ITAT Kolkata Removes Section 68 Addition on Demonetisation Deposits When Books of Account Were Properly Maintained
Introduction
The Income Tax Appellate Tribunal, Kolkata Bench, recently adjudicated a significant matter concerning additions made under Section 68 of the Income Tax Act relating to cash deposited during the demonetisation phase. The case of New Saha Dyers And Processors Vs DCIT presented crucial questions about the evidentiary value of regularly maintained books of account versus Information Technology System (ITS) data extracted by tax authorities.
The proceedings involved Assessment Year 2017-18, where the tax authorities had made substantial additions to the assessee's income based on cash deposits made during the demonetisation window. The original addition stood at approximately ₹1.48 crore, which was subsequently enhanced to ₹3.45 crore by the first appellate authority.
Background of the Dispute
The assessee entity operates in the textile sector, specifically engaged in clothing, apparel manufacturing, dyeing operations, and retail distribution. During the controversial demonetisation period that affected the Indian economy, the assessee had deposited specified bank notes into banking channels.
Initial Assessment Actions
The Assessing Officer initiated proceedings and noticed discrepancies between the amount declared by the assessee and the figures appearing in the ITS database maintained by the Income Tax Department. While the assessee maintained that it had deposited ₹1,43,54,500/- consisting of demonetised currency notes, the ITS portal reflected a different figure of ₹3,45,00,450/-.
Interestingly, despite noting the ITS figure at ₹3,45,00,450/-, the Assessing Officer ultimately made an addition of ₹1,48,53,500/- while finalizing the assessment. This discrepancy itself became a point of contention in subsequent proceedings.
Enhancement by First Appellate Authority
The matter took a more serious turn when the National Faceless Appeal Centre, Delhi, functioning as the CIT(A), reviewed the assessment order. The appellate authority enhanced the addition to ₹3,45,00,450/-, aligning it with the ITS database figures. The rationale provided was that since the Assessing Officer had himself determined the figure as per ITS details at ₹3,45,00,450/-, the addition should match that amount.
This enhancement significantly increased the tax burden on the assessee, prompting the appeal before the Income Tax Appellate Tribunal.
Contentions Raised Before the Tribunal
Assessee's Arguments
The authorized representative appearing for the assessee presented comprehensive documentation to substantiate the legitimacy of cash deposits. The following key submissions were made:
Documentation of Cash Sources
The assessee produced the cash book maintained in the regular course of business, demonstrating that all cash deposits made during demonetisation were sourced from entries already recorded in these books. The cash book entries showed regular business receipts from cash sales that were subsequently deposited into bank accounts.
Additionally, stock registers were presented to corroborate the cash sales claimed by the assessee. These registers maintained a detailed record of inventory movements, supporting the volume of business transactions that generated the cash subsequently deposited.
Comparative Analysis Across Years
A particularly compelling submission involved a comparative chart spanning three assessment years: 2016-17, 2017-18, and 2018-19. This analysis demonstrated the cash deposit patterns across these periods, showing consistency in business operations.
The comparative data revealed no abnormal spike or unusual variation in cash deposit patterns during the demonetisation period when compared with preceding and subsequent years. This consistency strongly suggested that the demonetisation deposits were part of normal business operations rather than unaccounted income.
Volume of Cash Sales
The assessee highlighted that during the impugned assessment year, total cash sales amounted to ₹11,99,22,712/-. This substantial volume of cash transactions in a retail-oriented business provided adequate source for the deposits made during demonetisation.
Furthermore, the assessee demonstrated that both gross profit margins and net profit had been increasing progressively across the years under consideration, indicating genuine business growth rather than artificial inflation of income.
Absence of Defects in Books
A critical submission emphasized that neither the Assessing Officer nor the CIT(A) had pointed out any specific defect, discrepancy, or irregularity in the cash book or stock register maintained by the assessee. The books had been produced during assessment proceedings and were available for scrutiny, yet no manipulation or false entries had been identified.
Post-Demonetisation Cash Book Entries
To demonstrate the regular nature of cash handling, the assessee also produced cash book extracts from periods beyond the demonetisation window. These entries showed similar patterns of cash receipts and deposits, reinforcing that the demonetisation period transactions were not aberrations but consistent with established business practices.