ACIT, (OSD), Range-10 vs Gupta Jewellers Private Limited

1.

On facts and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 2,40,20,465/- made by the AO u/s. 68 r.w.s. 115BBE of the Act, ignoring that the assessee failed to substantiate the genuineness of alleged cash sales recorded on 8.11.2016, immediately after the announcement of demonetization.

2.

The Ld. CIT(A) has erred in law and on facts in holding that mere furnishing of sales invoices and names of alleged customers discharged the onus cast upon the assessee, without appreciating that almost all notices issued u/s 133(6) were returned unserved, thereby rendering the sales unverifiable.

3.

The Ld. CIT(A) has failed to appreciate that the AO rightly rejected the books of accounts u/s. 145(3) after recording specific defects, namely (i) all sales on 8.11.2026 were structured below Rs. 2 lakh to avoid reporting under section 269ST, (ii) the assessee could not have physically generated such a large number of bills in the limited time available, and (iii) the alleged buyers could not be traced or verified.

4.

The Ld. CIT(A) has erred in disregarding the AO’s finding that the assessee artificially inflated sales on the date of demonetization to justify subsequent cash deposits, which constitutes accommodation entries and unexplained money assessable u/s. 68 of the Act.

5.

The Ld. CIT(A) has wrongly applied judicial precedents such as CIT vs. Orissa Corporation Pvt. Ltd. and Lalchand Bhagat Ambica Ram vs. CIT, which are distinguishable on facts, as those cases involved creditors whose identities were furnished, whereas in the present case, the existence and genuineness of sales/customers remained unverified.

6.

The Ld. CIT(A) has failed to consider binding precedents in favour of Revenue, wherein cash deposits during the demonetization period claimed s sales have been treated as unexplained income in absence of proper verification, such as some ITAT rulings are as under:-* Bharat Krishi Kendra vs. Union of India (High Court of Chhatisgarh). * Logamaheshwara vs. ITO (High Court of Madras). * Vudatha Vani Rao vs. ITO (High Court of Vishakhapatnam)

7.

The order of the Ld. CIT(A) is perverse and contrary to evidence on record, in as much as it accepts the assessee’s version without addressing the categorical findings of manipulation recorded by the AO.

4.1. Adjudication of Ground Nos. 1, 3, 4, 5, 6, 7, and 8: Substantive Addition under Section 68 and Rejection of Books of Account

The appellant, in these grounds, argues that the AO's order is flawed in both fact and law. The addition of Rs.2,40,20,465/- is contested on the basis that it was made without providing sufficient evidence or a sound legal basis, and was instead a product of conjectures and surmises. The appellant asserts that the cash deposits in question were fully accounted for in its books of account and were sourced from genuine cash sales made in the normal course of business.

In support of its claim, the appellant submitted voluminous documents during the assessment proceedings, including a detailed day-wise cash book, sales and purchase registers, sales invoices for the demonetization period, VAT/GST returns, and stock statements for gold, diamond, and silver jewellery. These documents were submitted in response to multiple notices from the AO. The appellant highlighted that its purchases were made entirely through banking channels and were not doubted by the AO. The stock position also reconciled, and the sales were duly recorded in the books and reflected in the VAT returns, which were all duly audited. The audit report confirms that books of accounts, including the Day Book, Ledger, Cash Book, and Stock Register, were examined.

The AO's primary justification for the addition was two-fold: an alleged unverifiability of the cash sales and an assertion that the sales figures were "abnormal". The AO based the "unverifiability" claim on the outcome of a test-check inquiry under Section 133(6), wherein notices sent to 100 identifiable customers were returned unserved in 97 cases. The AO's second claim was based on an arbitrary calculation, surmising that given a maximum of three hours and two billing staff, the assessee could not have generated more than 72 bills on 08.11.2016, and thus concluded that only 30% of the sales were genuine.

The fundamental flaw in the AO’s reasoning lies in the nature of the evidence relied upon. The AO’s conclusion is not based on any material proving that the sales were fictitious or that the cash deposits were from an undisclosed source. Instead, it is based on the failure of a third-party inquiry and an unsubstantiated estimation of business capacity. The AO failed to discharge the burden that shifted to him after the appellant provided a plausible explanation and supporting documentation. As held by the Hon'ble Supreme Court in CIT v. Orissa Corporation Pvt. Ltd., (159 ITR 78) (SC), once an assessee provides the names and addresses of creditors or buyers, the initial burden is discharged. The Revenue cannot make an addition solely because the third parties failed to comply with notices without the AO undertaking further action or demonstrating that the transactions were not genuine.

Furthermore, the rejection of the books of account under Section 145(3) is a drastic step that must be justified with specific, cogent defects. The AO's order makes no mention of any irregularities in the stock register or purchase details. The fact that the purchases were accepted and the stock position reconciled with the sales undermines the rejection of the books. A mere suspicion of "abnormal sales" on a single day, particularly in the unique context of the demonetization announcement, is not a legally tenable reason to reject the entire book of accounts and resort to a best judgment assessment. The appellant's argument that such a large sales volume on a single day is commercially plausible given the circumstances, and citing a large sales team of 25 persons and historical data of issuing over 238 invoices on other dates, is a valid counterpoint to the AO's arbitrary estimation. The judicial principle, as articulated in cases like Laichand Bhagat Ambica Ram v. CIT (37 ITR 288) (SC), is that suspicion or conjecture cannot be a substitute for evidence, and an addition made on such a basis is perverse and unsustainable in law. The ITAT has upheld that sales cannot be rejected on the ground that sales for a particular period are higher compared to the corresponding previous period, and cash deposits within normal business trends from accepted books cannot be treated as undisclosed income.

Therefore, the AO's conclusion, particularly the arbitrary decision to accept only 30% of the sales as genuine, is devoid of any factual or legal basis. The action of the AO in making an addition on ad-hoc basis by treating part of the cash sales as unexplained credits under Section 68 is not sustainable.

Decision: Grounds 1, 3, 4, 5, 6, 7, and 8 are allowed. The addition of Rs.2,40,20,465/- made under Section 68 is hereby deleted.

4.2. Adjudication of Ground No. 2: Violation of Principles of Natural Justice

The appellant contends that the AO passed the assessment order in violation of the principles of natural justice by not providing a proper opportunity to be heard. While the assessment order lists numerous hearing dates, the core of this ground lies in the AO's failure to provide the appellant with crucial information upon which an adverse finding was based.

Specifically, the AO's decision to treat the cash sales as "unverifiable" was a direct result of the fact that 97 out of 100 notices sent to customers under Section 133(6) were returned unserved. The appellant, upon being informed of this outcome, explicitly requested the list of non-compliant parties and offered to assist in their verification. The AO, however, did not provide this list and instead proceeded to finalize the assessment based on this unconfronted adverse material. The principle of audi alteram partem—that no one should be condemned unheard—is a cornerstone of fair legal procedure. This principle mandates that any material or evidence intended to be used against an assessee must be disclosed to them, and they must be given a fair opportunity to respond or rebut it. The denial of this information to the appellant, which was central to the AO's reasoning, constitutes a serious procedural impropriety and a clear violation of natural justice.

Decision: Ground 2 is allowed.

4.3. Adjudication of Ground Nos. 9, 11, and 12: Applicability of Section 115BBE and Interest under Sections 234A and 234B

The appellant challenges the application of the enhanced tax rate of 60% with a 25% surcharge under Section 115BBE, arguing that the amendments introduced by the Taxation Laws (Second Amendment) Act, 2016, which received Presidential assent on 15.12.2016, should not apply to transactions that occurred prior to this date, such as the sales on 08.11.2016. The appellant's position is that the higher rate of tax should be applicable from A.Y. 2018-19, not A.Y. 2017-18.

The Taxation Laws (Second Amendment) Act, 2016, specifically amended Section 115BBE with effect from 01.04.2017, making the enhanced rates applicable for A.Y. 2017-18 and onwards. The judiciary has consistently held that while charging provisions of an Act cannot be applied retrospectively, the tax rate for any given assessment year is determined by the annual Finance Act and can be specified to apply to the entire corresponding financial year. The amendment to Section 115BBE, for the purpose of tax rate determination, is considered a procedural aspect that is applicable to the entirety of the financial year 2016-17. Consequently, the AO's action of applying the higher tax rate for A.Y. 2017-18 is in accordance with the law as clarified by various judicial pronouncements.

However, the appellant also challenges the charging of interest under Sections 234A and 234B, which are consequential in nature. Since the substantive addition of income is being deleted, the very basis for levying this interest is removed. The interest liability must be recomputed on the basis of the returned income.

Decision: The grounds challenging the applicability of the tax rate under Section 115BBE for A.Y. 2017-18 are dismissed on legal merit. However, the grounds concerning the charging of consequential interest under Sections 234A and 234B are allowed to the extent that the tax liability must be re-computed after the deletion of the main addition.

4.4. Adjudication of Ground No. 10: The Right to Add/Amend Grounds of Appeal

The appellant, in this ground, reserves the right to add, amend, or alter any of the grounds of appeal. This is a standard and routine procedural ground, which does not require specific adjudication.

Decision: This ground is considered allowed as a matter of standard practice.

5. Summary of Findings and Directions

Based on a comprehensive review of the facts, the appellant's submissions, and the relevant legal principles and judicial precedents, the following conclusions are reached:

•

The AO's addition of Rs.2,40,20,465/- under Section 68 is unsustainable as it is based on mere surmises, conjectures, and an arbitrary estimation of the appellant's business capacity on a specific, exceptional day.

•

The AO's rejection of the books of account under Section 145(3) is not legally tenable as no specific defects were pointed out, and the AO's action was inconsistent with his acceptance of the purchases, stock, and other financial records.

•

The assessment process was flawed by a violation of natural justice, as the AO relied on adverse information from third-party inquiries without providing the assessee with an opportunity to confront it.

•

The applicability of the higher tax rate under Section 115BBE for A.Y. 2017-18 is legally correct, as the amendment to the Act explicitly made this rate applicable for the relevant assessment year.

•

The levy of interest under Sections 234A and 234B is consequential to the assessed tax liability and must be re-computed in line with the revised total income.

^6. In the result, the appeal is partly allowed.”