’s addition unsustainable. Asst.CIT vs. Jewel World Asst. Year : 2017-18 7.6. The AR further relied on the decision of the coordinate bench in the case of LKS Bullion (imports and Exports) Pvt. Ltd. (ITA No.382/Ahd/2022), where the Co-ordinate Bench ruled in favour of the assessee in a similar case involving cash deposits from jewellery sales during demonetization. In that case, the Bench held that when sales are recorded in books and reflected in tax returns, the AO cannot arbitrarily treat cash deposits as unexplained income. The AR emphasized that the present case was on similar footing, and the same principle should apply.
7.7. In conclusion, the AR contended that the Revenue’s appeal lacked merit, as the AO’s addition was based purely on suspicion and conjecture rather than any tangible evidence.
After considering the submissions of both parties, the findings of the AO, the decision of the CIT(A), and the judicial precedents cited, we note that the Revenue has challenged the deletion of the addition of Rs.5,61,85,000/- made under Section 69A of the Act by the CIT(A), contending that the cash deposits made by the assessee during demonetization were unexplained and not supported by genuine sales transactions. The DR argued that the assessee failed to provide sufficient details to establish the authenticity of sales, particularly pointing out that the invoices did not contain buyer details such as PAN and addresses. The DR further contended that the assessee structured all transactions below Rs.2 lakh to avoid mandatory PAN disclosure and that this raised serious doubts about the genuineness of the claimed sales. However, we find this argument to be misplaced, as the law does not mandate PAN disclosure for cash transactions below Rs.2 lakh, and Asst.CIT vs. Jewel World Asst. Year : 2017-18 if buyers voluntarily structured their purchases within the legal limit, the assessee cannot be penalized for complying with existing rules. The AO has not brought any evidence to show that the sales did not occur or that the cash deposited was from undisclosed sources.
8.1. Another major contention of the DR was that the assessee did not maintain a detailed stock register containing itemized inventory records, which made it impossible for the AO to verify whether the sales actually took place from available stock. We note that the assessee had maintained stock records and submitted the same during the proceedings, and the auditor had reported stock details in Annexure to Form 3CD (Tax Audit Report). The AO did not reject the books of accounts or point out any defects in stock movement, nor did he dispute the purchases made by the assessee. When purchases are accepted, the corresponding sales cannot be arbitrarily disregarded without evidence to the contrary. Therefore, the AO’s assumption that the stock records were inadequate is not supported by any material evidence.
8.2. The DR further argued that the CIT(A) failed to consider the AO’s findings regarding inadequate investigation into cash sales and that the CIT(A) merely accepted the assessee’s explanation without independent verification. We find that this claim is not supported by facts. The CIT(A) thoroughly examined the assessee’s submissions, documentary evidence, and legal provisions before concluding that the addition was unsustainable. The AO, on the other hand, did not conduct any independent inquiries to disprove the sales or examine the customers allegedly making the purchases. Suspicion, however strong, cannot take the place of evidence. Since the sales Asst.CIT vs. Jewel World Asst. Year : 2017-18 were recorded in the books, reflected in VAT returns, and supported by stock movement, the CIT(A) correctly held that the AO failed to justify the addition under Section 69A of the Act.
8.3. The Revenue placed reliance on the judgement of Hon’ble Punjab & Haryana High Court in the case of Namdeo Arora (389 ITR 434), arguing that even if cash is recorded in books, an addition can still be made under Section 68 of the Act if the source of money remains unexplained. The DR contended that since the genuineness of cash sales was doubtful, the AO was justified in making the addition under Section 69A of the Act, and alternatively, the addition could also be sustained under Section 68 of the Act. However, we find that the Namdeo Arora case is distinguishable from the present case. In the case of Namdeo Arora, the assessee failed to provide any documentary evidence to substantiate the receipt of a loan, and therefore, the Hon’ble High Court upheld the addition. In contrast, in the present case, the assessee has recorded cash deposits as sales in its books, duly supported by stock registers, purchase and sales records, VAT returns, and cash books. The transactions are accounted for, disclosed in tax records, and were subjected to audit. Unlike, in the case of Namdeo Arora, where the transaction was found to be inherently improbable, the present case involves a business reality where there was a significant surge in gold jewellery sales post- demonetization, a fact corroborated by media reports and industry trends. Thus, the reliance on Namdeo Arora is misplaced, as it does not apply to a case where transactions are properly recorded in the books.
8.4. The DR also attempted to distinguish judicial precedents relied upon by the CIT(A), by arguing that those cases did not involve cash deposits Asst.CIT vs. Jewel World Asst. Year : 2017-18 during demonetization or the absence of an itemized stock register. However, we find that the principle laid down in those cases fully applies to the present case. The rulings establish that when cash sales are duly recorded in books and reflected in tax returns, the AO cannot arbitrarily treat cash deposits as unexplained income. The Revenue has not provided any reason why these precedents should not apply, nor has it demonstrated how the facts of the present case are materially different.
8.5. Finally, the DR urged to restore the addition made by the AO under Section 69A of the Act, arguing that the CIT(A) failed to address key discrepancies in the assessee’s records. However, we find that the Revenue has not brought any substantive evidence to justify the addition. The AO did not reject the books of accounts, did not point out any defect in purchases or stock movement, and did not conduct any independent verification of the sales transactions. The entire addition was based on assumptions and general suspicion, without any factual basis. The CIT(A), on the other hand, has examined all aspects of the case and passed a well-reasoned order deleting the addition.
8.6. Considering the above findings, we conclude that the assessee has duly recorded the cash deposits as sales in its books of accounts, and once a transaction is recorded in books, Section 69A of the Act cannot be invoked. The AO has not rejected the books of accounts under Section 145(3) of the Act, nor has he pointed out any material discrepancies in stock movement, VAT returns, or financial statements. The Revenue’s reliance on Namdeo Arora is misplaced, as that case dealt with unexplained loans, whereas the present case involves recorded business transactions supported by documentary Asst.CIT vs. Jewel World Asst. Year : 2017-18 16 evidence. The AO failed to disprove the genuineness of the sales or conduct any independent verification, making the addition purely based on suspicion. The judicial precedents relied upon by the CIT(A), support the assessee’s case, as they establish that cash sales, if duly recorded and disclosed, cannot be treated as unexplained income.
8.7. In light of the above, we hold that the CIT(A) was justified in deleting the addition of Rs.5,61,85,000/- under Section 69A of the Act, as the assessee had duly recorded these sales in its books and provided extensive documentation to support them. The AO failed to disprove the assessee’s submissions or conduct any inquiry to verify the genuineness of the transactions. The Revenue has not brought any material evidence to counter the findings of the CIT(A).
8.8. Accordingly, we uphold the order of the CIT(A) and dismiss the grounds of Revenue’s appeal.
In the result, the appeal of the Revenue stands dismissed.