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Judgment
Per Satbeer Singh Godara, Judicial Member:
These Revenue’s and the assessee’s cross appeals IT A Nos. 3327 & 4751/Del/2025 for Assessment Year 2017-18, arise against the CIT(A)/NFAC, Delhi’s DIN & order No. ITBA/NFAC/S/250/2024-25/1075343569(1) dated 31.03.2025, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in shor t “the Act”).
Heard both the p arties at length. Case files peruse d.
It transpires d uring the course of hearing that the Revenue has raised it’s twin grounds in it’s appeal ITA No. 3327/Del/2025 that the CIT(A) has inter alia erred in law and on facts in reversing the Assessing Officer’s action treating the assessee’s cash deposits of Rs.1,50,21,473/- as unexplained as well as in partly restricting section 40A(3) disallowance of Rs.61,22,854/- qua the assessee’ s purchases to the extent of 20% thereof; co ming to Rs.15,32 ,213/-, respectively.
The assessee’s cross appeal ITA No. 4751/Del/2025 on the other hand raises it’ s sole substantive grievance that we o ught to delete even the forego ing 20% of it’s alleged bogus purchases disallowance as well.
We have given our thoughtful consideration to the Revenue’s and the assessee’s respective veheme nt submissio n. We no tice that the CIT(A) has partly accepted the assessee’s case vide following detailed discussion:
4. Decision :
I hav e car efully considered t he grounds of appeal, stat ement of facts , written submissi o n of t he appellant, as reproduc ed above, and the facts appearing from impugned assessment order.
4.1The appellant c ompa ny is eng aged in the busine ss of sell and purc hase of jewelry a nd precious metal s. The appellant c ompa ny filed ret urn of inc ome for the concer ned assessment year on 31.10.2017 declaring total income of Rs 32,37,240/- which was subsequently assessed u/s 143(3) of the Act, det ermi ni ng total inco me at Rs.2 ,59,09,780/- only, vide t he impugned ass essme nt order da ted 30.12.2019 by mak ing an addition of Rs.1,50,21,473/- u/s 68 and Rs 76,51,067/- u/s 40A(3 ) of the o f the Act r.w. R ule 6D D of I.T . Rul e .
4.2Addition u/s 68 of the I.T. Act of Rs.1,50,21,473/-was made by t he AO t reati ng the deposit of cash out of to tal cash sales of jeweller y items i n the bank duri ng t he demonetizati on period as unexplai ned mo ney and as per the provision of Secti on 115BB E tax on this sum was charged at special rate.
Further addition of Rs.76,51,067/- only , u/s 40A(3) r .w. Rul e 6DD of Income Tax R ul es in respect of cash purc has e of items above Rs. 20,000/-, in r espect of each purc has e i n a day, was made by the AO to the retur ned income of the app ellant.
4.3In ground no.1, t he appellant has c hallenged t he assessment order o n the gr ound tha t t he AO did not provide a reasonable opport uni ty to respo nd to the final show cause notic e before c ompleti ng the ass essment. It has been co ntended that the fi nal sho w ca use notic e was issued by the AO on 29.12.2019 at 1:34 PM a nd upl oaded on the e-proceedings portal , requiring compl iance by 30.12.2019 at 01:31 PM. The appellant submitted that due t o the cl os ure of the e-proceedi ngs portal after 01:13 PM on 30.12.2019, the compliance could not be made t hrough the portal . Ho wever, an email submission was made o n the same day at 04:32 PM, whic h was allegedly i gnor ed by the AO whil e finalizi ng t he assessment .
Upon careful e xamination of t he facts and s ubmi ssions, it is observed t hat t he AO did issue the fi nal show cause notice at a time t hat allowed only a short period for complianc e. It is a well-settl ed pri nciple of nat ural justice t hat a n assesse e s hould be give n adequat e opportunity to pr esent their case. Howe ver , i n this ca se, it is also noted that the appellant had al ready r espo nded to various stat utory notices issued u/s 142(1 ) duri ng the course of t he assessment pr oce edings, and the details prod uced i n r esponse to the fi nal show ca use notice were not mat erially differ ent from t he i nformati on previ ously furnished by the a ppellant.
Whil e t he AO o ught to ha ve c onside red the e mail submissi on of 30 .12.2019, t he fact r emai ns that t he appellant’s reply did not i ntr oduce any new facts or arguments that woul d hav e materially alt ered t he outcome of the assessment. Given t hat the substantive content of the appellant ’s response, it had already been exami ned earlier duri ng the course o f ass essment proc eedi ng, the no n-consideration of the email submissi on does no t, i n itself, render t he ass essme nt order i nval id.
In view of the above, the gr ound rai sed by t he appellant tha t the ass essment was completed without affording a prop er opportuni t y is not tenable under the law. The assessment proceedi ngs was c onducted in acc ordanc e with due process after pr oviding ample o pportuni ty t o the appellant, and t he appel lant was not pr ej udiced by the AO's acti on in a manner t hat woul d warrant the annulme nt of the assessment or der. Theref ore, this ground of appeal i s dismissed.
4.4The appellant in its ground no. 2 to 5 has cont ested the addition o f Rs. 1,50,21,473/- made by the AO under Secti on 68 of the Income Tax Act, 1961, treati ng a porti on o f the cash deposits made duri ng t he demonetizati on peri od as unex plained cash c redit . The appellant was engaged i n the business of tradi ng and manufacturi ng of jewelry. It was a rgued that the cash sales were duly recorded i n t he books of accounts which has be en audited u/s 44AB of the I.T. Act, a nd the AO had acc epted and assess ed these re ceipts as c onstituent part of the busi ness income. The appellant conte nded tha t the cash deposits in questio n we re sourced from busi ness operatio ns only and all thes e r eceipts w ere acco unted for i n determi nati on of to tal i nc ome, for the ye ar. The ass es sment was made by the AO on mere suspicion witho ut any concr ete e vidence, the appella nt stat ed i n his s ubmission.
Upon careful examinati on of the a ssessme nt order, it is observed t hat t he AO has primarily relied on st atisti cal compari sons and assumptio ns to chal lenge the genui neness of the cas h sales. The AO not ed t hat cas h sales duri ng October and the first ei ght days of November 2016 wer e si gnificantl y higher than the usual tr end of the previous fi na ncial year, raising doubts ab out their authenticit y. The AO f urther ar gued that the appellant’s pat tern of cash deposits did not align wit h i ts historical trends and that the festive seaso n jus tification did not hol d good, as Di wali had al ready passed by 3 0th Octobe r 2016. Additionally, the AO obser ved discr epancies in stock details and allege d that t he appellant had failed to fur nis h compl ete details of purc has es , t hereby questioni ng the availability of s tock to s upport the c ash sal es .
Ho wever, a detailed review of the submissi ons made by the a ppellant reveals that t he appellant had furnished compl et e audited bo oks of acc ounts, cash books , and ot her relevant records, whic h were not disputed by the AO. The appellant had provided month-wi se de tail s of purc has es and sales , i ncl uding cash sal es, s tock stat ements, and ot her s upporting documents . The tot al tur nover, i ncl udi ng t he impugned cash sales, was alr eady ta ken i nto account and co nsider ed whil e co mputi ng t he busi ness i ncome and the same had be en accepted as sales from busi ness oper ations and ass essed under the head "Income from Busi ness."
Further i t was also observe d that the appell ant had declared Rs. 50,0 0,000/- under the Pradhan Mantri G arib Kalyan Yojana (PMGKY), whic h was duly acce pted by t he AO.
One of the si gnificant issues in this cas e is t hat the same amo unt of sal es has been subj ec ted to tax twice in t he hand of the appel lant, whic h ar ose due to t he addition made by the AO. The fundamental principl e of taxation is tha t t he s ame i nco me cannot be taxed t wice in the hands of the sam e asse ssee. It is a trite law and t he law is settled in t his regard that no income ca n be subj ected to tax twic e. In the pr esent case, the AO has not di sput ed tha t the cash sal es amounti ng t o R s.1,50,21,473/- were not duly recorde d in the books of accounts. It has also not been disputed that these correspondi ng sal es has not bee n account ed for or not been incl uded i n t he P&L acco unt as part of the busi ness turnover. Ther e is no dispute eit her regarding the opening st ock of ite ms, mat erials purc hased, materials cons umed, it ems sold , closing stock etc., quantity wise. Accounti ng of all these mat erial has res ul te d i n computatio n of t otal inco me of Rs.32,37,240/- as disclosed by the appellant in i ts ret urn of i ncome filed f or the year. Once t he revenue from business or sales has been offer ed for taxati on in its ITR , the sam e amount canno t be characteriz ed as an unex plained cr edit u/s 68 of t he I.T. Act wi tho ut any mat erial bei ng brought on record to support such a claim.
The real inc ome of the appell ant is det ermi ned bas ed on its busi ness activities, as re flected in t he P& L acc ount. If this disputed s um has already been i ncl uded i n the tur nover and has al ready be en acc ounted for in computi ng taxable incom e, taxi ng it agai n under Section 68 would lead to an artificial and unjust enha ncem ent of income, whic h i s contrary to t he pri nciples and law.
Moreover, no material or evidence has been br ought on rec ord to prove that t he cash sal es were fictiti ous or that the ca sh deposits represent ed unacc ounted i ncome. Mere suspicion without corr oborativ e evid ence is not suffici ent to justify the a ddition made under Sec tion 68. In this regard, hon’ble courts have consistently held that an additi on under S ection 68 cannot be s ustained whe n t he same amount is already r ecorded as business i ncome .
The AO , while maki ng the addition, has allowed a part of Rs. 84,42,527/- out of the t otal cas h deposits made duri ng the period of d emonetization and disallowed t he remai ni ng a mount of Rs.1,50,21,473/-. The method adopted b y the AO to es timat e genui ne sales by a pplyi ng a multiplicati on factor on previous year’s cash sales cannot be held to be a valid acti on. The AO’s reliance on broa d statistical analysis, wit hout specific findi ngs of suppression of inc ome, is insufficient to justify the additi on. In t his re gard the appellant has re fer red several j udicial pr ecedents of Hon’ble Courts where it has bee n consist ently held t hat suspicion, ho wever strong, cannot take the pl ace o f evidence.
In this case, the cash deposits were duly accounted for in the bo oks a nd had been subjected to tax as business income which has not been disputed in the assess ment. Further the appellant i n its writ ten submissi on stated tha t it had paid V AT/Sal es Tax on t otal sales be it cash or credit and showed the same i n t he VA T/S ales Tax ret urn. In t he course of the assessment it has not been establ is hed that the cash sal es were bogus o r that mat erial, jewelry items wer e not del ivered or the entries itself are bogus. The deviation in sales tr ends , howe ver unus ual, does not a utomatically r ender the transac ti ons fictitious in the absence of c or roborative e videnc e. The AO has also not rejected the B ooks of Accounts of t he appellant u/s 145 befor e drawi ng his concl usi on and maki ng additi on of Rs.1,50,21,473/- onl y. Further, maki ng an addition u/s 68 on the same amount whic h has alre ady been account ed for, as s ales and off ered as income i n ITR wo uld r esult i n double tax ati on, whic h is impermissible as per law.
In view of the above, the additio n of Rs.1,50,21,473/-made by t he AO u/s 68 is legally not s ustai nable. He nce, the AO is directed to delete t his sum, i n ef fect . The appeal on this ground is allowed, accordingly.
In ground no.6, t he appellant has c hallenged t he additi on of Rs. 76,51,067/- made u/s 40A(3 ) of t he I.T. Act on acco unt of cash purchas es of old je wel ry. The AO has disallowed t hese purchases , cum ul ati ng vari ous smaller cash transacti ons and a pplied t he pr ovisions of Secti on 40A (3 ), which r estrict cash pa yments exce eding Rs. 20,000 in a day t o t he same party f or a ny expenditure.
The appellant contends that the “Cas h Agai nst Gold” sche me is popular among middl eclass c ust omers i n the Lajpat Nagar, New Del hi area. The c ust omers, primarily middle class people, sell thei r old jewelry for cash due to urgent fi nancial needs, and eac h transac tion is recor ded separately i n the books of accounts and stoc k re gisters. The appell ant ar gues that each tra nsactio n was bel ow Rs. 20,000/- and made with di ff erent individuals, and theref ore, pro vision of sec tion 40A(3 ) s hould not apply.
In the ass ess ment order, i t is evident t hat the AO clubbed multiple purchas es from sellers on t he same day without any c onc ret e evidence t hat they belonged to the same party. Fur ther, the appellant co ntended that it was not under any statutor y obligati on to mai ntain the names and addresses of s ellers of old jewelry. In this regard t he appellant relied upon the judgment of Bombay Hi gh Co urt in t he case of R.B. Jessaram Fatehchand (S ugar Dept.) vs. S .P. Kotval C.J and V.S . Desai that supports non-mai ntenance of addresses in cash transac tions is not a valid ground f or rejecti on of acco unt s.
The AO, upon exami nation of the submissi ons made by the assess ee, found that the appell ant made 4 31 purc has es betwee n 01.04.2016 and 09.11.2016, out of whic h 410 purc has es wer e in cas h, each below Rs.20,000. The appellant, i n its submissio ns before AO, disclosed t hat purchases were made from 8 parties. Due to t his, t he AO was doubtful whether these transacti ons bei ng genuinely made with diffe rent indivi duals in a singl e day.
Ho wever, as the sales from thes e purchases were duly reflected i n the i ncome tax return, disal lowi ng t he entire purc has e amount woul d be unj ustified. Instea d, only t he profit element embedded in s uc h purchas es is requi red to be taxed. Thi s observati o n was ma de in Mumbai Tri bunal ’s decision in the cas e of Oopal Diamond vs. ACIT [2022] 144 taxmann.com 184 (ITAT/Mumbai) i n t heir order dt :26.10.2022, it was hel d as und er:
“4 .1 We ha ve heard ri val submi ssi ons and perused t he mat erials avail able on r ecord. We fi nd t hat assess ee is enga ged in the business of tr adi ng and manufact uri ng of diamonds . It i s not in dispute that assessee had made purc has es fr om certai n par ties who were tr eat ed as taint ed deal ers as p er i nformatio n gathe red from the s earch c arrie d out i n t he entities of Shri Bhawarlal Jai n and G roup. Howe ver, t he s ales made out of t he purc has es made from the disputed parties were not doubt ed by t he Revenue. Accor dingl y, the ld. A O concluded t hat t he ass essee c ould have made purc has es from t he grey marke t i n order to have some savi ngs i n i ndi rect taxes and i ncidental profit elem ent thereon and observed t hat onl y pr ofit el eme nt embedded i n t he val ue of s uch purchas es c ould be brought to tax i n the i nt erest of j ustice . Acc ordi ngly , the ld. AO estimated the profit element embedded i n the val ue of s uch disputed purchases at 5% which was reduced to 3% by the ld. CIT(A).”
In the pres ent c as e, the AO has not disputed the quanti ty of Sales, quantit y of Purc hases , quantity of openi ng stoc k, quantity cons umed in manufacturi ng process and quanti ty of cl osi ng stock. No obs ervation or findi ng could be f ound i n t he assessment order re garding the quanti ty of mat erials procured, c onsum ed, sold a nd held as ope ni ng and closing s tock. There is no recor di ng that these st ocks wer e not maintai ned pr operly and not rec orde d i n t he boo ks mai nt ai ned. The appellant has also argued that suc h books were audi ted by t he appella nt and no discrep ancy was found by the A O i n the quanti tative details. Therefore, it is not i n disput e that the assessee had made purchas es from certain parties .
The disallowance u/s 40A(3) of I.T. Act applies when cash payments exceedi ng Rs. 20, 000 are made t o t he same party i n a singl e day. The AO clubbed mul tiple purc has es from se llers on the sa me day without bri ngi ng on record materi al/ evidence in the assessment or der tha t t hey were from t he same part y. This weakens t he ground for c omplete disallo wance mad e by the AO of entire cas h purchase for the said per iod.
Ho wever, the patte rn of t ransactions raises reaso nable doubts a bout the purc hases. While the appellant has not mai ntained seller addresses, t he absence of s uch details makes verification difficult t hat purchases i n a si ngl e day was ma de from al l different parti es. This gap in rec ordkeepi ng, c ombi ned with the pat tern of purc hases, suggests t he poss ibility of purchases from unverified or grey mar ket sources .
Further, the likel ihood of these 8 parti es re peatedly selling j ewelry bel ow Rs . 20,000 on the same day is low, maki ng it probable that the purchases were str uctured to avoid c ontr avention of the provisions of secti on 40A (3) of the I.T. Act . Thus , there is a po ssibili ty that t he appellant purchased f rom unverified deal er s i n t he gr ey mar ket to save on indirec t taxes and ear n incidental profits.
Since the appel lant has recorded sales of gol d (quantity) from all the purchas es , and the quantity of purc hases, sales , openi ng and closi ng stoc k has not been disputed by t he AO. Therefore, it canno t be said that the purc has es we re ficti tious, not genui ne; a nd full disal lowance of the same would be not be proper and unj usti fied . Inst ead, taxi ng an estimated profit margi n on these purchases aligns wit h judicial principl es . Based on similar cases, a 20% profit rate on Rs. 76,51,067/- is considered r eas onable .
Given the above obse rvations, the AO’s complete disal lowance of Rs. 76,51,067/- is not j ustifi ed.H owever , consideri ng the hi gh probabili ty that purc hases were made fr om unverifiable s ourc es to reduce tax liabilities, an estimated profit addi ti on is warranted. Accor di ngly, 20% of Rs. 76,51,067/- (i.e. , Rs. 15,30,213/-) may be added t o t he t otal inc ome of the app ellant. The remai ning additi on is required to be del eted . Ther efor e the ap peal on this gr ound is partly allowed.
4.6In ground no .7, appellant challenged t he c hargi ng of inte rest u/s 234B and 234C of I.T. Act. This ground is consequential in nat ur e. The AO i s di rected to char ge inte rest as per law afte r giving effect to this order. This ground is allowed.
5.In the res ul t, t he appeal is partly allowed.”
It is in this factual backdrop that we first advert to the assessee’s alleged bogus purchases disallowance made in the CIT(A)’s lower appellate discussion. T here is hard ly any dispute between the parties that the Assessing Officer had infact invoked section 40A(3) disallowance of Rs.76,51 ,067/- alleging cash pur chase of old jewe llery items without even ind icating that the same violated the specified limits as per statutory provision in issue. Learned counsel submits that the assessee had purchased the impugned old jewellery items witho ut even crossing the statutory limit of Rs.20 ,000/- “in a day to the same party”. And that the CIT( A)/NFAC had nowhere issued any enhancement notice to this effe ct as well. This clinching factual position has go ne un-rebutted from the Revenue side. We further wish to emphasize here that what the CIT (A)/NFAC has done herein to change the head of disallowance from section 40A(3) under challenge to that under estimation from 100% to 20% (supra) as well which is not sustainable as per CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC), CIT vs. Sardari Lal & Co. (2001) 251 IT R 864(Del.) and CIT vs. Union Tyres (1999) 240 IT R 556(Del). We thus deleted the impug ned bogus purchase disallowance on this legal issue itself. The assessee succee ds in it’s cross appeal ITA No. 4751/Del/2025 in very terms. The Revenue’s latter substantive ground fails according ly.
We are now le ft with the Revenue’s former substantive ground in it’s ap peal IT A No. 3327/Del/2025 seeking to revive section 68 addition of Rs.1,50,21 ,473/- in question made in the assessee’s hands in the assessment order and deleted in the CIT(A)/NFAC ’s lower appellate d iscussion.
Learned counsel has invited our attention to the assessee’s P&L account for the relevant previous year that it had already included the very amount as it’s regular business income; and that, therefore, any attempt to revive the addition herein would amount to a double additio n only.
We find only a part merit in the assessee’s vehement contentio ns against the impug ned addition. We reiterate here that the assessee’s preceding stands before us is that it carried out regular jewe llery sale & purchase business wherein it had acquired old jewellery items from vario us custo mers involving purchase o f le ss than Rs.20 ,000 /- only in a day to the same party. We are of the considered view that going by the correspond ing rates of gold jewellery items in the re levant previous year in the range of Rs.50,000/- to Rs.60,000/- at that point of time, it’s explanation supporting the impugned purchase on merits hardly deserves to be accepted since going beyond human probability(ies) as per Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC) . We wish to observe in other words that it could no t be acce pted that the assessee only purchased the old gold and other jewellery items of less than 0.3 gm. on each and every occasion in a day. All this raises a serio us question on acceptability of the assessee’s explanation. The facts also remains that all this could not lead us to reject the assessee’s stand here in attributing source of the impug ned cash deposits to it’s regular business sale in entire ty as well.
Faced with this situation, we are considered vie w that a lump sum addition of Rs.10,00 ,000/- only in the given facts would be just and proper with a rider that the same shall not be treated as a precedent. Learned CIT(A)’s lower appellate findings deleting sectio n 68 unexplained cash credits addition of Rs. 1 ,50,21,473/- stand upheld to the extent of Rs.1 ,40,21,473/- in other words.
So far as assessee’s assessment under Section 115BBE is concerned, we quote S.M.I.L.E Microfinance Limited Vs. The AC IT CC-1 in W.P.(MD) No.2078 of 2020 & W.M.P. (MD) No. 1742 of 2020 held that the said provisio n applied for transactions done on or after 01.04.2017 only. The assessee is according ly directed to be asse ssed under nor mal provisio ns only.
No other ground or argument has been pressed before us.
This Revenue’s appeal ITA No. 3327/Del/2025 is partly allowed and the assessee’s cross appeal ITA No. 4751/Del/2025 is allowed in foregoing terms. A copy of this common order be placed in the respective case files.