ITAT Amritsar Ruling: Sales Backed by Stock Register Cannot Be Taxed as Unexplained Money u/s 69A Despite Demonetization Cash Spikes

In a significant relief to jewellers and traders facing scrutiny over cash deposits made during the demonetization period, the Income Tax Appellate Tribunal (ITAT), Amritsar Bench, has delivered a crucial verdict. In the case of Divay Mohindru Vs ITO, the Tribunal held that cash deposits originating from sales, which are fully supported by a quantitative stock register and regular books of account, cannot be treated as unexplained money under Section 69A of the Income Tax Act, 1961.

The ruling clarifies that tax authorities cannot reject book results merely on the grounds of "human probabilities" or suspicion regarding a surge in sales, provided the assessee maintains a direct correlation between the stock available and the sales effected.

Case Background and Factual Matrix

The dispute arose from the assessment year 2017-18, a period heavily scrutinized due to the demonetization exercise announced by the Government of India in November 2016.

The assessee, operating a proprietorship firm under the name "Mahavir Abhushans," is engaged in the business of trading gold ornaments and jewellery. The assessee filed a regular return of income declaring ₹22,04,540/-. However, the case was selected for scrutiny under the Computer Aided Scrutiny Selection (CASS) specifically to verify "large cash deposits" made during the demonetization window.

During the relevant period, the assessee had deposited a total of ₹4.09 crore in the bank account. Upon assessment, the Assessing Officer (AO) examined the books and explanations provided. The AO accepted ₹1.34 crore of the deposits as genuine and explained. However, the remaining balance of ₹2.75 crore (calculated as ₹4.09 crore minus ₹1.34 crore) was treated as unexplained money.

Consequently, the AO made an addition of this amount under Section 69A, invoking the higher tax rate provisions of Section 115BBE. To arrive at this conclusion, the AO invoked Section 145(3) of the Act to partially reject the books of account, recalculating the profits by reducing the disclosed sales figures.

The Controversy: Preponderance of Probabilities vs. Documentary Evidence

The core of the Revenue Department's argument, which was subsequently upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], rested on the theory of "preponderance of probabilities."