ITAT Delhi: Ad-hoc Addition Under Section 68 of Income Tax Act Cannot Be Sustained on Mere Conjecture Without Evidence

ITAT Delhi Limits Revenue's Power to Disregard "Concocted" Cash Sales Without Evidence

In a significant ruling for taxpayers facing scrutiny over cash deposits made during the 2016 demonetization period, the Income Tax Appellate Tribunal (ITAT) Delhi has curtailed the ability of assessing officers to make ad-hoc additions to income based on "surmises and conjectures."

The case, Basant Kumar Aggarwal vs. ITO , saw the tribunal set aside a massive tax addition of over Rs. 9.41 crore, emphasizing that the burden of proof rests on the Revenue to find concrete evidence of ledger manipulation before dismissing a taxpayer's properly recorded books of accounts.

The Demonetization Dispute

The dispute centered on the Assessment Year 2017-18, during which the assessee, Basant Kumar Aggarwal, reported significant cash sales in October and early November 2016. High cash deposits in the taxpayer's bank account during the demonetization period prompted the Income Tax Officer (ITO) to flag the case for scrutiny.

The Assessing Officer (AO) argued that the sales were "concocted"—purportedly manufactured to account for unexplained wealth—given the lack of similar cash deposit patterns in other months. The AO subsequently rejected the taxpayer's books of account under Section 145(3) and applied an ad-hoc addition of 35% of the total cash deposits as unexplained income under Section 68 of the Income Tax Act. The Commissioner of Income Tax (Appeals) later upheld this decision, arguing the sales figures were an "afterthought."

Arguments at the Tribunal

Counsel for the appellant, Sh. Ved Jain, argued that the additions were based purely on suspicion. He highlighted that the sales and purchases ledger had been verified against VAT returns, and there was no evidence to suggest that the traded stock did not exist or that the deposits were not derived from legitimate business activity.

Relying on a series of legal precedents, including Smile Microfinance Ltd vs. ACIT , the defense contended that invoking the punitive measures of Section 115BBE (covering tax on unexplained cash credit) was inappropriate in the absence of valid findings regarding the falsity of the books. The Revenue, represented by Senior Departmental Representative Sh. Manish Gupta, largely relied on the observation that the timing of the deposits was highly irregular compared to the previous year.

Key Observations

The tribunal expressed skepticism over the Revenue’s reliance on "rules of probability" rather than hard evidence. In its order, the Bench noted:

> "No explanation of assessee can be rejected questioning the prudence to hold the cash or deposit of cash unless there is something in the form of direct or substantial evidence which establishes that the cash was merely reflected in the book and was otherwise not available."

The Bench further criticized the AO’s approach, stating:

> "The observations and conclusions of Ld. CIT(A) to sustain ad-hoc additions appear to have too far stretched the rules of probability and prudence as applicable in assessment proceedings."

Regarding the lack of evidence found by the tax authorities, the ITAT observed:

> "Except for doubting the cash sales on superfluous basis there was no evidence otherwise."

The Verdict and Its Implications

The ITAT Bench, comprising Shri S. Rifaur Rahman and Shri Anubhav Sharma, ultimately allowed the appeal, ruling that since the quantitative details of sales, purchases, and stocks were corroborated by VAT returns, the rejection of books was legally untenable.

This ruling serves as a vital precedent, reminding tax authorities that the power to disregard a taxpayer's accounts must be grounded in specific proofs of omission or fabrication. For business owners, this judgment offers a strong shield against arbitrary estimations of income by the Revenue, particularly for transactions occurring during periods of heightened regulatory scrutiny like the demonetization era.