ITAT Deletes S. 68 Addition Towards Cash Receipts Subsequently Converted Into Sale Of Jewellery

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition under Section 68 of the Income Tax Act towards cash receipts, which were subsequently converted into the sale of jewellery.

The bench of Mahavir Singh (Vice President) and Manjunatha. G (Accountant Member) has observed that there cannot be any reason for uniform sales on all days, months, or years. There may be various reasons for an increase or decrease in sales that depend on various factors, including festival sales, clearing sales, year-end sales, etc. Therefore, the explanation of the assessee that it has received cash from various customers towards the sale of jewellery and subsequently the advances have been converted into sales appears to be bona fide and reasonable.

The assessee/respondent is in the business of trading in gold and jewellery. The assessee has filed its return of income, admitting total income.

The AO opined that the assessee could not discharge the initial onus to establish three things necessary to obviate the mischief of Section 68 of the Income Tax Act, namely the identity of the investors, their creditworthiness, and the genuineness of the transactions. Since the assessee has failed to prove the credits found in his bank account to the satisfaction of the AO, the total cash receipts have been treated as unexplained cash credits and brought to tax.

The assessee filed the appeal before the CIT. The CIT observed that the assessee is able to explain the source of cash deposits during the demonetization period out of cash in hand available before the date of demonetization as per the cash book maintained for the impugned assessment year. The CIT(A) observed that the AO tries to build up a case on the presumption that the so-called advances claim to have been received by the assessee or cash credits, which need to be examined in light of the provisions of Section 68.

The CIT(A) opined that the AO erred in making additions towards cash receipts under Section 68 r.w.s. 115BBE of the Income Tax Act and thus directed the AO to delete additions made towards cash deposits.

The department contended that the assessee has failed to prove the identity of the creditors, the creditworthiness of the creditors, and the genuineness of the transactions, which are prerequisites for accepting the entries made in the books of accounts. The CIT(A) failed to appreciate the fact that the assessee has not furnished details like purchase bills, sales bills, etc., which is evident from the observations of the AO in his assessment order, where the AO records categorical findings that the assessee has failed to file necessary evidence.

The assessee contended that the sole basis for the AO to treat cash receipts recorded in the books of accounts of the assessee as unexplained cash credits and taxable was the fundamental mistake committed by the AO in understanding the difference between trade advances and cash credits. It is a well-settled principle of law based on the decisions of various courts that trade advances are outside the scope of the provisions of Section 68, and those advances cannot be examined in light of the provisions of Section 68.

The tribunal held that AO is erred in making additions towards cash receipts received for the sale of jewellery, which have been subsequently converted into sales, for the assessment year as unexplained cash credits taxable under Section 68 of the Income Tax Act. The CIT (A) has rightly deleted the additions made by the AO.

Counsel For Appellant: R. Clement Ramesh

Counsel For Respondent: S.Sridhar

Case Title: ITO Versus M/s.Sahana Jewellery- Exports Pvt. Ltd.

Case No.: ITA No.999/Chny/2022

Click Here To Read The Order