ITAT Delhi Deletes ₹9.41 Crore Demonetisation Addition: Accepted Books of Account Cannot Be Rejected on Mere Suspicion

Overview of the Dispute

In a significant ruling for bullion traders and assessees who faced scrutiny during the demonetisation period, the Income Tax Appellate Tribunal, Delhi Bench, rendered a decisive verdict in Basant Kumar Aggarwal Vs ITO (ITAT Delhi) for Assessment Year 2017-18. The Tribunal set aside an addition of ₹9.41 crore that had been sustained by the first appellate authority, holding firmly that no addition under Section 68 read with Section 115BBE of the Income Tax Act, 1961 can withstand judicial scrutiny when it rests entirely on surmise, conjecture, and an arbitrary percentage-based estimation, especially where the books of account, stock records, purchase details, cash ledger, and VAT returns all stand accepted by the Revenue.

Background and Factual Matrix

The assessee in this case was a dealer engaged in the bullion and jewellery trade. For AY 2017-18, the assessee filed his return of income declaring total income of ₹64,93,410/-. The case was flagged for scrutiny under CASS primarily on two counts — an abnormal surge in cash deposits during the demonetisation period relative to the pre-demonetisation period, and large-value cash deposits during the demonetisation window.

During the demonetisation period, the assessee deposited a total of ₹26,89,50,000/- in cash into his bank account in the month of November 2016. The assessee's explanation was straightforward: the deposited cash represented proceeds from recorded cash sales of ₹19,82,26,543/- made during October 2016, and ₹6,88,56,281/- from the first week of November 2016, all of which were properly entered in the books of account, reflected in the VAT returns, and supported by complete stock and purchase records.

The assessee submitted that the festival season — comprising Dhanteras, Diwali, and Bhai Dhuj — invariably generates heightened demand in the bullion and jewellery segment, which naturally accounts for the spike in cash sales during October and early November 2016. It was also pointed out that total cash sales for AY 2017-18 of approximately ₹26 crore were substantially lower than the cash sales of around ₹118 crore recorded in the preceding assessment year, further demonstrating that the figures were commercially reasonable rather than inflated.

Assessment Order: AO's Reasoning and Addition

The Assessing Officer examined comparative data on cash sales and cash deposits for the years 2014-15, 2015-16, and 2016-17. The comparative statement, as reproduced in the assessment order, revealed that in FY 2015-16 the assessee had made cash sales and simultaneously deposited the proceeds in the bank throughout the year. In sharp contrast, during FY 2016-17, the assessee recorded cash sales only in October and November 2016, with the entire cash deposit of ₹26,89,50,000/- made in November 2016.

The AO drew the following adverse inferences from this pattern:

  • No reasonable businessman would retain cash of ₹19,82,26,543/- from October 2016 sales without depositing it in the bank, particularly while continuing other regular banking transactions and simultaneously bearing interest expenses on an overdraft account and car loan.
  • The assessee's declared income of ₹64,93,410/- was insufficient justification for holding such enormous cash balances outside the banking system.
  • The concentration of cash sales exclusively in October and November 2016 — coinciding precisely with the period just before demonetisation — was inconsistent with the trading pattern of prior years.