DEVNGI JEWELLWERS PVT. LTD.,SURAT vs. DCIT, CIRCLE-1(1)(1), SURAT

Facts of the case in brief are that the assessee e-filed its return of income for the AY 2017-18 on 30.10.2017, declaring therein total income at Rs.31,12,100/-. The case of the assessee was selected for complete scrutiny /AY.2017-18 Devngi Jewellers Pvt. Ltd. under CASS. The assessee had maintained five bank accounts during the year under consideration. There were cash deposits of Rs.11,17,71,000/- during the demonetization period in the three bank accounts. During the assessment proceedings, notices were issued by the Assessing Officer (in short, ‘AO’) u/s 142(1) and 133(6) of the Act, calling for various details regarding the cash deposit. The assessee was requested to furnish quantitative details of purchases/sales made during the year. In response, the assessee furnished ledger account of sales and purchases made during the year. In the ledger account of sales, entries were passed without mentioning the name of the customers. Cash sales bills were produced for verification, which contained the names of the customers only. Hence, the AO observed that the persons to whom cash sales were made remained unidentifiable and hence, the genuineness of the transactions could not be ascertained. Therefore, a detailed show cause notice was issued requesting the assessee to explain why the book result shown by the assessee should not be rejected and the cash deposits made during the demonetization period should not be added to the total income u/s 68 of the Act. In response, the assessee submitted that the sales registers contain the names of the customers. It was also submitted that as per Rule 114B of the Income-tax Rules, 1962, the company was not required to maintain such record of its customers, when sale amounts did not exceed /AY.2017-18 Devngi Jewellers Pvt. Ltd. Rs.2 lakhs per individual. Moreover, assessee submitted that the sales could be reconciled from the VAT return. However, the AO on verification noticed that the assessee was not regularly filing the VAT returns. The AO also observed that the Rule 114B did not grant immunity to the assessee from not establishing the identity of the person to whom cash sales were made. Further, in the business of the jewellery, most of the sales were made over the counter and in cash only; but at the same time each assessee has its client base which could be identified. The AO further stated that the assessee could furnish the details in respect of 7 customers only to whom cash sales of Rs.10,79,677/- had been made. As against the above, the total cash sales during the period under consideration was Rs.23,43,78,298/-. Hence, the assessee was able to establish the identity only 0.5% of the customers. As regarding the reliance placed by the assessee on the VAT return, it was noted that the assessee was not regular in filing the VAT return; hence, the same could not be accepted as credible evidence for establishing the genuineness of the sales. The AO held that the so-called sale proceeds in cash deposited in bank accounts are cash credits in the books of the assessee, the source of which has not been satisfactorily explained by the assessee. Therefore, the onus of proof u/s 68 of the Act has not be discharged by assessee. The genuineness of these cash receipts could not be satisfactorily proved by the /AY.2017-18 Devngi Jewellers Pvt. Ltd. assessee as no details of the said purchasers were filed by the assessee. Accordingly, the sales book and cash book of the assessee were rejected u/s 145 of the Act. The AO, therefore, treated cash deposit of Rs.11,34,29,166/- as unexplained u/s 68 of the Act and added the same to the total income of the assessee. He passed order u/s 144 of the Act on 31.12.2019, determining total income at Rs.11,65,41,266/- as against returned income of Rs.31,12,100/-.

Aggrieved by the order of the AO, appellant filed appeal before the CIT(A). The CIT(A) observed that the AO was justified in requiring the appellant to prove the identity of the buyers. He also observed that AO can make additions u/s. 68 of the Act without rejecting books of account. The appellant company did not provide item-wise details of the stocks, but instead provided quantitative details, which was not acceptable. The appellant failed to establish satisfactorily the source of credit appearing in his books of account before the demonetization period. Regarding the issue of addition u/s 68 of the Act, he observed that the appellant was unable to provide item-wise purchases, sales and stock data. Therefore, the stock register kept by the appellant cannot be considered as complete in all respects. The appellant’s way of maintenance of cash memos did not give the impression of genuine cash transaction, which suggested that cash books were tampered with to justify cash deposits during demonetization period. The excess sales during the /AY.2017-18 Devngi Jewellers Pvt. Ltd. demonetization period were intended to conceal deposits of currency notes in the bank accounts. The appellant failed to provide item-wise quantitative details of stock and sales. The discrepancies raised by the AO were not adequately addressed by the appellant. The appellant’s inability to furnish item-wise quantitative details, coupled with facts that there was no material or evidence to verify the genuineness of sales, led the AO to infer that the books of account, particularly the cash book and stock register, were not complete and correct. It was further observed by the CIT(A) that section 68 of the Act required an assessee to prove three ingredients: the identity, creditworthiness of the creditors and the genuineness of the transaction. In the instant case, the assessee failed to prove the aforementioned ingredients. Resultantly, the credit in the appellant’s books of accounts was treated as unexplained cash credits. The CIT(A) also observed that the plethora of judgements of various Courts relied upon by the assessee are not applicable because facts of the assessee are different. Hence, the CIT(A) dismissed the appeal of the assessee.

Aggrieved by the order of CIT(A), the assessee filed appeal before this Tribunal. The learned Authorized Representative (ld. AR) of the appellant submitted paper book containing written submissions filed by the appellant before CIT(A) on 20.07.2023, 16.11.2023 and 19.03.2024, replies/submissions filed by the appellant before AO, other details, viz., name & addresses of all /AY.2017-18 Devngi Jewellers Pvt. Ltd. the suppliers of gold bar and ornaments, quantity-wise & rate-wise purchase register, sample copies of purchase bills, bank statements, details of opening stock, purchases, sales in cash, closing stock in quantity and amounts, VAT audit report, ITR acknowledgement along with computation of income, relevant portions of tax audit report evidencing quantity details and audited profit & loss and balance sheet. The ld. AR submitted that all the above documents and details were submitted before CIT(A) and AO. He submitted that all cash deposits were duly reflected in the books as sale proceeds and no separate unexplained cash credit was recorded. The cash book and sales register matched with stock records and were supported by VAT and tax audit reports. The ld. AR submitted that all purchases have been accepted by the AO but he is not accepting the corresponding sales. Once purchases are genuine, sales cannot be doubted and there is no prohibition for sales in cash. The ld. AR relied on the decision of Hon’ble Gujarat High Court in case of ITO vs. Prestige Marketing Pvt. Ltd., Tax Appeal No.479 of 2008, dated 08.09.2008 wherein it was held that there is no prohibition in law as regards making of cash sales nor is there any prohibition which obligates a person making cash sales to keep record of the names and address of the persons to whom such cash sales have been made. That once the sales account was credited, the same could not be treated as cash credit u/s 68 of the Act. He also relied on /AY.2017-18 Devngi Jewellers Pvt. Ltd. the decision of Hon’ble Gujarat High Court in case of CIT vs. Vishal Exports Overseas Ltd., Tax Appeal No.2471 of 2009, dated 03.07.2012, where it upheld the Tribunal’s finding that when the assessee had already offered sales realization and such income is accepted by the AO, addition of the same amount once again u/s 68 would tantamount to double taxation of same income. The ld. AR relied on the decision in case of R S Diamonds India Pvt. Ltd. vs. ACIT, 145 taxmann.com 545 (Mum.) where it was held that where assessee deposited cash during demonetization period, since deposit was made from cash balance available in the books of account, there was no question of treating same as unexplained cash credit. He also relied on the decision of ITAT, Mumbai in case of ACIT vs. Ramlal Jewellers Pvt. Ltd., (2023) 154 taxmann.com 584 wherein it was held that addition u/s 68 on account of cash deposit could not be made simply on the reason that during demonetization period, cash deposit vis-à-vis cash sales ratio was higher when it was established that cash sales representing outflow of stock was duly accounted in the books of account. The ld. AR also relied on the decisions in cases of ACIT vs. Chandra Surana, 149 taxmann.com 379 (Jaipur – Trib.), DCIT vs. Viswa and Devji Diamonds (P.) Ltd., 171 taxmann.com 474 (Chennai – Trib.) and ACIT vs. Hirapanna Jewellers, 128 taxmann.com 291 (Vizak – Trib.).

On the other hand, learned Commissioner of Income-tax - Departmental Representative (ld. CIT-DR) relied upon the orders of lower authorities. He submitted the cash-in-hand was abnormally high during demonetization period. The assessee is also not able to explain why it withdrew cash when there was substantial cash in hand. There are huge unidentified cash sales before demonetization. The VAT return was filed only after demonetization. The CIT(A) had also issued questionnaire u/s 250(4) of the Act, which was not satisfactorily explained. The impossibility of conduct by the assessee has not been satisfactorily explained. The VAT return does not put fetters on the AO to make addition, if the conditions of section 68 are satisfied. The labour charges were also minimal. The CIT(A) relied on the decisions in cases of Shah Maganlal Gulabchand Choksi vs. ACIT, 171 taxmann.com 178 (Surat – Trib.) and Vaishnavi Bullion (P.) Ltd. vs. ACIT, 145 taxmann.com 197 (Hyd – Trib.).

The ld. AR in the rejoinder submitted that in the above decisions, there were advances received by the assessee and the cash was not out of sale proceeds. It was also submitted that there was substantial cash in hand before demonetization, which was deposited by the assessee in his bank account. In the alternative, the ld. AR submitted that the revenue could estimate profit on the sales but it cannot make addition of the entire sale proceeds.

We have heard both the parties and perused the materials available on record. We have also deliberated upon the decisions relied upon by both sides. There is no dispute that assessee has deposited cash of Rs.11,17,71,000/- during the demonetization period. The appellant submitted that the said deposit was out of the sale proceeds prior to demonetization period. The AO did not accept contention of the assessee by observing that appellant was not able to identify the customers who purchased gold bar and ornament in cash. The appellant was also unable to prove the identity of the customers. Further, the three ingredients of section 68 of the Act, i.e., identity, creditworthiness and genuineness of the transaction are not established. The AO rejected the sales book and cash book of the assessee u/s 145 of the Act. Out of the total amount of cash in hand as on 08.11.2016 at Rs.11,60,01,738/-, the AO allowed (i) peak cash in hand of Rs.14,92,895/- of the preceding year and (ii) sales of Rs.10,79,677/- in respect of which identity was established by the assessee. The remaining amount of Rs.11,34,29,166/- was added u/s 68 of the Act. The CIT(A) has considered the assessment order, written submissions of the assessee and also the reply of the assessee in response to the inquiry made by him u/s 250(4) of the Act. He has upheld rejection of the books of account u/s 145(3) of the Act and confirmed the addition made by the AO.