Demonetisation Cash Deposits from Accepted Sales Cannot Be Taxed Again Under Section 69A: ITAT Chennai

1. Background and Context

The Chennai Bench of the Income Tax Appellate Tribunal recently pronounced an important ruling in the case of DCIT Vs KJS Jewellers (ITAT Chennai), vide I.T.A.No. 562/Chny/2026, order dated 15/10/2026, concerning Assessment Year 2017-18. The central question before the Tribunal was whether cash deposited in specified bank notes (SBNs) during the demonetisation period could be subjected to a fresh addition under Section 69A of the Income-tax Act, 1961, when the Assessing Officer had already accepted the assessee's reported turnover — including the cash sales that generated that very cash balance.

The Tribunal answered in the negative, affirming the deletion of the disputed addition of ₹3,87,46,000 and dismissing the Revenue's appeal in its entirety.

2. Facts of the Case

KJS Jewellers, a firm engaged in the jewellery trade operating out of Salem, Tamil Nadu, filed its return of income for Assessment Year 2017-18 declaring a total income of ₹2,75,85,610. The return was initially processed under Section 143(1) of the Income-tax Act, 1961, and the case was subsequently selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) scheme. Statutory notices were issued under Section 143(2) and Section 142(1), in response to which the assessee furnished extensive details.

During the course of assessment, the Assessing Officer zeroed in on the cash balance held by the assessee as on 8 November 2016 — the date of demonetisation. The cash in hand stood at ₹3,87,96,431 on that date. The Assessing Officer compared this figure with the cash balance of ₹66,65,739 as on the corresponding date of the preceding year, i.e., 8 November 2015, and treated the difference as abnormal and suspicious.

The Assessing Officer also noted that while the average monthly cash sales of the assessee ranged between approximately ₹2.5 crore and ₹3 crore during April to September 2016, there was a sharp rise to ₹6,33,66,791 in October 2016 and ₹2,52,49,813 between 1 November and 8 November 2016. Additionally, the Assessing Officer noted that the assessee had not been depositing these cash sales into its bank accounts, leading to an accumulation of cash on hand. On the basis of these observations, the Assessing Officer proceeded to disallow the cash in hand claim and added ₹3,87,96,431 to the total income of the assessee under Section 69A as unexplained money.

The assessee appealed before the Commissioner of Income Tax (Appeals), Chennai-20, who passed an order on 12.12.2025 deleting the addition. Aggrieved, the Revenue carried the matter to the Tribunal.

3. The Revenue's Argument Before the Tribunal

The Departmental Representative, Ms. Nayani Swapna, CIT, contended that the CIT(A)'s order was erroneous both on facts and in law. The core argument advanced was that the SBNs received by the assessee from customers after 8 November 2016 had no legal validity in view of the Government of India's notifications dated 08.11.2016 and 09.11.2016, which declared specified bank notes as not being legal tender for the designated transactions. Since the SBNs deposited in the bank accounts were themselves rendered legally invalid by these notifications, the Revenue argued that such deposits could not constitute a satisfactory explanation for the source of the cash, and the transactions were to be treated as null and void. On this basis, the Revenue prayed that the CIT(A)'s order be set aside and the addition restored.

4. The CIT(A)'s Reasoning — Adopted and Upheld by the Tribunal

The assessee's Authorised Representative, Mr. H. Yashwanth Kumar, Advocate, supported the findings recorded by the CIT(A) in paragraphs 6.4 to 6.13 of the appellate order. After examining the records and the CIT(A)'s detailed reasoning, the Tribunal found no infirmity in those findings.

(i) Year-on-Year Comparison of Cash Balance Is Not a Valid Basis for Addition

The CIT(A) addressed the Assessing Officer's first ground of suspicion — the comparison of cash in hand on 8 November 2016 with the figure on the same date in the previous year — as follows: