Demonetisation Cash Deposits & Section 68: Key Takeaways from Challani Raanka Jewellers Vs DCIT (ITAT Chennai)

1. Overview of the Decision

The Chennai Bench of the Income Tax Appellate Tribunal, in Challani Raanka Jewellers Vs DCIT, upheld an addition of Rs.11,31,05,600/- under Section 68 of the Income Tax Act 1961 for Assessment Year 2017-18.

The assessee, a partnership firm engaged in trading silver articles and utensils, claimed that the cash deposited during the demonetisation window represented genuine cash sales of silver items. Despite the existence of audited books, an item-wise stock register, and voluminous paper books, the Tribunal concluded that the evidence on record did not satisfactorily link:

  • the available stock,
  • the alleged cash sales, and
  • the cash deposits made during the demonetisation period.

Accordingly, the explanation for the cash credits was held to be unsubstantiated, and the Section 68 addition was confirmed.

2. Factual Matrix: Business, Return and Scrutiny

2.1 Business Profile and Return Filing

  • Assessee: M/s Challani Ranka Jewellers, a partnership firm with two partners,
    • Shri R.J. Anandmul Challani
    • Smt. Sumthi A. Challani
  • Nature of business: Trading in silver utensils, silver articles, leg chains, hip chains, metti, etc.
  • AY involved: 2017-18
  • Return filed on 08.03.2018, declaring total income of Rs.3,55,020/-.

The case was selected for complete scrutiny under CASS. A Section 143(2) notice dated 24.09.2018 was followed by a Section 142(1) notice on 31.01.2019, calling for detailed information.

2.2 Detection of Cash Deposits During Demonetisation

During assessment, the Assessing Officer (AO) noticed that the assessee had deposited cash aggregating to Rs.11,31,05,600/- in its bank account with Indian Overseas Bank, Washermenpet Branch, Chennai, during the demonetisation period (09.11.2016 to 30.12.2016).

The assessee’s stand was:

  • The deposits were business receipts, mainly from sales of silver articles.
  • These transactions were reported in the Cash Transaction 2016 portal.

The AO asked for a break-up of specified bank notes (SBNs) and other denominations forming part of these deposits. In a letter dated 24.12.2019, the assessee stated that it had not maintained records segregating new/old currency.

3. AO’s Findings: Unexplained Credits Under Section 68

3.1 Spike in Cash Deposits and Low Historical Cash Balances

The AO noted:

  • A sharp increase in cash deposits in November 2016 vis-à-vis November 2015.
  • Comparatively low closing cash balances in the three earlier financial years (2013-14 to 2015-16), contrasted with a large cash build-up in the year of demonetisation.

The cash book for earlier years showed very modest closing cash on hand, whereas in the relevant year, significant cash was allegedly accumulated in a short span before and around demonetisation.

3.2 Pattern of Cash Sales Between 28.10.2016 and 02.12.2016

On examining the cash book and bill book, the AO found:

  • High-value cash sales recorded daily from 28.10.2016 to 02.12.2016, aggregating to Rs.9,57,01,240/-.
  • In the normal course, the assessee’s records reflected the names of customers against sales entries.
  • However, for these disputed sales, the entries showed only “CASH”, without purchaser details, for a substantial portion of the period.

The AO also noted that:

  • Cash deposits during the relevant period were followed by withdrawals, including withdrawals by partner Smt. Sumthi A. Challani, with no convincing business rationale explained.

3.3 Addition Under Section 68

Based on:

  • The absence of denomination details,
  • The unusual jump in cash deposits,
  • The block of cash sales without identifiable purchasers, and
  • The pattern of deposits and withdrawals,

the AO concluded that the assessee had not satisfactorily explained the nature and source of the cash deposited. The entire amount of Rs.11,31,05,600/- was treated as unexplained cash credit under Section 68.

4. First Appeal Before CIT(A)

The assessee carried the matter to the Commissioner of Income Tax (Appeals) [CIT(A)], raising, inter alia:

  • Non-supply of certain annexures referred to in the assessment order.
  • Alleged non-consideration of written submissions.
  • Challenge to invocation of Section 68 where books were audited under Section 44AB.

4.1 Annexures and Natural Justice

The CIT(A):

  • Sought a report from the AO on the annexures issue.
  • Noted the AO’s statement that the assessee had been allowed to access the voluminous records and was offered the option to scan them.
  • Found that adequate opportunity had been provided; therefore, there was no violation of the principles of natural justice.

4.2 Merits Examined by CIT(A)

On merits, the CIT(A) recorded that:

  • There was a marked jump in cash deposits in November 2016 (Rs.14.10 crores) compared to November 2015 (Rs.6.85 crores).
  • The assessee had no record of the nature of currency deposited (old/new).
  • Substantial cash sales were recorded in the period, with no purchaser details for sales aggregating to approximately Rs.9.57 crores.
  • The assessee had not produced adequate evidence to prove that the source of cash deposits was genuine business receipts.

Consequently, the CIT(A) confirmed the addition of Rs.11,31,05,600/- under Section 68 and dismissed the appeal.

5. Proceedings Before ITAT and Direction for Remand

5.1 Assessee’s Submissions Before ITAT

At the Tribunal hearing on 06.04.2026, the authorised representative (AR) submitted that: