ITAT Jaipur Quashes Section 69A Addition on Demonetization Cash Deposits Backed by Genuine Jewellery Sales

Introduction to the Dispute

The aftermath of the 2016 demonetization exercise continues to generate substantial tax litigation, particularly concerning the deposit of specified bank notes (SBNs) into bank accounts by business entities. A recurring point of contention between the revenue authorities and the assessee is the classification of these cash deposits. While business owners often attribute these deposits to routine cash sales, especially in cash-intensive sectors like jewellery and bullion, tax authorities frequently view sudden spikes in cash transactions as mechanisms to launder undisclosed income.

In a significant judicial pronouncement, the Income Tax Appellate Tribunal (ITAT), Jaipur Bench, in the case of Mukesh Soni Vs ITO, addressed this exact controversy. The Tribunal adjudicated on whether cash deposited during the demonetization period, which corresponds to sales already recorded in the audited books of accounts and offered to tax, can be independently added to the assessee's income under Section 69A read with Section 115BBE of the Income Tax Act 1961.

Factual Matrix of the Case

The assessee, operating a proprietary business engaged in the trading of bullion and gold ornaments, filed the income tax return for the Assessment Year (AY) 2017-18 declaring a total income of ₹3,17,090 after claiming deductions under Chapter VI-A. The return was selected for complete scrutiny under the Computer Assisted Scrutiny Selection (CASS) system. Consequently, the Assessing Officer (AO) initiated proceedings by issuing statutory notices under Section 143(2) and Section 142(1) of the Income Tax Act 1961.

During the assessment proceedings, the AO scrutinized the assessee's bank statements and observed that a total sum of ₹33,71,000 had been deposited across three different bank accounts during the demonetization window (specifically on 15 November 2016, 1 December 2016, and 6 December 2016).

The Assessing Officer's Observations

Upon analyzing the cash book and sales registers, the AO noted a dramatic concentration of cash sales immediately preceding the demonetization announcement. The data revealed:

• Cash sales between 1 October 2016 and 8 November 2016 amounted to ₹29,65,226.
• Cash sales prior to October 2016 were virtually nil.
• Cash sales during the post-demonetization period (up to 31 March 2017) were merely ₹3,15,340.

The AO concluded that the exponential surge in cash sales during the 39-day window (1 October 2016 to 8 November 2016) was a fabricated arrangement designed to introduce unaccounted money into the formal banking system. Consequently, the AO rejected the assessee's explanation and made an addition of ₹32,71,000 as unexplained money under Section 69A, invoking the penal tax rates prescribed under Section 115BBE of the Income Tax Act 1961. The assessment was finalized under Section 143(3).