Demonetisation Cash Deposits Upheld as Genuine Sales: Key Ruling from ITAT Bangalore

The Bangalore Bench of the Income Tax Appellate Tribunal, in the case of Sri. Soger Malleshappa Manjunath Kanasoger Mane Mugulikoppa Vs CIT (Appeals), has delivered an important ruling on cash deposits made during the demonetisation window. The Tribunal deleted an addition of ₹29,27,000/- made under Section 68 on the ground that the amount represented cash sales already recorded in the assessee’s regular books, even though the sales proceeds were received in Specified Bank Notes (SBNs).

The decision clarifies that where cash sales are properly documented and reflected in audited accounts, VAT returns, stock records and cash book, such amounts cannot be recharacterised as unexplained cash credits merely because of an alleged violation of RBI guidelines relating to acceptance of SBNs.

Background of the Case

The assessee, a proprietor of M/s Kalleshwara Enterprises, was engaged in trading of borewell tubes, pipes, collars, GI pipes, bore caps and related agricultural equipment. For Assessment Year 2017-18, the assessee filed a return of income on 22.09.2017 declaring a total income of ₹5,57,560/-.

The case was selected for scrutiny under CASS, and notices under Section 143(2) and Section 142(1) of the Income Tax Act 1961 were issued. The assessee furnished the required details including:

  • Audited books of account maintained on a day-to-day basis
  • VAT returns
  • Stock registers
  • Sales invoices
  • Cash book and bank statements

Cash Deposits During Demonetisation

During scrutiny, the Assessing Officer (AO) noticed that the assessee had deposited SBNs in two bank accounts during the demonetisation period:

  • Corporation Bank: ₹14,89,500/-
  • Pragathi Grameena Bank: ₹30,92,000/-

Total SBN deposits: ₹45,81,500/-

As per the e-filed cash book, the cash-in-hand as on 08.11.2016 stood at ₹16,54,500/-. The AO therefore concluded that:

  • Cash sales were made between 10.11.2016 and 17.12.2016
  • The assessee accepted SBNs as consideration for these sales
  • After adjusting opening cash balance, ₹29,27,000/- (₹45,81,500 - ₹16,54,500) represented cash deposits allegedly unsupported by “permissible” tender

On this basis, the AO treated ₹29,27,000/- as unexplained cash credit under Section 68 read with Section 115BBE, categorising it as “income from other sources”, and completed the assessment under Section 143(3) by determining total income at ₹34,84,560/-.

Findings of CIT(A)/NFAC

The assessee challenged the assessment before the CIT(A)/NFAC. The primary explanation offered was that:

  • The entire cash deposited, including the so-called “excess” portion of ₹29,27,000/-, was sourced from cash sales carried out during the demonetisation period.

The CIT(A)/NFAC, however, upheld the AO’s view, essentially on the following lines:

  1. Legality of Accepting SBNs

    • After 08.11.2016, the assessee was allegedly barred from accepting SBNs as valid currency as per RBI guidelines.
    • Consequently, any claimed cash sales involving receipt of SBNs could not be treated as genuine for tax purposes.

  2. Rejection of Supporting Documents

    • VAT returns, stock registers, bank deposit slips and audited financial statements were considered insufficient because, in the opinion of the appellate authority, the real question was not whether the bank credited the amount, but whether the deposits had a lawful and acceptable source.