ITAT Jaipur Rules Out Section 68 Addition On Demonetisation Cash Deposits Supported By Books

Background and Context

The Jaipur Bench of the Income Tax Appellate Tribunal, in ACIT Vs Mahendra Kumar Agarwal (ITAT Jaipur), examined whether substantial cash deposits made in demonetised currency between 9 November 2016 and 31 December 2016 could be treated as unexplained cash credits under Section 68 when such amounts were reflected as cash sales in the regularly maintained and audited books of account.

The Revenue had challenged the order of the ld. CIT(A)-4, Jaipur, who deleted an addition of ₹1,41,32,000 made by the Assessing Officer (AO) under Section 68 for Assessment Year 2017-18. The Tribunal ultimately upheld the ld. CIT(A)’s order and dismissed the Revenue’s appeal.

Assessee’s Business Profile and Assessment Proceedings

Nature of Business and Return Filing

  • The assessee is an individual engaged in:

    • trading in bullion, precious stones and diamonds, and
    • manufacturing and sale of jewellery

    through a proprietorship concern named M/s Mohan Lal Mahendra Kumar Jewellers.

  • The assessee maintains regular books of account, duly audited by a Chartered Accountant.

  • For A.Y. 2017-18, the assessee filed a return of income on 27.10.2017, declaring a total income of ₹1,27,020.

  • The case was selected for scrutiny under CASS and notice under Section 143(2) was issued on 09.08.2018. Subsequently, assessment was framed under Section 143(3).

Cash Deposits During Demonetisation

During the demonetisation window (09.11.2016 to 31.12.2016), the assessee deposited ₹1,41,32,000 in old high denomination notes (Specified Bank Notes). The AO treated this entire amount as unexplained cash credit under Section 68, resulting in assessment at ₹1,42,59,020 as against the returned income of ₹1,27,020.

The ld. CIT(A) deleted this addition. The Revenue carried the matter in appeal before the ITAT, raising multiple grounds, including:

  • error in deleting addition of ₹1,41,32,000,
  • alleged failure of assessee to furnish names, addresses and PANs of cash buyers,
  • alleged non-application of “test of human probability” as per Sumati Dayal 214 ITR 801 (SC) and Durga Prasad More 82 ITR 540 (SC),
  • challenge to non-application of Section 115BBE, and
  • allegation that the assessee was involved in activity against public policy.

Core Controversy

The central issue was whether cash deposited in demonetised currency, which was explained as arising from cash sales already recorded in the audited books, supported by stock records and accepted in VAT assessment, could still be treated as unexplained cash credit under Section 68.

Revenue’s Primary Contentions

The Revenue argued:

  1. Disproportionate cash deposits post-demonetisation

    • Cash deposits between 01.04.2016 to 07.11.2016: ₹87.29 lakh.
    • Cash deposits between 09.11.2016 to 31.12.2016: ₹1.41 crore.
    • According to the AO, such a large cash balance in hand with existing bank accounts “defied logic” unless there was some non-genuine element.

  2. Non-availability of buyer details

    • The assessee did not furnish names, complete addresses or PANs of individual cash buyers who allegedly purchased jewellery and bullion, particularly relating to cash sales that formed the source of the cash balance.

  3. Application of human probabilities and surrounding circumstances

    • Based on Sumati Dayal and Durga Prasad More, the AO contended that the pattern of deposits and absence of detailed buyer information made the explanation implausible.

  4. Taxability under Section 115BBE

    • The Department challenged the ld. CIT(A)’s conclusion that Section 115BBE was not attracted.

  5. Allegation of activity against public policy

    • One ground suggested that the assessee’s behaviour was contrary to public policy during demonetisation.

Assessee’s Explanation and Evidence

Cash Book Summary Around Demonetisation

The assessee explained that the cash deposited was not generated in a short window post-demonetisation but represented accumulated cash from regular cash sales during the year, primarily:

  • September 2016 to 07.11.2016.

A summarised extract of the cash book from 01.09.2016 to 08.11.2016 (as produced before authorities) showed approximately the following pattern (numbers rounded for narrative clarity, original numbers retained where material):

  • Opening cash balance on 01.09.2016: ₹20,98,024.45
  • Add:
    • Cash received from sales in September 2016: ₹17,22,424
    • Cash received from sales in October 2016: ₹1,14,43,282
    • Cash received from sales from 01.11.2016 to 08.11.2016: ₹14,37,830
  • Less:
    • Cash deposited in bank during September, October and 01.11.2016–08.11.2016: ₹20,79,000
    • Cash expenses during the same periods: ₹4,51,639

This resulted in a closing cash balance as on 08.11.2016 of ₹1,41,70,921.45, comprising:

  • ₹38,921 in non-demonetised notes (₹50, ₹100 etc.), and
  • ₹1,41,32,000 in demonetised currency, which was subsequently deposited in the bank.

Documents Produced Before AO

To corroborate the above, the assessee produced:

  1. Cash book and sales register

    • Date-wise cash transactions and cash sales were furnished.
    • These records directly reflected the cash balances, including the closing cash on 08.11.2016.

  2. Stock register (monthly summaries)

    • Stock records demonstrated that sufficient stock existed before effecting cash sales.
    • No discrepancy in stock was pointed out by the AO.

  3. VAT assessment order

    • The Commercial Tax/VAT department had completed assessment and accepted the sales disclosed in VAT returns, thus validating the turnover figures.

  4. Audited financial statements and tax audit report

    • The AO did not dispute the audit, nor did she reject the books under Section 145.

  5. Earlier and subsequent assessment orders

    • Assessments for earlier and later years, where a similar pattern of cash sales and cash deposits existed, had been completed without adverse findings on cash balances.

The assessee demonstrated that: