Whether cash sales be treated as cash credit by IT authorities

PCIT Shimla Vs JMJ Essential Oil Company
Date: 20th July, 2022

SUB: Whether acceptance of cash sales by Sales-tax authorities imposes fetters on the Income-tax officer to treat the cash sales as unaccounted income and impose penalty u/s 271(1)(c) for furnishing inaccurate particulars of Income?

BRIEF FACTS

1. This appeal filed by the assessee against the order of learned Commissioner of Income Tax (Appeals), Shimla dated 29.12.2014.

2. The assessee firm is engaged in the business of manufacturing and sale of essential Oil, commercially known as musk attars Heena Special and sales thereof.

3. The firm filed its return declaring ‘nil income after claiming deduction under section 80IC of the Act (in short ‘the Act’) at Rs. 1,94,37,600/-.

4. During the course of assessment proceedings, it was noticed by the Assessing Officer while examining the books of accounts that the assessee had shown cash sales. The assessee was asked to justify the cash sales and furnish details of the parties. The reply filed by the assessee was considered and was not found satisfactory, The Assessing Officer stated that the mere fact that VAT was paid on the sales did not establish that the sales were genuine. The AO stated that by paying a mere 4% VAT, the assessee had brought tax exempt funds at Rs. 1.87 crores into its books and further that the stock record maintained did not prove a quantitative tally of raw material viz-viz production. Thus the total amount of Rs. 1,94,37,600/-, including VAT as credited in the books account, which was claimed to be cash sales, was held by the AO as the assesses own money introduced in the garb of cash sales and was added back to the total income of the assessee under section 68 of the Act and penalty proceedings under section 271(1)(c) of the Act initiated thereon.

5. The quantum appeal filed by the assessee was dismissed by the CIT(Appeals) vide order dated 27.2.2012.

6. In response to show cause notice under section 271(1)(c), the reply filed by the assessee was found unsatisfactory. The Assessing Officer referring to the order of CIT(Appeals), Shimla, held that the assessee firm had inflated the profits by introducing the income from undeclared sources to get maximum deduction under section 80IC of the Act and thus concealed the particulars of income to the extent of Rs. 1,94,37,60/-. Thereafter the Assessing Officer levied the penalty under section 271(1)(c) of the Act.

7. The penalty order was challenged before ld. CIT(Appeals) and it was submitted that cash sales amounted to Rs. 1.94 crores only, out of the total sales of Rs. 47.17 crores and that the said cash sales were duly disclosed and accounted for in the books of account. It was argued that all the sales were backed by the sales bills, sales tax paid challans and Sales Tax Return filed by the assessee with the Commercial Tax Department of Una. It was argued that books of account alongwith inventory record were duly audited by the tax auditor and the cash sales should not have been treated as unexplained cash credits merely because the address of all the customers were not found to be complete on the cash sales bills. It was further argued that the Assessing Officer had failed to discharge the onus of proving the source of generation of such undisclosed income and had proceeded only on suspicion and assumptions while levying the penalty.

8. It was submitted that appeal of the assessee had been admitted by the Hon'ble High Court of Himachal Pradesh which proves that addition made by the Assessing Officer is certainly debatable. The assessee relied upon decision of the Hon'ble Supreme Court in the case of Reliance Petroproducts Pvt. Ltd., 322 ITR 158 and argued that merely because the assessee's explanation was not acceptable to the revenue, that by itself would not attract the penalty under section 271(1)(c) of the Act.

9. The ld. CIT(Appeals) did not accept contention of the assessee and on the basis of finding of fact recorded by the authorities below as confirmed by the Tribunal and following the decision of the learned CIT(Appeals) in Assessment Year 2007-08, came to the conclusion that assessee had furnished inaccurate particulars of income by way of claiming bogus cash sales to the tune of Rs. 1.94 crores and accordingly, confirmed the levy of penalty under section 271(1)(c) of the Act.

10. Before us, the learned counsel for the assessee brought to our notice that penalty levied on identical addition made in the case of the assessee in the preceding year i.e. Assessment Year 2007-08, had been deleted by the Hon'ble ITAT Chandigarh Bench, vide its order in ITA No. 1327/Chd/2012 dated 25.8.2015.

11. We have considered the submissions and material available on record. On perusal of the order of the Hon'ble I.T.A.T., Chandigarh Bench in ITA No. 1327/Chd/2012 in the case of the assessee for Assessment Year 2007-08, we find that penalty levied on identical addition of unexplained cash sales was deleted for the reason that no evidence of concealment of income or furnishing of inaccurate particulars of income was brought on record except the explanation of the assessee was found unacceptable.

12. The Hon'ble Bench held that merely disbelieving explanation was no ground for levying penalty moreso when the explanation was not found to be false. It was also held that Explanation-1 to section 271(1)(c ) of the Act was also not attracted, since the assessee had offered an explanation which was not found to be false and the assessee had also substantiated the same with evidences in the form of sales bills, sales challans and sales tax order passed by VAT authorities.

13. The Hon'ble Bench further held that though the quantum addition had been sustained but the assessee had been able to make out an arguable and debatable case to prove that penalty need not be imposed. The relevant finding of the Hon'ble I.T.A.T. at para-8 of its order deleting the levy of penalty are as follows:

“In this case, the penalty has been imposed because the Assessing Officer found that assessee has booked cash sales of Rs. 3 Crores in the month of September, 2006 to different parties. This was the sole basis for levy of penalty against assessee because the addition on quantum had been confirmed even by the Tribunal. The Assessing Officer, after examining the record and material found that no complete details of purchasers are mentioned in the sale bills and whatever the details were submitted, were not subjected to verification. This led to the conclusion of the Assessing Officer that the assessee firm had introduced unaccounted cash in its books of account in the garb of cash sales. It is well settled law that findings given in the quantum proceedings have a probative value, however, assessee is still at liberty to explain the addition in the penalty proceedings so as to explain that levy of the penalty is not justified in the matter because the quantum and penalty proceedings are distinct and independent proceedings. Merely because addition on merit have been confirmed by itself is no ground to sustain the penalty automatically. It is an admitted fact that cash sales of Rs. 3.12 Cr were out of the total sales of Rs. 94.54 Cr. The assessee maintained complete books of account and the accounts are audited. The assessee produced books of account, purchase bills, sales bills and stock register before the authorities below and disclosed complete facts with regard to the sales made to different parties. Therefore, nothing was concealed to the revenue department in filing of the return as well as at the time of assessment framed by the Assessing Officer. The sale bills were supported by sales tax paid challans and sales tax return filed by the assessee with Commercial Tax Department of Una and as well as shown by the assessee in the books of account have been accepted by the sales tax authorities (VAT authorities).

Thus, the sales made by the assessee including the cash sales have been accepted by the sales tax authorities. The authorities below dis-believed the explanation of the assessee with regard to cash sales made to different parties because their complete details are not noted in the bills. It was also noted that since no complete particulars of the purchasers are mentioned in the sale bills, therefore, cash sales are not subjected to verification.

This was the sole reason for making the addition as well as levying the penalty under section 271(1)(c) of the Act against the assessee.

The Hon'ble Bombay High Court in the case of R.B. Jessa Ram Fateh Chand v. CIT 75 ITR 33, and similarly, Kerala High Court in the case of M. Durai Raj v. Commissioner Of Income-Tax, Ernakulam 83 ITR 484, held that the books of account cannot be rejected if in cash sales, names and address of the purchasers are not mentioned. There is no need to mention name and address in the cash sales.

These judgements support the version of the assessee that mere dis-believing the explanation of the assessee would not be enough to levy the penalty under section 271(1)(c) of the Act against the assessee for merely not mentioning the complete details of the purchaser in the cash sale bills. No evidence has been brought on record of concealment of income or filing inaccurate particulars of income in respect of cash sales except the explanation of assessee had been found to be unacceptable.

Therefore, it would not follow the amount of cash sales represents income of the assessee so as to levy the penalty under section 271(1)(c) of the Act. Merely dis-believing explanation of the assessee was no ground to levy the penalty. The explanation of assessee was not found to be false. No material is brought on record to hold assessee had made any false claim of cash sales. In our opinion, in the cash sales bills, there was no need to mention the complete names and addresses of the purchasers further because if some customer gave some other wrong name and address to the seller, the seller in the interest of its business would be bound to record what-so-ever address have been supplied by the purchaser. The facts and circumstances of the case, therefore, clearly show that it is not a case of furnishing inaccurate particulars of income or concealing particulars of income.

The ld. DR referred to Explanation-I to section 271(1)(c) of the Act in support of the argument but the same would not be applied in the case of the assessee because assessee has not failed to offer any explanation and that explanation of assessee was not found to be false. Further, the explanation of the assessee is substantiated by the sale bills, sales tax challans and sales tax order passed by the VAT authorities Further, Explanation-I to section 271(1)(c) of the Act deals with deemed concealment of income. Since the assessee has been able to explain its case through the material on record, therefore, Explanation-I to section 271(1)(c) of the Act would not apply against the assessee.

It is a matter of record also that assessee maintained stock register of the raw material purchased and purchase bills were also produced. The assessee also placed the details of raw material used in the manufacturing of its product, therefore, the same would clearly show that assessee has been able to explain that it is not a fit case of levy of penalty, in the given facts and circumstances of the case.

Mere non mention of complete details of purchaser in sale bills would not per-se make out a case of concealment of particulars of income. It is well settled law that penalty is not automatically to be imposed in each and every case. The facts and circumstances of the case shall have to be considered because levy of the penalty is discretionary in nature. The Hon'ble Supreme Court in the case of Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC held that on every demand, penalty is not automatic.

Considering the facts of the case in the light of the above discussion, we are of the view that even if addition on quantum have been sustained, however assessee has been able to make out an arguable and debatable case to prove that penalty need not be imposed in this case. We, therefore, do not subscribe to the views of the authorities below in levying and sustaining the penalty under section 271(1)(c) of the Act. We, accordingly, set aside the orders of the authorities below and delete the penalty.

We may clarify that the findings given in this order are relevant to the penalty matter only and shall have no bearing on the quantum matter in appeal already pending before Hon'ble High Court.”

14. The facts in the present case, we find, are identical to that in the preceding year, being penalty levied on addition made of unproved cash sales. As in the preceding year, the assessee in the impugned year had maintained complete Books of accounts which were audited also. The Books of accounts alongwith purchase bills, sales bills and stock register were produced before the lower authorities and complete facts with regard to sales made to different parties was disclosed. Thus the factum of cash sales was not concealed by the assessee. The sales, including the cash sales, had been accepted by the sales tax authorities. The authorities below disbelieved the explanation of the assessee with regard to cash sales because complete details of the parties to whom cash sales was made was not disclosed.

15. Since on identical facts the Hon'ble I.T.A.T. has deleted penalty in the case of the assessee in the preceding year, respectfully following the same, we set aside the order of the authorities below and delete the penalty levied in the impugned year.

16. In the result, appeal of the assessee is allowed.

CONCLUSION

Section 271(1)(c) cast responsibility upon the AO to reach the clear finding with respect to levy of penalty under the specific charge and if the AO fails to do so then the penalty cannot be levied as such penalty order shall not be maintainable in the eyes of law. In the given case the Cash Sales by the assessee has been proved and substantiated with proof such as bills, invoices , VAT returns and Sales Tax Assessment Orders. Mere not mentioning address and details of customers on sales bills did not allow AO to consider the Cash Sales as undisclosed income and an arrangement by the assessee to introduced unaccounted money to claim the same U/s. 80IC of the IT Act,1961.

DISCLAIMER: the case law presented here is only for sharing information and knowledge with the readers. the views are personal . in case of necessity do consult with tax professionals.