ITAT on Demonetisation Cash Deposits: When Section 68 Cannot Be Invoked

Overview

The Bangalore Bench of the Income Tax Appellate Tribunal in Sri Soger Malleshappa Manjunath Kanasoger v. ITO examined whether cash deposits made during the demonetisation window could be taxed as unexplained cash credits under Section 68 when they were backed by properly recorded sales in audited books of account.

The Tribunal concluded that once the assessee conclusively demonstrated that cash deposits of ₹29,27,000 represented cash sales duly reflected in regular books and already subjected to tax as part of turnover, there was no basis to invoke Section 68. Any such addition would result in taxing the same income twice.

Central Question Before the Tribunal

The dispute revolved around a specific issue:

Can cash deposits aggregating to ₹29,27,000 during the demonetisation period be assessed under Section 68 when the assessee shows that these deposits arose from documented cash sales, and the Revenue’s only objection is that specified bank notes were allegedly accepted after 08.11.2016 in violation of RBI guidelines?

The Tribunal answered this in favour of the assessee, clearly demarcating the scope of Section 68 from any alleged non-compliance with RBI instructions.

Facts in Brief

Business Background

  • The assessee, Sri Soger Malleshappa Manjunath Kanasoger, operated as sole proprietor of M/s Kalleshwara Enterprises.
  • The business consisted of trading in:
    • Borewell pipes
    • GI pipes
    • Collars
    • Bore caps
    • Agricultural equipment

Books of Account and Records

For Assessment Year 2017-18, the assessee:

  • Maintained:
    • Day-wise cash book
    • Ledger accounts
    • Stock register
    • VAT returns
    • Sales invoices and vouchers
  • Had the accounts duly audited.
  • Reflected all sales, including cash sales, in the regular books of account.

Cash Deposits During Demonetisation

  • During the demonetisation period, total cash deposits in specified bank notes amounted to ₹45,81,500.
  • The assessee’s books showed cash in hand of ₹16,54,500 as on 08.11.2016.
  • The Assessing Officer (AO) treated the difference of ₹29,27,000 as unexplained cash credit under Section 68.

The AO’s reasoning was not that the sales were bogus, but that the assessee was allegedly not permitted, post 08.11.2016, to accept specified bank notes. According to the AO, this contravention rendered the subsequent cash deposits unexplained.

Stand of the Assessee

The assessee took the position that:

  1. All deposits were backed by cash sales

    • The cash deposited post 08.11.2016 represented proceeds from cash sales made during the demonetisation period.

  2. Comprehensive documentary support was produced, including:

    • Cash book demonstrating opening cash balance and subsequent cash inflows/outflows
    • Stock register showing movement and availability of traded goods
    • VAT returns in line with the declared turnover
    • Sales invoices corresponding to the cash sales
    • Bank deposit slips matching cash book entries
    • Audited financial statements where these sales were included in the turnover

  3. Sales were part of declared turnover

    • The cash sales had already been considered while computing total income.
    • Consequently, taxing the same amounts again under Section 68 would lead to double taxation.

The assessee therefore argued that the nature and source of the cash deposits were fully disclosed and substantiated through contemporaneous business records.

Findings of the Assessing Officer

The AO: