Section 145(3) IT Act | Statistical Deviations Alone Cannot Justify Rejection of Audited Books : ITAT Jaipur

The Income Tax Appellate Tribunal, Jaipur, has delivered a significant ruling clarifying the limits of revenue authorities in rejecting a taxpayer’s books of accounts based solely on statistical anomalies during the demonetization period. The decision reinforces that mere deviation in cash sales or bank deposits, without concrete evidence of fabrication or irregularity, cannot justify invoking Section 145(3) of the Income Tax Act.

Background & Facts

The Dispute

The appellant, Subhash Chand Agrawal, is a small trader engaged in the business of gold and silver jewellery in Jaipur. During the assessment year 2017-18, the Assessing Officer (AO) made an addition of Rs. 40,81,919/- under Section 68 of the Income Tax Act, 1961, treating cash deposits made in November 2016 as unexplained income. The AO rejected the appellant’s books of accounts under Section 145(3), citing a sharp increase in cash sales and bank deposits during the demonetization period as evidence of fabricated transactions.

Key Facts

• The appellant’s business involved retail sales of gold and silver jewellery, primarily in cash.
• On 13.11.2016, the appellant deposited Rs. 59,50,000/- in his bank account, coinciding with the demonetization period (8.11.2016 to 30.12.2016).
• The appellant disclosed an opening cash balance of Rs. 11,63,000/- as on 01.10.2016, which was accepted by the AO.
• The appellant surrendered Rs. 5,95,000/- under the Pradhan Mantri Garib Kalyan Yojana (PMGKY).
• The AO estimated sales from 01.10.2016 to 08.11.2016 at Rs. 2,74,316/-, based on the preceding year’s sales, and treated the balance of Rs. 40,81,919/- as unexplained cash credit.
• The appellant maintained and submitted: purchase registers, sales registers, stock statements, cash books, VAT returns, and copies of all sales bills.
• All books of accounts were audited by a chartered accountant with no adverse remarks.
• The appellant’s turnover increased by 217.39% compared to the previous year.
• Sales bills were all below Rs. 2,00,000/- and lacked complete buyer addresses - a pattern consistent across the entire financial year, not limited to the demonetization period.
• The appellant purchased all stock from a single vendor, Pushpa Enterprises, whose PAN and address were disclosed and verified by the AO.
• No negative stock or inventory discrepancy was found.
• VAT returns filed by the appellant reflected the same sales figures as declared in the income tax return.

Procedural History

• 01.04.2017: Income tax return filed for AY 2017-18 declaring income based on audited books.
• 15.03.2018: Notice under Section 142(1) issued by AO.
• 20.05.2018: AO issued notice under Section 145(3) proposing rejection of books.
• 10.07.2018: AO passed assessment order making addition of Rs. 40,81,919/- under Section 68 and rejecting books under Section 145(3).
• 12.08.2018: Appeal filed before the Commissioner of Income Tax (Appeals) [CIT(A)].
• 31.05.2025: CIT(A) confirmed the AO’s order.
• 15.06.2025: Appeal filed before ITAT Jaipur (ITA No. 1072/JPR/2025).
• 01.06.2026: Hearing conducted.
• 02.07.2026: Judgment pronounced.

Relief Sought

The appellant sought deletion of the addition of Rs. 40,81,919/- under Section 68, restoration of the audited books of accounts, and deletion of the invocation of Section 145(3). He also prayed for deletion of the addition under Section 115BBE, which was not independently contested.

The Legal Issue

The central question was whether Section 145(3) of the Income Tax Act permits rejection of audited books of accounts based solely on statistical deviations in cash sales and bank deposits during demonetization, without identifying specific defects or falsification in the records.

Arguments Presented

For the Appellant

The appellant’s representatives, CAs Tarun Mittal and Harshit Agrawal, argued that:

• The books of accounts were duly audited with no adverse remarks.
• The increase in cash sales was attributable to demonetization, a nationwide, exceptional event forcing cash holders to deposit currency.
• The sales bills’ lack of complete addresses was a consistent practice across the entire year, not confined to the demonetization period.
• All sales were supported by bills, VAT returns, and stock records.
• The AO’s estimation of sales at Rs. 2.74 lakh was arbitrary and led to double taxation - profit already taxed in the books was again taxed as unexplained cash credit.
• The Revenue failed to produce any evidence disproving the source of cash deposits.
• Reliance was placed on CIT v. M/s. S. S. Agarwal & Co. and CIT v. M/s. R. K. Jain & Co., which held that statistical suspicion alone cannot override documented evidence.

For the Respondent

The Revenue, represented by JCIT Gaurav Awasthi, contended that:

• The 217% surge in cash sales and bank deposits was abnormal compared to the previous year.
• Sales bills lacked buyer addresses and product details, suggesting fabrication.
• The volume of cash deposits during demonetization was disproportionate to the declared sales.
• The AO was entitled to apply the principle of preponderance of probability to reject the explanation.
• Section 145(3) empowers the AO to reject books if they are not reliable, even if audited.

The Court's Analysis

The Accountant Member, Smt. Annapurna Gupta, undertook a meticulous review of the evidence and found the Revenue’s reasoning fundamentally flawed. The Tribunal emphasized that Section 145(3) permits rejection of books only when there are specific, material defects - not merely because the figures appear unusual.

"The alleged anomaly noted in the sales made by the assessee prior to demonetization was, I find, not confined only to that period, but persisted in all the bills raised by the assessee during the entire year."

The Tribunal observed that the purported defect - incomplete buyer details on bills - was uniform across the entire financial year, including the previous year. This undermined the Revenue’s claim that the demonetization-period bills were fabricated. The fact that the appellant’s purchases were from a single, verified vendor (Pushpa Enterprises) and that stock records tallied with sales further corroborated the genuineness of the transactions.

The Tribunal rejected the notion that statistical deviation alone could justify rejection of audited books. It held:

"A mere statistical analysis of the cash sales made in the impugned year as compared to the preceding year in the same period can at the most lead to a suspicion, but the same has to be supported with evidences collated from investigation and inquiry done by the Department to reject the explanation of source of cash deposited."

The Tribunal also noted the internal inconsistency in the Revenue’s approach: having rejected the books under Section 145(3), the AO still relied on the book results to estimate sales, thereby creating a contradictory position. The Tribunal held this was legally impermissible.

The Court further observed that the appellant had discharged the burden of proof by producing contemporaneous, verifiable records - purchase registers, stock statements, VAT returns, and bills - all of which were consistent and unchallenged except for the superficial defect of incomplete addresses.

The Verdict

The appeal was allowed. The Tribunal deleted the addition of Rs. 40,81,919/- under Section 68, set aside the rejection of books under Section 145(3), and directed that the income be assessed on the basis of the audited books of accounts. The addition under Section 115BBE was also deleted as it was contingent on the Section 68 addition. The order of the CIT(A) dated 31.05.2025 was quashed. No interest or costs were awarded.

What This Means For Similar Cases

Rejection of Books Requires Concrete Evidence, Not Suspicion

• Practitioners must argue that Section 145(3) cannot be invoked merely because cash deposits increased during demonetization or due to seasonal fluctuations.
• Audited books with no adverse remarks from the auditor are strong evidence of reliability.
• Statistical anomalies alone are insufficient - the Revenue must identify specific falsifications, omissions, or contradictions in the records.

Documentation Consistency Trumps Perceived Anomalies

• If a procedural flaw (e.g., incomplete addresses on bills) is consistent across the entire year, it cannot be used to isolate and discredit transactions from a specific period.
• VAT returns matching income tax returns serve as independent corroboration of sales.
• Stock registers and purchase ledgers, when maintained and verified, create a reliable audit trail.

Double Taxation Must Be Avoided

• Where income is already taxed under the books, it cannot be re-assessed as unexplained cash credit under Section 68.

• Estimating sales lower than declared and then taxing the difference as unexplained income constitutes double taxation and violates the principle of single taxation.

• Always challenge Section 145(3) invocations where books are audited and no specific defect is cited.

• Highlight consistency in documentation across financial years to neutralize claims of artificial manipulation.

• Use VAT returns and stock records as independent corroborative evidence.

• Argue that demonetization-related cash deposits are a legitimate, government-mandated phenomenon, not evidence of tax evasion.