ITAT Chandigarh Deletes Section 68 Addition on Demonetization Cash Deposits Linked to Cash Sales

1. Background of the Appeal

The matter in Madan Lal Aggarwal HUF Vs DCIT (ITAT Chandigarh) arose from an order passed by the Ld. CIT(A)-3, Gurgaon dated 05/11/2021 for Assessment Year 2017-18. The assessee challenged the sustained addition of Rs. 17,00,000/- treated as unexplained cash credits under Section 68 and taxed under Section 115BBE, relating to cash deposited during the demonetization window.

The appeal before the Tribunal was filed belatedly by 350 days. The delay and the core dispute both came up for adjudication before the ITAT Chandigarh in ITA No. 28/CHD/2023, decided on 08/12/2023.

2. Condonation of Delay: Tribunal’s Approach

2.1 Facts Relating to Delay

  • The assessee was part of a larger group of cases connected with M/s C.M. Jewellers, where a search/survey action had taken place on 21.03.2017.
  • Assessment orders for the group were framed in December 2018, with various additions made, including in the case of the present assessee.
  • Appeals against these assessments (including 22 related family-member matters) were filed before the CIT(A)-3, Gurgaon in January 2019, and replies were stated to have been filed up to 2021.
  • An order in the case of a related concern, M/s CM Jewellers, was passed by the CIT(A) on 22.09.2021 and that matter was promptly taken in appeal and decided by the ITAT in ITA No. 386/2021 dated 23.06.2022.
  • The assessee’s stand was that:
    • No physical copy of the CIT(A) order in the HUF’s case was ever delivered;
    • The order uploaded on the portal was not noticed as the group believed that the appeal remained pending;
    • The then Karta, Shri Madan Lal Aggarwal, who was managing the litigation, suffered from gangrene, underwent amputation of his legs, remained under prolonged treatment for over a year and passed away on 09.08.2022.

The new Karta, Shri Rohit Aggarwal, filed an affidavit narrating that:

  • After his father’s death, he took over as Karta of the HUF (PAN AAHHM2284F).
  • He later checked the e-filing portal in January 2023, discovered that the appellate order had been uploaded on 09.12.2021 and that it had been emailed to the earlier counsel, but no separate physical or email communication was received by the assessee.
  • The appeal to the ITAT was then filed immediately, though beyond the statutory 60-day period by 350 days.

The assessee relied on decisions including:

  • Improvement Trust Ludhiana Vs. Ujagar Singh & Ors, Civil Appeal No. 2395 of 2008 (09.06.2010)
  • Jayvantsinh N Vaghela Vs. Income Tax Officer, 40 taxmann.com 491 (Gujarat)
  • Paras Rice Mills Kurukshetra Vs. CIT Karnal, ITA No. 657 of 2009 (P&H)

to support condonation of delay where sufficient cause and absence of mala fides are shown.

2.2 Revenue’s Objection

The Ld. DR objected to condoning the 350-day delay, arguing that:

  • The delay was significant;
  • Except for the reference to the Karta’s ill health and eventual demise on 09.08.2022, no convincing cause was made out;
  • Even after excluding the period of serious illness and death, there was still an unexplained delay.

2.3 ITAT’s Finding on Delay

After examining the affidavit and the surrounding facts, the Tribunal held:

  • The assessee had put forth a reasonable and bona fide explanation: non-receipt of a physical appellate order, prolonged illness and death of the Karta, and the new Karta’s time taken to collate records and detect the order on the portal.
  • There was no apparent advantage derived by the assessee by delaying the filing of the appeal.
  • In the interest of substantial justice, the Tribunal condoned the delay and admitted the appeal for decision on merits.

3. Core Issue: Addition of Rs. 17,00,000/- Under Section 68

3.1 Facts of Assessment

  • A survey under Section 133A was conducted in the case of the assessee on 21.03.2017 as part of the M/s C.M. Jewellers Group proceedings.
  • The assessee filed its return of income on 12.10.2017, declaring total income of Rs. 8,69,400/-.
  • Scrutiny was initiated through notices under Section 143(2) and Section 142(1).

During assessment, the Assessing Officer (AO) examined cash deposits made after demonetization:

  • Total cash deposit between 09.11.2016 and 31.12.2016: Rs. 21,00,000/-
  • Specifically, deposits in SBI Ambala City:
    • Rs. 20,00,000/- on 10.11.2016
    • Rs. 50,000/- on 06.12.2016
    • Rs. 50,000/- on 20.12.2016

The assessee consistently claimed that these deposits were sourced from routine cash sales duly recorded in its books, on which VAT had been charged and paid.

3.2 AO’s Reasoning

The AO:

  • Sought complete details and supporting documents for post-demonetization cash deposits.
  • Rejected the assessee’s explanation that the deposits were out of day-to-day sales in the period immediately preceding demonetization.
  • Reasoned that:
    • As per the bank pattern, daily sales used to be deposited regularly; therefore, it was improbable that substantial cash balances from sales preceding 08.11.2016 would remain un-deposited and then be deposited only after demonetization.
    • A comparative study of cash sales for October and November 2016 with the corresponding months of the previous two financial years showed a sharp increase.
    • The number of cash sale bills issued between 25.10.2016 and 08.11.2016 was higher as compared to earlier periods.
    • Cash in hand on 08.11.2016 was significantly higher than as on the same date in the prior two years.
    • Cash deposits during October and November 2016 were also higher than in the past.

Based on these comparisons, the AO treated the cash sales in October–November 2016 as inflated and partly bogus.

He accepted cash sales of only Rs. 4,00,000/- as genuine and treated the balance portion corresponding to the cash deposits as unexplained:

  • Total cash sales for October 2016: Rs. 11,94,308/-
  • Total cash sales for November 2016: Rs. 10,47,311/-
  • Out of total cash deposits of Rs. 21,00,000/- after demonetization, the AO found the source of Rs. 4,00,000/- acceptable and the remaining Rs. 17,00,000/- as not satisfactorily explained.

Consequently: