Addition Under Section 68 Unjustified as Demonetization Cash

Addition Under Section 68 Unjustified as Demonetization Cash Deposits Were Supported by Verified Bullion Sales

Issue

Whether cash deposits made during the demonetization period out of recorded bullion and jewellery sales can be treated as unexplained cash credit under Section 68 read with Section 115BBE when stock records, purchases, and sales remain undisputed.

Facts

Business Activity: The assessee-company is engaged in the wholesale and retail trade of gold and silver bullions and jewellery.
Demonetization Cash Deposit: During scrutiny for AY 2017-18, the Assessing Officer (AO) noted cash deposits amounting to ₹2.12 crores in the assessee’s bank account during the demonetization period.
AO’s Action: Observing a spike in sales between 07-11-2016 and 08-11-2016, the AO treated the sales as bogus to the extent of cash deposited, allowed a set-off of ₹40 lakhs declared under PMGKY, and added the remaining balance of ₹1.72 crores as unexplained cash credit under Section 68.
Evidence Submitted: The assessee provided comprehensive month-wise details of purchases, sales, and stock movement showing:
- Opening stock of ₹1.08 crore as on 01-04-2016.
- Closing stock of ₹6.36 crore as on 31-10-2016.
- Substantial depletion of stock through documented sales.
Lack of Dispute by Revenue: The AO did not question or dispute the stock details, purchases, or sales, and found no discrepancy in the cash book or accounting records.

Decision

Verification of Stock Depletion: The assessee successfully demonstrated sufficient availability of stock and its corresponding depletion through sales.
Failure of Inquiry: The AO failed to conduct any independent inquiry or produce evidence establishing that sales receipts were fictitious or unexplained.
Addition Invalidated: In the absence of any defect or doubt in the stock and cash books, cash deposits representing sale proceeds cannot be added under Section 68. (In favour of assessee)

Key Takeaways

Sales-Backed Cash Deposits Are Not Unexplained Credits: Cash deposited in bank accounts during demonetization cannot be treated as unexplained cash credit under Section 68 if it originates from verifiable sales of corresponding stock.
Rejection of Accounts Required: Revenue cannot selectively reject cash sales or treat them as bogus while simultaneously accepting the underlying stock movement, purchases, and trading results without pointing out specific defects in books of account.
Burden of Proof on Revenue for Alleging Bogus Sales: Once the assessee submits complete stock and cash book details showing adequate inventory, the onus shifts to the AO to conduct inquiries before treating cash sales as unexplained income.

IN THE ITAT LUCKNOW BENCH ‘B’

Balaji Shakti Bullions & Jewellers (P.) Ltd.

Deputy Commissioner of Income-tax

Sudhanshu Srivastava, JUDICIAL MEMBER
and Nikhil Choudhary, ACCOUNTANT MEMBER

IT Appeal No. 94 (LKW) of 2023
[Assessment year 2017-18]

OCTOBER 5, 2026

Akshay Agarwal, Adv. for the Appellant. Smt. Pratibha Singh, D.R. for the Respondent.

ORDER

Sudhanshu Srivastava, Judicial Member. – This appeal has been preferred by the Assessee against the order dated 06.03.2023, passed by the Learned Commission of Income Tax (Appeals), Lucknow -3 [Ld. CIT(A)] for Assessment Year 2017-18.

2. The brief facts of the case are that the assessee was engaged in the wholesale and retail business of gold and silver bullions and jewellery. The assessee filed its return of income for the year under consideration on 31.10.2017, declaring a total income of Rs.93,84,568/-. The case of the assessee was selected for scrutiny under Computer-Assisted Scrutiny Selection (CASS). The Assessing Officer (AO) issued statutory notices along with questionnaire, requiring the assessee to furnish the details of transactions entered into by the assessee during the year under consideration. The assessee filed its submissions through online portal of the Income Tax Department.

2.1 The reply of the assessee was examined and the AO noticed that the assessee-company was incorporated on 16.06.2015 and was engaged in the wholesale and retail business of gold, silver, bullions, ornaments and allied products. It was further noticed by the AO that during the year under consideration, the income from business was of Rs.93,84,570/- on the total turnover of Rs.1,51,80,31,359/-, which included sale of goods of Rs.1,51,73,02,942/- and sale of services of Rs.7,28,417/-, the gross profit was of Rs.1,46,06,684/- and net profit was of Rs.89,82,850/-, which were disclosed by the assessee. The assessee had furnished before the AO the copies of Audit Report, Balance Sheet along with notes and profit and loss account. As per the Statement of Financial Transactions (SFT) data available with the Departmental database, the assessee had made cash deposits of Rs.2,12,49,000/- in his bank account No.259335917856 maintained with IndusInd Bank, during the demonetization period. In order to verify the genuineness of the cash deposits made by the assessee during the demonetization period, the AO required the assessee from time to time to furnish details concerning the source of cash deposits, duly supported with documentary evidences. The AO also called for the account statement(s) of the assessee from the respective bank(s) under section 133(6) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The AO, on comparison of the sales and cash deposits made by the assessee during the year under consideration and the preceding year, also noticed that there was an increase of 180% in October, 2016 and of 138% in November (1st to 8?? of November, 2016) in sales as compared to the relevant periods of the preceding year. The AO noted that the gold bullion and jewellery sector thrived on cash economy and, therefore, correct recording and reporting of transactions in the business was hard to monitor or to verify and also that the account books were prone to manipulation.

2.2 After considering the entire facts of the case and submissions made by the assessee, the AO treated the sales booked by the assessee from 07.11.2016 to 08.11.2016 as bogus sales and unexplained to the extent of cash deposited during the demonetization period. However, the AO allowed set off of Rs.40.00 lakhs, which was declared by the assessee under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and the balance amount of Rs.1,72,49,000/- (Rs.2,12,49,000 – Rs.40,00,000) was treated as unexplained and was added to the total income of the assessee under section 68 of the Act. The AO completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.2,66,33,568/-.

2.3 The AO also invoked the provisions of section 115BBE of the Act and initiated penalty proceedings under section 271AAC of the Act, separately.

2.4 Aggrieved, the Assessee preferred an appeal before the Ld. First Appellate Authority, who dismissed the appeal of the assessee and confirmed the order of the AO.

2.5 Now the assessee has approached this Tribunal challenging the order of the NFAC, by raising the following grounds of appeal:

1. The Ld. CIT(A)-3, Lucknow erred on facts and in law in confirming the addition of Rs.1,72,49,000/- as unexplained cash credit u/s 68 read with section 115BBE of I. T. Act without appreciating that cash was deposited in the bank during the demonetization period out of cash received from sales of Bullion and Silver as per cashbook.

2. The Ld. CIT (A) did not appreciate that once the trading results and audited books of accounts have been accepted, no addition can be made u/s 68 of I. T. Act, when the cash deposited during demonetization period in SBN (Specified Bank Notes) was out of sale proceeds of Bullion and Silver being Cash in hand as per books of accounts as on close of 08.11.2016.

3. The Ld. C.I.T. (A) fails to appreciate that in case of audited accounts no addition can be made for sale duly recorded in books u/s 68 of I.T. Act. Further, without rejecting the books of accounts, no addition can be made separately.

4. The Ld. C.I.T. (A) has not given any adverse finding on evidences filed being cash book, sales ledger, stock book, purchase ledgers, sale and purchase bills and Vat Returns in support of sale being cash deposit. However merely relying on human conduct and preponderance of probabilities considered the cash sales as unexplained transaction.

5. The Ld. C.I.T. (A) did not appreciate that amount of Rs.1,72,49,000/- was credited in the sales account and duly included in the Trading A/c and profit arising from sale has been included in the profit disclosed by the assessee in its return of income. Thus in these circumstances cash sales could not be treated as unexplained cash credit and no addition could be made ‘twice’ in respect of the same.

6. The Ld. C.I.T.(A) failed to appreciate that once the assessee sold the goods and paid VAT tax thereon, the buyer of the goods becomes the debtor of the assessee and any receipt of money/ recovery of sale consideration is the realization of such ‘debt’, thus provisions of Section 68 of I.T Act cannot be applied i.r.o recovery of sale consideration.

7. The Ld. C.I.T. (A) failed to appreciate that the company was incorporated in 16.06.2015, therefore, sales of earlier year cannot be compared with the sales made during the year.

8. The addition upheld is highly excessive, contrary to the facts, law and principle of natural justice and without providing sufficient time and opportunity to have its say on the reasons relied upon.

3. During the course of hearing before us, the Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the assessee had filed monthly purchase details, monthly sales details and monthly opening and closing stock details before the AO and the AO had not pointed out any discrepancy in any of these documents. It was also submitted that the assessee had filed the Cash Book for the period 1.10.2016 to 8.11.2016 before the AO and the AO had not pointed out any discrepancy in the same. The Ld. A.R. further submitted that no unregistered purchases had been made by the assessee during the financial years 2015-16 and 2016-17 and that all the purchases had been made through registered dealers and the payments of purchases were made only through bank accounts. The Ld. A.R. has placed before us the following details:

(1) The opening/closing stock details:

As on 01-04-2016	:	Rs.1,08,10,370/-
As on 31-03-2017	:	Rs.16,52,02,913/-

(2) The stock of Gold bullion:

As on 30.09.2016	:	2.277.755 Gms.
As on 31.10.2016	:	5.235.305 Gms.
As on 30.11.2016	:	26.636.175 Gms.

(3) The Stock of Gold Jewellery:

As on 30.09.2016	:	16,621.957 Gms.
As on 31.10.2016	:	15,982.319 Gms.
As on 30.11.2016	:	14,445.65 Gms.

3.1 The Ld. A.R. submitted that in view of the above, if the average rate of stock as on 31.10.2016 was taken @ Rs.30,000/- per 10 gms., then the estimated value of stock comes to Rs.6,36,51000/- (5235 Gm +15982 Gm) X 3000) and, thus, the assessee undisputedly had sufficient stock in hand for the sale of goods on 7?? and 8?? of November, 2016. The Ld. A.R. also placed before us the details of the purchases made during the year and in specific months, which are as under:

(1)

Purchases for F.Y- 2015-16 :Rs.9,64,19,202.15

(2)

Purchases for F.Y- 2016-17 :Rs.1,65,78,17,219.78

(3)

Purchases Made in Sep., 2016: Rs.3,61,13,267.00

(4)

Purchases Made in Oct., 2016: Rs.16,99,0110.00

(5)

Purchases Made in Nov., 2016: Rs.16,85,39,696.00

3.2 The Ld. A.R., inviting our attention to monthly VAT returns, submitted that no return had been revised for any of the month of the year under consideration and, thus, it was beyond doubt that the assessee’s purchases as well as the stock could not be doubted. It was further submitted that the annual turnover in financial year 2016-17 was Rs.151.80 crores and the average per day sales were approximately Rs.50.00 lakhs on the basis of annual turnover of 300 days and that the cash sales of Rs.2.12 lakhs was a small amount of cash sales as compared to the annual turnover and the daily average sales of the assessee. The Ld. A.R. has also placed before us the comparative analysis of the sales (Annual Turnover) for three years, which are as under:

(1)

2015-16 : Rs.8,87,13,764/-

(2)

2016-17 : Rs.1,51,80,31,359/-

(3)

2017-18 : Rs.4,72,66,01,356.97/-

3.3 The Ld. A.R. submitted that from a perusal of the above, it can be seen that the annual turnover had risen more than 20 times from financial year 2015-16 to financial year 2016-17, and it had increased three times in financial year 2017-2018 as compared to financial year 2016-17. The Ld. A.R. made specific emphasis on the following facts/points:

(1)

There was no abnormality in sales, as the sales of each year had increased.

(2)

The books of accounts were accepted by the AO and no defect had been pointed out.

(3)

The A.O had verified all the sales bills, cash memo and purchases as well as stock details and no defect or objection had been raised.

(4)

The purchases and stock in hand of the assessee were never in dispute. The A.O had not raised any doubt against the stock in hand in respect of purchases.

(5)

The expenses of the assessee in the books of accounts were allowed and no other addition had been made other than the cash deposits.

(6)

The cash in hand as on 7th and 8?? of November, 2016 was not doubted by the A.O

(7)

The assessee had sufficient stock in hand at the time of sale made during the demonetization and substantial quantities of purchases were made by the assessee even after the demonetization period. In the month of November, 2016, the assessee had made purchases of more than Rs. 16.00 crores.

(8)

No purchases were made from unregistered persons. All the purchases were made from registered dealers and the payments were made only through banking channel.

(9)

The sales receipts were below Rs.2.00 lakhs and were in accordance with the Income Tax provisions. There was no requirement of KYC below sale of Rs.2.00 lakhs and all the sales bills were in accordance with the Income Tax Provisions.

3.4 The Ld. A.R. submitted that the addition has been made only on presumption basis under section 68 of the Act, which is bad in law and the same needs to be deleted.

3.5 It was further submitted by the Ld. A.R. that the addition made under section 68 of the Act, in the case of the assessee, would amount to double taxation, because the receipts had already been offered to tax and, therefore, the entire amount could not be brought to tax again.

3.6 The Ld. A.R. prayed that in view of the above facts, the order passed by the Ld. CIT(A) may be set aside and the addition of Rs. 1,72,49000/- made by the AO be deleted.

4. Per contra, the Ld. Sr. D.R., inviting our attention to the assessment order, submitted that the AO had observed that there had been abnormal jump in cash sales in the month of October, 2016 and upto 08.11.2016 when compared to the overall trend of cash sales reported by the assessee during the year under consideration. The Ld. Sr. D.R. submitted that in the context of demonetization of SBNs and the fact that the assessee had opportunity uptil 20.11.2016 to manipulate his accounts, the AO had made a compelling case to show that the abnormal results of October, 2016 were only with a view to account for unexplained Specified Bank Notes that were in the hands of the assessee. In this regard, the Ld. Sr. D.R. placed further emphasis on the case laws relied upon by the AO, particularly the judgment of the Hon’ble Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) and stated that in considering such matters, the test of human probabilities had to be applied. The Ld. Sr. D.R. submitted that since the assessee had not shown huge cash purchases either earlier or subsequently, it had to be held that the cash sales shown in the month of October, 2016 were abnormal and only shown with a view to explain unaccounted Specified Bank Notes in the possession of the assessee. The Ld. Sr. D.R. further submitted that the assessee had admitted to suppression of income by making a disclosure under PMGKY, and hence the books were not reliable. The Ld. Sr. D.R., placing reliance on the orders of the authorities below, submitted that the appeal of the assessee may be dismissed.

5. We have heard the rival submissions and have also perused the material on record. On examination of the assessee’s submissions, it is observed that the assessee had set up its business in the financial year 2015-16 and made sales of Rs.8,87,13,764/- during that year. This had increased to Rs.1,51,80,31,359/- in the financial year relevant to the assessment year under consideration and had further increased to Rs.4,72,66,01,356.97 in the subsequent financial year. Thus, it is evident that the business of the assessee was an expanding business and the sales had not abnormally increased in one particular month but was showing a constant trend of increasing over the years. It is also observed that the assessee had an opening stock of jewellery worth Rs.1,08,10,370/- on the 1st of April, 2016. The assessee had furnished before the AO the month- wise details of purchases and sales made after that date and the movement of stock. From the same, it is seen that the assessee had a closing stock of Rs.6,36,51,000/- as on 31st October, 2016 and had depleted a substantial amount of that stock by way of sales. The details of stock, purchases and sales that have been submitted by the assessee before the AO have not been questioned or doubted in any manner by the AO. Therefore, only because the month of October, 2016 saw a spurt in cash sales below the limit of Rs.2,00,000/-, for which the assessee was not in a position to furnish details of purchasers, the sales made by the assessee cannot be doubted unless the purchases, sales and stock depletion are not accepted.

5.1 With regard to the argument that the assessee had not submitted the sales invoices to the Assessing Officer, we observe that unless there is a finding that the stock was not available or was diverted elsewhere, sales claimed by the assessee out of this stock cannot be doubted. The AO has based his additions on the belief that there existed a possibility of manipulating the exact date of sale on account of the requirement of filing of VAT return for October, 2016 on 20.11.2016, but we observe that first of all, in this case, all the cash from sales was deposited on 08.11.2016 itself leaving lesser scope for manipulation but even if that were so, it would not take the credits on account of the sales in its books outside the purview of sales receipts, unless it could be shown that the sales had not occurred or that the assessee did not have the stock to sell that which it claimed to have sold. It is observed that the assessee presented the cash book before the AO and the AO could not find any discrepancy in the same. Therefore, the credits made in the said cash book on account of cash sales, remain uncontroverted.

5.2 The ITAT Lucknow Bench had an occasion to consider similar facts in the case of Lala Kashi Nath Seth Jewellers (P.) Ltd. v. ACIT [IT Appeal No.185 (LKW) of 2025, dated 5-8-2026], the Bench deleted the addition by observing as under:

” 5.0 We have heard the rival submissions and have also perused the record. We have also given a thoughtful consideration to the orders of both the lower authorities. The facts in this case are undisputed. The Assessing Officer (AO) has made an addition of Rs.15,87,62,645/- being cash deposited in its bank account during the demonetization period. The Ld. AR has submitted that the cash was deposited out of the cash available in the cash book of the assessee as on 08.11.2016. It has been explained by the Ld. AR that the assessee is in the business of Jewellery and most of the customers generally make payment in cash against purchase of jewellery. It has been further argued that the impugned cash deposits during the demonetization period had become a necessity in view of the demonetization announced by the Government of India on 08.11.2016. The assessee had offered a similar explanation before the AO had also submitted month-wise details of opening cash in hand, cash sales and cash deposit (as reproduced by the AO at Page 4 of the assessment order). A perusal of the above would show that the assessee had sufficient cash in hand in its books on 08.11.2016 which was deposited during the demonetization period. Further, as the records show, the AO has not at all disputed the availability of stock to make the sales. The AO has also observed that the purchases by the assessee were in order. The AO, however, was of the view that there was an abnormal increase in sales which was beyond human probability and that the circumstantial evidence also would be against the assessee in this regard. The AO has, however, not doubted that cash was available in the books of the assessee on 08.11.2016.

5.1 It is seen that the AO has simply brushed aside the explanation offered by the assessee on the ground that the high volume of sales, as declared by the assessee, was beyond human probability. In this regard, the assessee had explained before the AO that there were five retail business outlets and the assessee was equipped with proper manpower and infrastructure to effect the huge volume of sales but this explanation also did not find favour with the AO. This, in our considered view, cannot be upheld. On a factual matrix, we are of the considered view that the assessee has duly explained the source of cash before the AO and it is evident that the AO has just proceeded to make the impugned addition only on surmises and conjectures. The books of account of the assessee are duly audited and the AO has not pointed out a single defect in the said books. Thus, the AO has completely disregarded the voluminous evidences filed by the assessee and has proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. Thus, the entire addition has been made by the AO on presumption and on ‘preponderance of probability’ and not on any concrete evidence. It is our considered view that where the assessee has furnished audited books of accounts wherein opening stock, sales and closing stock had been duly disclosed and duly accepted in audit, rejecting the assessee’s books only qua substantial increase in sales during the demonetization year, without any adverse evidence being brought on record by the Income Tax Department was not justified. It is our considered view that the impugned additions have been made on a very general basis and hypothesis of human probability which cannot stand the test of reasoning and logic. In our considered view, abnormal growth in sales is a vague ground to make addition where the assessee has demonstrated that there was a direct co-relation between the cash inflow (sales) and cash outflow (deposit in bank). Further, the outflow of stock has not been doubted by the AO and, in fact, the AO has himself observed in Para 22.1 of the impugned order that the assessee had sufficient stock.

5.2 It is further seen that the AO has even commented in Para 22.1 of the assessment order that the purchases were in order. However, the Ld. First Appellate Authority raised some doubts about the veracity of unregistered purchases by observing that the quantum of unregistered purchases during the demonetization period was almost 82% of the entire unregistered purchases, this in our view cannot be a sound reason for not accepting the quantum of sales/purchases especially when the complete list of purchases, including unregistered purchases, were furnished and when it was also submitted by the assessee that the all the purchases were paid for through the banking channels without bringing any evidence on record which would disprove the claim of the assessee. It is also seen that the Ld. First Appellate Authority has also referred to the Assessment Order passed under VAT and has observed that huge VAT liability had been created against the assessee due to difference in the figures reported against unregistered purchases in the Annual VAT Return filed by the assessee. However, the fact of the matter is that VAT demand of Rs. 11,565/- only was raised while passing the VAT assessment order and the explanation of the assessee with respect to the difference in the purchases from unregistered sources was duly accepted by the VAT Department and, therefore, this does not, in our considered view, give rise to any logical reason to discard the purchases/sales. Further, a comparison between the figures relating to differences in VAT figures as per VAT Assessment Order and as stated in the order of the Ld. First Appellate Authority would show that the figures stated in the order of the Ld. First Appellate Authority are not correct and have been reproduced in the impugned order without proper verification. As the Ld. AR has rightly pointed out, that the VAT demand raised at the time of VAT assessment was only 11,565/- and not Rs. 50,11,565/- as stated by the Ld. First Appellate Authority. Similarly, as has been rightly pointed out by the Ld. AR, the Ld. First Appellate Authority has misquoted the figure of purchases omitted to have been included in the VAT Annual Return at Rs. 10,49,14,405/- whereas the correct figure was Rs. 49,14,405/- only. Therefore, any sustenance of addition based on such incorrect figures cannot be upheld by us.

5.3 In view of our observations in the preceding paragraphs, it emerges that the AO has completely disregarded the voluminous evidences filed by the assessee and has proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. Thus, the entire addition has been made by the AO on presumption and on ‘preponderance of probability’ and not on concrete evidence. Further, even the calculation of alleged unexplained cash credit of Rs. 15,87,62,645/- added u/s 68 of the Act has no logical basis as the same has been calculated by taking only average sales for seven days in October, 2016 and treating the rest as unexplained. This working by the AO has no sound basis and is again based on presumption, surmises only human probability. Though preponderance of probability is an accepted principle to judge reliability of evidences as held by the various Hon’ble Courts in plethora of cases but its application in judging the quality of evidences should be done in a reasonable manner. The action of the AO is not reasonable in as much as he proceeded to disbelieve the quantum of sales only for the reason of their sheer volume without pointing any defect in the books of account of the assessee. When as per the submission of the assessee, cash in hand was the source of the impugned cash deposit, then some further enquiries ought to have been made by the AO before rejecting the Assessee’s explanation outright on the ground of high volume of sales. It will not be out of place at this juncture to refer to the judgment of the Hon’ble Apex Court in the case of Dhakeshwari Cotton Mills Ltd v. CIT (1954) 26 ITR 775 (SC) on the issue of suspicion vs. proof. The Hon’ble Apex Court held as under:

“As regards the second contention, although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23(3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT [1944] 12 393. In the instant case, the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the assessee to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by the ITO and the Tribunal, was based on surmises, suspicions and conjectures. The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills but did not show that statement to the assessee did not give him a opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It was not known whether the mills which had disclosed these rates were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the assessee, but it refused even to look at books and papers which assessee’s representative produced before the Accountant Member in his chamber. The assessment in this case and in the connected appeal, was above the figure of Rs. 55 lakhs and it was just and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub- Divisional Officer. Thus both the ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It was thus a fit case for the exercise of power under Article 136.

In the result, the appeal was to be allowed and the order of the Tribunal was to be set aside and the case was to be remanded to it with direction that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the ITO if it is intended to make the estimate on the foot of those enquiries.”

5.4 Further, the addition of Rs.2,94,14,977/- on allegation of extra profit having been earned is again based on an assumption that during the period of demonetization, jewellers were making extra profit of 20% to 22% over and above the regular profit margins. However, in this regard too, the lower authorities have not brought any evidence on record to prove that the assessee was in fact earning this kind of extra profit. Thus, it is very much apparent that this addition too is devoid of any merit as the same is based only on an assumption and lacks any sound evidentiary basis and, therefore, in our considered view, cannot be upheld.

5.5.0 The Ld. AR has also submitted that the impugned addition of Rs.15,87,62,645/- could not have been made u/s 68 Act as the same would amount to double taxation and has cited numerous judicial precedents in support of this contention. We are in agreement with the arguments of the Ld. AR in this regard in as much as once the sales (source of cash deposited) declared by the assessee have been included in the profit/loss account and have been reflected in the returned income, they cannot be considered as being ‘unexplained’ within the meaning of section 68 of the Act. As per the provisions of section 68 where any sum is found credited in the books of account for which the assessee offers no explanation about the nature and source thereof or the explanation thereof is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income tax as the income of the assessee for that previous year meaning thereby that where assessee offers no explanation or provides unsatisfactory explanation with respect to the sum so found credited in the books of accounts, can such a sum be added to the income of the assessee in terms of section 68 of the Act. However, it is undisputed that in the present appeal, the assessee has already disclosed the amount as having been received from sales of jewellery etc and has accepted the same as revenue receipts and to disbelieve the sales either the assessee should not have sufficient stocks or there should be defects in the stock register. However, the AO has himself observed in Para 22.1 of the Assessment Order, the assessee had sufficient stock and has proceeded to reject the assessee’s explanation regarding cash having been generated through sales on the ground of abnormal increase in sales, a reason, which in our considered view, does not empower the AO to reject the books of account without bringing on record any evidence to the contrary and, therefore, we are not in agreement with the action of the AO in invoking provisions of section 68 in this regard.

5.5.1 The Visakhapatnam Bench of this Tribunal, in the case of ACIT v. Hira Panna Jewellers reported in (2021) 189 ITD 608 had held that purchases, sales and stock are interlinked and inseparable. Every purchase increases the stock and every sale decreases the stock. Once there is no defect in the purchases and sales and the same are matching with inflow and outflow of stock, there is no reason to disbelieve the sales. Where the AO has not disturbed the closing stock, which has direct nexus with the sales and where no defects were found in the books of account, suspicion howsoever strong it may be, it should not be decided against the assessee without disproving the sales with tangible evidence. Therefore, in our considered view, the abnormal increase in cash sale and their deposit in the bank account consequent to demonetization could not be the basis for rejection of accounts and addition u/s 68 of the Act without there being any contrary evidence having been brought on record by the Income Tax Department.

5.6 Therefore, in view of our observations and findings in the preceding paragraphs and on facts of this case, we set aside the order of the Ld. First Appellate Authority and direct the AO to delete both the impugned additions viz. (i) the addition of Rs.15,87,62,645/- made by the under section 68 of the Act and; (ii) the addition of Rs.2,94,14,977/- being the addition on account of alleged extra profit.

6.0 In the final result, the appeal of the assessee stands allowed.”

5.3 Respectfully following the same and considering the fact in the present appeal that the assessee has presented evidence of available stock and depletion of the said stock on account of sales and the AO has not carried out any enquiry to show that any portion of the receipts on account of the sale of that stock are unexplained by such sales, no case for addition under section 68 of the Act is made out. We, therefore, find no merits in the addition made by the AO under section 68 of the Act and as confirmed by the Ld. CIT(A). Accordingly, we set aside the order of the Ld. CIT(A) and direct the AO to delete the addition of Rs. 1,72,49,000/- made under section 68 of the Act.

6. In the result, the appeal of the assessee stands allowed.