Chennai ITAT Nullifies Section 68 Addition Related to Cash Receipts Converted into Sale of Jewellery

The addition under section 68 of the Income Tax Act for the receipts of cash has been deleted by The Chennai Bench of Income Tax Appellate Tribunal (ITAT) that was converted into the jewellery sale.

There could not be any cause for the uniform sales on all the days, months, or years, The bench of Mahavir Singh (Vice President) and Manjunatha. G (Accountant Member) noted. There might be diverse reasons behind fluctuations in sales, tied to factors like seasonal, clearance, or year-end sales. Hence, the explanation provided by the taxpayer, stating that cash received from customers for jewellery sales is later converted into sales, seems genuine and plausible.

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The taxpayer operates in the gold and jewellery trading sector, having filed income returns declaring the total income.

However, the AO believed that the taxpayer couldn’t fulfil the initial requirement to validate three crucial aspects—establishing the identity of investors, their financial credibility, and the legitimacy of the transactions. As the taxpayer couldn’t satisfactorily prove the credits in their bank account to the Assessing Officer (AO), the entire sum of cash receipts was considered unexplained and consequently subjected to taxation.

The taxpayer lodged an appeal with the CIT. Upon review, the CIT noted that the taxpayer could account for cash deposits made during the demonetization period, tracing them back to cash on hand recorded before the demonetization date, as documented in the cash book for that assessment year. The CIT(A) further observed that the AO attempted to base an argument on the assumption that the purported advances claimed by the taxpayer were either received or considered as cash credits, requiring scrutiny under Section 68.

The CIT(A) concluded that the AO made an error in including cash receipts under Section 68 in conjunction with Section 115BBE of the Income Tax Act, and consequently instructed the AO to remove the additions linked to cash deposits.

The tax department argued that the taxpayer failed to establish the creditors’ identities, their financial credibility, and the authenticity of the transactions, all of which are prerequisites for validating entries in the accounting records. The CIT (Appeals) was criticized for overlooking the absence of details such as purchase and sales invoices, as highlighted in the AO’s assessment report, where the AO explicitly stated that the taxpayer had not submitted essential evidence.

The taxpayer argued that the AO’s decision to label cash receipts, as documented in the taxpayer’s accounts, as unexplained cash credits liable for taxation stemmed from a fundamental misunderstanding. The AO failed to distinguish between trade advances and cash credits. Legal precedents from various court decisions affirm that trade advances fall beyond the purview of Section 68 and cannot be subject to scrutiny under its provisions.

The tribunal concluded that the AO made an error in including cash receipts—originating from jewellery sales later converted into sales—in the assessment year’s unexplained cash credits, taxable under Section 68 of the Income Tax Act. Consequently, the CIT(A) rightfully removed the additions made by the AO.

Case Title	M/s.Sahana Jewellery- Exports Pvt. Ltd. Vs ITO
Citation	ITA No.999/Chny/2022
Date	20.12.2023
Appellant by	Shri R. Clement Ramesh
Respondent by	Shri S.Sridhar
Chennai ITAT	Read Order