Higher Demonetisation Cash Sales vs. Additions Under Section 68 and Section 69A: Analysis of Girraj Ji Jewellers Vs ITO (ITAT Agra)

1. Background of the Dispute

The decision in Girraj Ji Jewellers Vs ITO (ITAT Agra) concerns additions made on account of cash deposits and cash sales during the demonetisation window for Assessment Year 2017-18. The central controversy was whether:

  • Cash sales already recorded in the audited books,
  • Supported by stock records and accepted for VAT purposes,

could still be treated as unexplained income under Section 68 and Section 69A of the Income Tax Act 1961 merely because:

  • Cash deposits surged during the demonetisation period, and
  • Profitability had apparently declined on a comparative basis.

The Agra Bench of the ITAT ultimately deleted additions aggregating to ₹79,91,296, holding that suspicion and statistical expectations could not override properly maintained and accepted business records.

The relief related to:

  • ₹6,99,438 added under Section 68 as alleged bogus cash sales, and
  • **₹72,91,858** added under Section 69A` as alleged unexplained excess cash sales during demonetisation.

The Tribunal decided the matter finally, without remanding it back, after independently appreciating the evidence.

2. Facts of the Case and Assessment Proceedings

2.1 Business Profile and Return Filing

  • The assessee was a partnership firm engaged in trading and manufacturing bullion and jewellery.
  • For A.Y. 2017-18, the assessee filed a return on 29.09.2017, declaring total income of ₹8,77,430.
  • The case was selected for scrutiny under CASS because:
    • There were large cash deposits during the demonetisation window (09.11.2016 to 30.12.2016), and
    • There was an unusual jump in sales accompanied by a reduction in profit margins compared to the preceding year.

2.2 Compliance and Records Produced

During the assessment, the assessee furnished a comprehensive set of records, including:

  • Income-tax return and computation,
  • Tax audit report under Section 44AB,
  • Trading and Profit & Loss account and balance sheet,
  • Details of unsecured loans and advances,
  • Bank account statements,
  • Ledger accounts,
  • Partnership deed,
  • Comparative gross profit and net profit statements,
  • Declaration of cash transactions for 2016,
  • Form 24Q,
  • Cash book, and
  • Month-wise sales summary.

The partner Mr. Rakesh Kumar Gupta was also examined on oath on 13.12.2019.

The assessee maintained quantitative stock records, and was a registered dealer under the Uttar Pradesh VAT Act, 2008, with the books duly audited for both Income Tax and VAT purposes.

3. Additions Made by the Assessing Officer

3.1 Alleged Bogus Cash Sales – Section 68 (₹6,99,438)

The Assessing Officer (AO) noticed certain cash sales and issued notices under Section 133(6) to four buyers:

  • Shri Anil Kumar Gupta – ₹1,61,923
  • Shri Vipin Kumar Gupta – ₹1,97,910
  • Shri Ramesh Chand Gupta – ₹1,40,529
  • Shri Narendra Kumar Gupta – ₹1,99,076

Each purchaser replied and confirmed purchasing jewellery in cash from the assessee. However, according to the assessment order, they did not furnish additional supporting evidence such as their own cash source documents.

Despite:

  • Confirmations from all four buyers, and
  • The fact that sales were duly recorded in the assessee’s books,

the AO treated the aggregate of ₹6,99,438 as bogus cash sales, invoking Section 68 on the reasoning that the source of cash in the hands of the buyers was not satisfactorily explained.

3.2 Unsecured Loan Addition – Section 68 (₹15,00,000)

The AO also added ₹15,00,000 as unexplained unsecured loans under Section 68. In the second round of appellate proceedings, this specific addition was deleted by the CIT(A) and was not an issue before the ITAT in this round.

3.3 Alleged Excess Cash Sales – Section 69A (₹72,91,858)

The larger dispute concerns cash deposits during the demonetisation period.

The AO observed that:

  • From April 2016 to October 2016 (7 months, pre-demonetisation), the assessee deposited cash of ₹94,78,500.
  • He worked out an average monthly cash deposit of ₹13,54,071 (₹94,78,500 ÷ 7).
  • For roughly 2 months of demonetisation, he estimated the “reasonable” cash deposit at ₹27,08,142 (13,54,071 x 2).
  • Actual cash deposited during demonetisation was ₹1,00,00,000.

The difference of ₹72,91,858 (₹1,00,00,000 – ₹27,08,142) was treated as:

  • Unexplained excess cash sales, and
  • Added under Section 69A as unexplained money.