ITAT Chandigarh Deletes Addition Under Section 68 on Demonetisation Cash Deposits

Background of the Dispute

The Chandigarh Bench “B” of the Income Tax Appellate Tribunal (ITAT Chandigarh) adjudicated an appeal filed by Sumit Wadhwa Vs ITO concerning Assessment Year 2017-18. The appeal challenged an order passed by the Addl./JCIT(A)-2, Jaipur under Section 250 of the Income Tax Act 1961, which had affirmed an addition made by the Assessing Officer (AO) in respect of cash deposits during the demonetisation period.

The controversy centred on an addition of Rs.13.34 lakh made under Section 68 read with Section 115BBE, arising out of cash deposits in an HDFC Bank account. The assessee, an individual engaged in the business of trading in glass for windows, doors, kitchens and similar uses, had deposited Rs.17.34 lakh in cash during the demonetisation window.

While the assessee consistently claimed that these deposits originated from recorded business sales and realisations from debtors, the AO treated a substantial portion of the deposits as unexplained and subjected them to tax under Section 68 and Section 115BBE.

Facts Considered by the Authorities

Nature of Business and Cash Deposits

  • The assessee is a resident individual dealing in glass items used in building interiors and exteriors.
  • During the demonetisation phase, the assessee deposited Rs.17.34 lakh in cash into an HDFC Bank account.
  • The assessee’s explanation was that:
    • Cash came from regular cash sales, and
    • Recoveries from sundry debtors.

Assessment Proceedings

In the course of assessment, the AO noted that:

  • Cash deposits during the demonetisation period were significantly higher as compared to earlier periods.
  • The AO suspected that the assessee’s financial records had been manipulated to justify the cash deposits.

On this reasoning, the AO:

  • Accepted Rs.4 lakh as explained, and
  • Treated the balance Rs.13.34 lakh as unexplained cash credits under Section 68 read with Section 115BBE (incorrectly referred to as 115BE at one place in the order).

An assessment order was then passed on 26.12.2019, bringing this amount to tax at the special rate applicable under Section 115BBE.

First Appellate Order under Section 250

The assessee’s appeal before the Ld. Addl./JCIT(A)-2, Jaipur under Section 250 was unsuccessful.

  • The CIT(A) upheld the AO’s view that the cash deposits to the extent of Rs.13.34 lakh remained unexplained.
  • The contention that the deposits flowed from cash sales and debtors’ realisations was not accepted.
  • The addition under Section 68 was therefore confirmed in full at the first appellate stage.

This led the assessee to approach the ITAT Chandigarh.

Grounds Raised Before the ITAT

Core Issue

The sole dispute before the Tribunal was:

  • Whether the addition of Rs.13.34 lakh made under Section 68 read with Section 115BBE in respect of cash deposits during demonetisation was justified, despite the assessee maintaining that all deposits were fully recorded in the regular books of account.

No other ground was pressed in the appeal.

Assessee’s Submissions

The assessee’s representative argued that: