ITAT Chennai Rules in Favour of Gold Jewellery Trader: Demonetisation-Period Cash Deposits Cannot Be Taxed Under Section 68 Where Trade Advances Stand Converted Into Recorded Sales
Background and Overview
The Income Tax Appellate Tribunal, Chennai Bench, recently delivered a significant ruling in the matter of DCIT Vs DAR Paradise Pvt. Ltd. pertaining to Assessment Year 2017-18. At the heart of this case was a fundamental question: whether massive cash deposits made during the demonetisation period by a gold jewellery trading company could be characterised as unexplained cash credits under Section 68 of the Income-tax Act, 1961, when the assessee had already accounted for the underlying amounts as sales income in its audited books of account.
The Tribunal not only upheld the deletion of the addition directed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, but also made important observations on the scope and limitations of Section 68, the evidentiary value of audited books of account, and the legal distinction between trade advances and cash credits.
Preliminary Issue: Condonation of Delay in Filing Revenue's Appeal
Before addressing the substantive question, the Tribunal had to deal with a procedural hurdle. The Revenue's appeal was filed with a delay of 136 days beyond the prescribed time limit. The Assessing Officer's petition explained that:
- The order passed by the learned CIT(A) on 21.03.2023 did not appear on the ITBA portal until 31.03.2023, owing to a technical glitch, and could therefore not be downloaded in time.
- The Assessing Officer was concurrently occupied with time-barring assessments, which caused the CIT(A)'s order to escape timely attention.
- The delay was neither deliberate nor motivated by any intent to gain an unfair advantage.
The assessee's representative fairly consented to condonation. The Tribunal, satisfying itself that the reasons offered constituted sufficient cause, condoned the delay in the interest of substantial justice and proceeded to hear the appeal on merits.
Facts of the Case
M/s. DAR Paradise Pvt. Ltd. is engaged in the business of trading gold jewellery and bullion. For Assessment Year 2017-18, the assessee filed its return of income on 04.11.2017, declaring total income of Rs. 31,74,020/- under the normal provisions of the Income-tax Act, 1961 and Rs. 17,32,330/- under Section 115JB of the Income-tax Act, 1961.
The case was selected for complete scrutiny under CASS, primarily to examine large cash deposits made during the demonetisation period. Upon calling for information under Section 133(6) from various banks, the Assessing Officer established that the assessee had deposited cash amounting to Rs. 90,80,86,500/- into accounts maintained with Oriental Bank of Commerce and Axis Bank during the demonetisation window.
Assessee's Explanation of the Source of Deposits
When called upon through a notice under Section 142(1) of the Act dated 18.11.2019 to explain the nature and source of deposits, the assessee provided the following breakdown of its opening cash balance as on 08.11.2016 standing at Rs. 90,75,10,005/-:
| Source | Amount (Rs.) |
|---|---|
| Cash withdrawals from bank prior to demonetisation | 39,33,30,165/- |
| Direct cash sales (without any advance) | 15,58,58,464/- |
| Trade advances received under gold scheme, subsequently converted into sales | 32,43,85,989/- |
| Total | Rs. 90,75,10,005/- (approx.) |
The assessee further furnished a list of 5,577 customers from whom trade advances had been collected under a gold scheme, along with supporting documentation.
Assessing Officer's Findings and Addition Made
Enquiries Conducted
The Assessing Officer undertook the following verification steps:
- Issued summons under
Section 131(1)of the Act to 28 persons from the customer list. - Called for information under
Section 133(6)from 37 persons. - An inquiry under
Section 131(1A)was also conducted by the DDIT (Investigation), Unit-2, during which the sworn statement of Shri D.R. Raghunath, Managing Director of the assessee company, was recorded.
Adverse Findings
- Summons and notices issued to a large number of persons were returned unserved with remarks such as "insufficient address," "address cannot be located," or "no such address."
- A few persons who appeared denied knowledge of any gold scheme promoted by the assessee.
- Only one or two persons confirmed participation in the scheme and payment of advances.