Bangalore ITAT Holds Debtor Confirmations Not Essential When Cash Deposits Match Recorded Sales

Overview of the Decision

The Bangalore Bench of the Income Tax Appellate Tribunal, in the case of Umabayi Gamanagatti (through Legal Heir) vs ITO, examined additions made on cash deposits during the demonetisation window and ultimately ordered deletion of the disputed additions of Rs. 4,50,000 and Rs. 6,11,683.

The Tribunal concluded that once the Revenue accepts that:

  • the assessee has carried out genuine sales,
  • those sales are duly recorded in the regularly maintained and audited books, and
  • corresponding debtor ledgers and sample bills are on record,

then merely not producing written confirmations from sundry debtors cannot, by itself, justify additions on account of unexplained cash deposits.

This ruling is particularly relevant to assessees who deposited cash during the demonetisation period and faced additions solely due to the absence of debtor confirmations, despite full reflection of sales in the books.

Background Facts

Nature of Business and Return Filing

  • The assessee was engaged in trading petrol and diesel.
  • For Assessment Year 2017–18, she filed her return of income on 28.10.2017, declaring total income of Rs. 14,09,870.
  • Audited books revealed:
    • Gross turnover of Rs. 14,29,68,007, and
    • Net profit of Rs. 15,14,998,
      reflecting a net profit margin of approximately 1.06%.

Scrutiny Selection and Demonetisation Deposits

The case was picked up for complete scrutiny primarily to verify substantial cash deposits made during the demonetisation period (09.11.2016 to 31.12.2016). A notice under Section 143(2) was issued on 24.09.2018.

From the bank statements, the Assessing Officer noted that:

  • Cash aggregating to Rs. 98,04,000 was deposited into the Bank of India account, and
  • Cash of Rs. 17,05,000 was deposited into the State Bank of India account.

The Assessing Officer invoked Section 133(6) and obtained details directly from the banks to verify these cash deposits.

Explanation of Source of Cash Deposits

In response, the assessee explained that:

  1. There was an opening cash balance as on 08.11.2016 of Rs. 28,17,772 in her books of account, and
  2. During the demonetisation period, she made cash sales and realised amounts from sundry debtors, resulting in recorded sales of Rs. 1,03,28,919.

Against this combined availability of cash (opening balance plus cash inflows from business), she deposited Rs. 1,16,19,500 into the Bank of India and State Bank of India accounts.

Her stand throughout was that:

  • All cash deposits were fully explainable from the books, and
  • There was no unexplained or unaccounted cash involved.

Assessment Proceedings and Additions Made

Rejection of Opening Cash Balance

Despite the explanation and audited books, the Assessing Officer declined to accept the claimed opening cash balance of Rs. 28,17,772 as on 09.11.2016.

  • The entire amount of about Rs. 28,17,000 (rounded) was treated as unexplained cash.
  • It was brought to tax as income in the hands of the assessee.

Difference Between VAT Turnover and Book Turnover

The Assessing Officer also cross-checked the assessee’s turnover disclosed in:

  • Books of account: Rs. 14,29,68,007
  • VAT returns: Rs. 14,42,96,368

A difference of Rs. 13,28,361 was noticed between the two figures. This discrepancy was also added as income, treating it as unexplained turnover or suppression of sales.

Assessed Income

After incorporating these additions, the assessment order under Section 143(3) was framed on 26.12.2019, determining total income at Rs. 69,18,390.