ITAT Deletes Addition of Unexplained Cash Deposits Due to Change in Sales Pattern

The Income Tax Appellate Tribunal (ITAT) Delhi, in one of its recent rulings, deleted the addition of unexplained cash deposits, observing that the change in sales pattern and justification for the deposits were ignored by the lower authorities.

The present case involves an assessee, Gupta Subhash & Sons HUF, who filed its return on 05.10.2017, reporting an income of Rs 3,49,095. The assessee’s case was selected for scrutiny through CASS. The assessing officer observed that the assessee, Gupta Subhash & Sons HUF, has made cash deposits of Rs 75,00,000 during the year. During the same period in the previous financial year, the assessee had made a cash deposit of Rs 22,38,000. The AO calculated the difference between the cash deposits of both the financial years and treated the difference of Rs 52,62,000 as unexplained cash and added the same to the income of the assessee under section 69A of the Income Tax Act. The assessee filed an appeal before the CIT(A) to challenge these additions.

The CIT(A) observed that the cash deposit made by the assessee is huge with reference to the total sale of 80.82%. The CIT(A) rejected the appeal filed by the assessee, calling the cash deposits abnormal as compared to the previous financial year. Therefore, the assessee approached ITAT, Delhi.

The assessee submitted that during the year, they had sold the goods on credit amounting to Rs 21,21,000 and the cash sales were Rs 75.29 Lakh. The cash deposits made by the assessee before demonetisation were Rs. 3,00,000 and Rs. 75,00,000 during demonetisation, matching the cash sales made. The assessee also explained that they changed the sales method by increasing the over-the-counter sales. This resulted in more cash sales during the financial year.

Further, the assessee also sold closing stock from the previous year and devised a distress sale programme during the year, leading to cash sales. The assessee also submitted that the AO had not conducted a proper inquiry under section 142(2), and the books of accounts were not rejected.

The Tribunal observed that the AO credited cash deposits of the previous year without verifying or justifying the nature of the business. The ITAT observed that there was a complete shift in the pattern of sales as compared to the previous financial year, and both the AO and CIT(A) did not consider the nature of transactions for the years under consideration.

The Tribunal, based on these observations, allowed the appeal and deleted the addition made by the AO.