ITAT Jaipur Drops Section 68 Addition On Jewellery Cash Sales During Demonetisation

Background Of The Dispute

The matter in Mahesh Kumar Gupta Vs ACIT (ITAT Jaipur) revolves around whether cash deposited during the demonetisation phase, which is backed by recorded cash sales of jewellery, can be taxed again as unexplained cash credit under Section 68 and further subjected to the higher tax rate under Section 115BBE.

The assessee, an individual jeweller dealing in wholesale and retail trade of gold and silver ornaments through his proprietorship concern M/s KV Jewellers, filed a return of income for Assessment Year 2017-18 declaring income of ₹45,83,340. The return was processed under Section 143(1).

The case was subsequently selected for complete scrutiny under CASS specifically to verify:

  • The sharp rise in cash deposits during the notified demonetisation period (09.11.2016 to 30.12.2016),
  • As compared to the assessee’s usual pattern of deposits prior to demonetisation.

During this period, the assessee deposited a total of ₹84,00,000 in cash in two bank accounts:

  • Bank of Baroda – ₹4,00,000
  • Yes Bank – ₹80,00,000 (deposited on 15.11.2016 in one go)

The central controversy was whether this ₹80,00,000 represented genuine cash sales of jewellery already recorded in the books, or unexplained money assessable under Section 68 and taxable at the special rate under Section 115BBE.

Assessment Proceedings: Key Findings Of The Assessing Officer

Enquiries Initiated By The AO

To probe the source of the demonetised currency deposited, the Assessing Officer (AO) issued notices under Section 142(1) seeking, among other things:

  • Break-up of old high denomination notes deposited during the demonetisation window
  • Comparative cash deposit details for:
    • AY 2015-16
    • AY 2016-17
    • AY 2017-18
  • Time-wise cash deposits during:
    • 01.04.2015 to 08.11.2015
    • 01.04.2016 to 08.11.2016
    • 01.04.2017 to 08.11.2017
  • Month-wise sales (cash and credit) for AY 2016-17 and 2017-18
  • Month-wise cash deposits for the same years
  • Comparative month-wise stock details for AY 2016-17 and 2017-18

The assessee responded via the ITBA portal and produced books of account and supporting records.

AO’s Show Cause And Doubts Raised

After evaluating the submissions, the AO issued a detailed show cause notice highlighting, among others:

  • In November 2016, cash deposits of ₹82,50,000 were made, whereas in November 2015 cash deposits were only ₹1,25,000, showing an extremely abnormal spike.
  • The AO questioned how such huge cash could be deposited at a time when the market was under severe liquidity stress post-demonetisation.

The assessee was further asked to:

  1. Explain the reason for the unusually large cash deposit in November 2016.
  2. Furnish all sale bills from 22.10.2016 to 15.11.2016 along with a tabular summary containing:
    • Bill number and date
    • Amount of cash sale
    • Name, full address, and PAN of the customer
    • Contact details
    • Item description, weight, and rate

Assessee’s Explanation Before AO

In response, the assessee explained that:

  • Diwali season started on 19.10.2016 and the wedding season commenced around 11.11.2016.
  • In the jewellery trade, such festive and marriage periods typically see significantly elevated retail cash sales.
  • Due to the sharp spike in cash collections from such sales between 01.10.2016 and 08.11.2016, there was a large cash balance on hand, which was then deposited on 15.11.2016 in demonetised notes following the Government announcement on 08.11.2016.
  • The assessee drew attention to past patterns showing high cash deposits during marriage seasons (e.g., a large cash deposit of ₹42,00,000 in May of an earlier year).

The assessee also submitted:

  • Copies of all relevant cash sale bills
  • Month-wise sales and stock details
  • Sales register and cash book
  • VAT returns and audited financial statements

AO’s Rejection Of Assessee’s Explanation

Despite the documentation, the AO rejected the explanation primarily on these grounds:

  1. Pattern of Deposits

    • Cash was regularly deposited in the bank earlier.
    • Cash deposits of ₹1,50,000 on 03.11.2016 and ₹1,00,000 on 07.11.2016 indicated that the assessee usually deposited cash promptly.
    • Therefore, the AO reasoned that if such large cash had indeed been generated from sales before 08.11.2016, it would also have been deposited earlier and not held back until 15.11.2016.

  2. Nature of Sale Bills

    • Most invoices during the relevant period were below ₹2,00,000,
    • Lacked names, addresses and PAN or contact details of buyers, except in a few instances.
    • The assessee stated inability to provide any further customer details.