Chennai ITAT Strikes Down Section 69A Addition on Demonetisation Cash Deposits Supported by Audited Books and VAT Returns
Background and Context
The demonetisation period of November 2016 gave rise to widespread scrutiny of cash deposits made by assessees across India. Revenue authorities invoked Section 69A of the Income Tax Act, 1961 in numerous cases to treat such deposits as unexplained money, particularly where no prior return of income had been filed or where the assessee's compliance history appeared irregular. One such matter recently came before the Income Tax Appellate Tribunal, Chennai, in the case of G.Ramesh Vs ITO (ITAT Chennai), where the Tribunal took a measured and evidence-driven approach to the question of whether cash deposits during demonetisation could be branded as unexplained income.
The case pertains to Assessment Year 2017-18 and arose from an assessment order passed under Section 144 of the Income Tax Act, 1961 — a best judgment assessment — dated 27.11.2019. The central issue before the Tribunal was whether the CIT(A) was justified in sustaining an addition of ₹33,66,000 representing cash deposits in Specified Bank Notes (SBNs), despite the assessee having produced corroborating business records.
Facts of the Case
Assessee's Profile and Filing History
The assessee, G.Ramesh, had not filed a return of income for the relevant assessment year 2017-18. The Assessing Officer also noted that returns for the earlier assessment years 2015-16 and 2016-17 had been filed belatedly. Given this background of non-compliance, the AO treated the cash deposits made during the demonetisation window as unexplained money under Section 69A of the Income Tax Act, 1961 and proceeded to make the addition through a best judgment assessment under Section 144.
Proceedings Before CIT(A)
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals)-1, Trichy. During the appellate proceedings, the CIT(A) called for a remand report from the Assessing Officer. Based on the findings in the remand report, the CIT(A) partially allowed relief to the assessee by accepting that the entire cash sales proceeds could not be subjected to tax. However, the CIT(A) directed the AO to sustain an addition of ₹33,66,000 — representing the amount deposited specifically in Specified Bank Notes (SBNs) — on the ground that this portion was not adequately explained.
The AO gave effect to the CIT(A)'s directions through an order dated 10.11.2022.
Issues Raised Before the ITAT
The assessee filed an appeal before the ITAT Chennai, raising Ground Nos. 2 to 8, which essentially converged on a single substantive question:
Whether the CIT(A) was justified in confirming the addition made by the AO on account of cash deposits during the demonetisation period, ignoring the assessee's explanation that such deposits were sourced from regular business sales proceeds?