Once AO accepts books of account, he cannot treat a part of sale as unexplained – ITAT

Once the AO has accepted the trading results, he cannot thereafter selectively treat a part of the sale proceeds as unexplained – ITAT

In a recent judgment, ITAT Visakhapatnam has held that once the AO has accepted the trading results, he cannot thereafter selectively treat a part of the sale proceeds as unexplained, unless he rejects the “books of accounts” under Section 145(3) of Act, and demonstrates that the sales are fictitious or bogus.

ABCAUS Case Law Citation:
4860 (2025) (11) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre (NFAC) in confirming the addition made by Assessing Officer (AO) towards the transaction carried on with party treating the same as unexplained cash credit under section 68 of the Income Tax Act, 1961 (the Act).

The return of income filed by the assessee company was initially processed as such under section 143(1) of the Act. Subsequently, the AO, based on information that the assessee company was a beneficiary of accommodation entries routed through one entity initiated proceedings under Section 147 of the Act.

Accordingly, notice under section 148 was issued and in response, the assessee company e-filed its return of income declaring the same income as was originally returned.

On query with regard to the transactions with the suspected entity, the assessee company submitted that it had sold goods to the aforesaid concern and had received payment through RTGS from the latter. The assessee also submitted copies of ledger accounts, bank statements, CST invoices, Form C, Form 16A, and other supporting documentary evidence.

The assessee further clarified that the subject receipts were duly recorded in its “books of accounts” as sales proceeds and were also reflected in its audited financial statements that formed part of its return of income for the year under consideration.

The AO, however, rejected the explanation of the assessee company and made the impugned addition as accommodation entries and treated the same as unexplained cash credit under section 68 of the Act. 

With respect to the challenge to validity of reopening, the Tribunal rejected it observing that as held by Hon’ble Supreme Court it is a trite law that what is required at the stage of initiating proceedings under Section 147 is the availability of material on record based on which the AO can arrive at a belief that the income of the assessee chargeable to tax had escaped assessment, and the sufficiency of or correctness of the material is not a matter to be looked into at the stage of reopening.

The Tribunal noted that AO, while framing the assessment, had accepted the audited “books of accounts” of the assessee company and computed its income on the basis of its returned income, which in turn was based on the latter’s audited book results. Having thus accepted the sales and the resultant profits, there was no justification for the AO to have re-characterized one of the receipts forming part of those sales as an unexplained cash credit under section 68 of the Act.

The Tribunal opined that once the AO had accepted the trading results, he coun’t have thereafter selectively treated a part of the sale proceeds as unexplained, unless he had rejected the “books of accounts” under Section 145(3) of Act, and demonstrated that the sales are fictitious or bogus

The Tribunal observed that the Co-ordinate Bench of Raipur ITAT had held that when the sale proceeds are duly recorded in the “books of accounts” and form part of the turnover accepted by the AO, the same cannot again be treated as an unexplained cash credit under section 68 of the Act.

Therefore, once the “books of accounts” are accepted and the trading results are not disturbed, there is no scope for making a separate addition under section 68 in respect of such recorded receipts as held by the Hon’ble High Court of Delhi and Gujarat.

The Tribunal also noted that assessee company had substantiated the authenticity of the subject sale transactions by filing in the course of the assessment proceedings the requisite documentary evidence, viz. copies of ledger accounts, bank statements, CST invoices, Form C, Form 16A, and other supporting documentary evidence, then, the same could not have been brushed aside and arbitrarily rejected by the authorities below based on flimsy observations.

Accordingly, the Tribunal deleted the addition made by the AO under Section 68 of the Act.

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