ITAT Delhi Clarifies Law on Demonetisation Deposits, Section 68 Loans & Rejection of Books

The Delhi Bench of the ITAT, in DCIT Vs Saluja Overseas Pvt. Ltd., has delivered an important ruling dealing with three contentious areas frequently arising in scrutiny assessments for AY 2017-18:

  • Rejection of books of account under Section 145(3) solely for not maintaining an item-wise stock register
  • Addition of unsecured loans as unexplained cash credits under Section 68 where the loans are fully repaid in the same year
  • Taxability of large cash deposits made during the demonetisation period where corresponding cash sales and purchases stand accepted

The Tribunal ultimately upheld the order of the CIT(A) and dismissed the Revenue’s appeal in its entirety, thereby deleting:

  • Estimated profit addition of ₹79,14,204/- under Section 145(3)
  • Addition of ₹2,52,50,000/- towards alleged bogus unsecured loans under Section 68
  • Addition of ₹18,53,09,000/- relating to cash deposits during 08.11.2016 to 31.12.2016, also under Section 68

This decision provides valuable guidance for assessees facing similar disputes, especially in demonetisation-related scrutiny and issues of stock maintenance.

Background of the Case

For AY 2017-18, assessment of Saluja Overseas Pvt. Ltd. was completed under Section 143(3) by the ACIT, Circle 2(2)(1), Ghaziabad. The assessed income was determined at ₹22,54,24,905/- after making three major additions:

  1. Rejection of books under Section 145(3) and estimation of profit

    • Net profit rate of 0.47% was applied
    • Resultant addition: ₹79,14,204/-

  2. Addition of unsecured loans under Section 68

    • Treated as unexplained cash credits
    • Amount added: ₹2,52,50,000/-

  3. Addition of cash deposits under Section 68 during demonetisation

    • Cash deposited in bank between 08.11.2016 and 31.12.2016
    • Amount added: ₹18,53,09,000/-

The assessee challenged the assessment order before the CIT(A), NFAC, Delhi. The CIT(A) deleted all three additions (though making some separate disallowances of specific expenses). Aggrieved, the Revenue carried the matter to the ITAT Delhi.

No one appeared for the assessee before the Tribunal; the Departmental Representative pressed the grounds seeking restoration of all the additions.

Issue 1: Rejection of Books Under Section 145(3) for Not Maintaining Item-wise Stock Register

AO’s Basis for Addition

The Assessing Officer invoked Section 145(3) and rejected the assessee’s books of account primarily on a single ground:

  • The assessee did not maintain an item-wise stock register for its electronic goods, such as iPhones, MacBooks and other Apple products.

Based on this rejection, the AO estimated profits by applying a net profit rate of 0.47% on turnover, resulting in an addition of ₹79,14,204/-.

Assessee’s Explanation Before CIT(A)

The assessee explained that:

  • It was engaged in wholesale trading of a very wide range of electronic items from Apple Inc. Ltd., involving:
    • Numerous models
    • Different specifications, capacities, colours and features
  • Maintaining a detailed item-wise stock register for every single product variant was practically not feasible.
  • Instead, the assessee:
    • Physically verified stock at year-end
    • Recorded all purchases from the manufacturer and sales to customers in the accounting system under main heads
    • Could derive quantity details from the accounting records when required

CIT(A)’s Findings on Section 145(3)

The CIT(A) concluded:

  1. Non-maintenance of item-wise stock register alone is not enough

    • No other defect in the books of account was identified.
    • The AO did not demonstrate how the absence of an item-wise stock register affected the determination of true profit.
    • The assessee’s books were otherwise maintained, and quantitative details could be worked out.

  2. Violation of natural justice

    • The AO invoked Section 145(3) without issuing a specific show cause notice regarding rejection of books.
    • Such unilateral rejection was held to be contrary to principles of natural justice.

  3. Reliance on judicial precedents
    The CIT(A) referred to:

    • Paramount Impex vs ACIT (ITA No. 1047/Cha/2016) – ITAT Chandigarh held that books cannot be rejected merely for non-maintenance of stock register.
    • S.N. Namasivayam Chettiar vs CIT (1960) 38 ITR 579 (SC) – Supreme Court considered similar issues and did not endorse rejection of books solely for want of a stock register where no further defects exist.

On this reasoning, the CIT(A) deleted the addition of ₹79,14,204/- made on estimated net profit.