ITAT Lucknow Rules in Favour of Jewellery Assessee on Demonetisation Cash Deposits Under Section 68

Background of the Dispute

The Lucknow Bench of the Income Tax Appellate Tribunal in ACIT Vs Harshit Garg dealt with an important controversy arising out of demonetisation-related cash deposits and their taxability under Section 68 of the Income Tax Act 1961.

The assessee, proprietor of M/s Bachhe Lala Jewellers, was engaged in the jewellery trade. For Assessment Year 2017-18, he filed a return declaring income of Rs.1,58,01,610/-. During the demonetisation phase, a substantial cash amount of Rs.3,80,00,000/- was deposited on 10.11.2016 into three bank accounts.

The Assessing Officer (AO) treated a sizeable portion of these deposits as unexplained cash credits under Section 68, alleging that the assessee had fabricated cash sales to justify the deposit of specified bank notes. The CIT(A) deleted the main addition of Rs.2,98,53,859/-, following which the Revenue approached the Tribunal. The assessee’s Cross Objection was later withdrawn.

The Tribunal’s order, dated 04.07.2025 in ITA No. 451/LKW/2024, has important implications for assessees who reported high cash sales during the pre-demonetisation window and later deposited such cash into bank accounts.

Facts Considered by the Assessing Officer

Nature of Business and Return Filing

  • The assessee was the sole proprietor of M/s Bachhe Lala Jewellers, dealing in jewellery.
  • Return of income for AY 2017-18 was filed showing total income of Rs.1,58,01,610/-.
  • Scrutiny assessment was initiated under Section 143(3).

Demonetisation Cash Deposit

On 10.11.2016, immediately after the demonetisation announcement of Rs.500 and Rs.1,000 notes on 08.11.2016, the assessee deposited Rs.3,80,00,000/- in cash into three bank accounts maintained with:

  • IndusInd Bank
  • Yes Bank
  • State Bank of Travancore and Cochin

The AO was of the view that demonetisation triggered large-scale attempts by persons holding unaccounted specified bank notes (SBNs) to route such amounts through jewellery purchases or manipulated sales.

Note: The AO emphasised that VAT returns for October 2016 were due only by 20.11.2016, giving assessees a window from 01.10.2016 to 20.11.2016 to allegedly “reconstruct” or inflate sales figures to reconcile unaccounted cash.

AO’s Analysis of Sales and Cash Pattern

The AO examined the sales pattern for F.Y. 2016-17 and noted:

  • Total sales: Rs.49,49,07,263/-
  • Total cash sales: Rs.4,94,40,120/-

Further, he highlighted:

  • Cash sales for October 2016: Rs.3,68,53,859/-
  • Cash sales up to 08.11.2016: Rs.37,25,359/-
  • Aggregate cash sales from 01.10.2016 to 08.11.2016: Rs.4,05,79,218/-

According to the AO, the average daily cash sale through such “sales invoices” for the full year was only around Rs.1,35,452/-, whereas in the targeted period there was a disproportionate spike.

The AO also noted that:

  • These cash sales were recorded through invoices each below Rs.2,00,000/-.
  • No identity details of purchasers were available.
  • No PAN details were captured, apparently to stay below the regulatory reporting threshold.
  • There was no comparable increase in sales through regular tax invoices.

He contrasted cash deposits in the previous year’s corresponding period (09.11.2015 to 30.12.2015), which were just Rs.32,85,000/-, with the demonetisation period deposit of Rs.3,80,00,000/-.

Addition Made by the AO

The AO considered the spike in cash sales during 01.10.2016 to 08.11.2016 to be non-genuine and held that:

  • Cash sales of Rs.3,68,53,859/- (for 01.10.2016 to 30.10.2016) represented unexplained cash credits under Section 68.
  • As the assessee had disclosed Rs.70,00,000/- under PMGKY, the AO made a net addition of Rs.2,98,53,859/- under Section 68.
  • Separately, he disallowed the assessee’s claim of deduction of Rs.70,00,000/- under Section 37, treating the PMGKY declaration amount as not allowable as a business expenditure.

In arriving at his conclusion, the AO placed reliance on:

  • Kale Khan Mohammad Hanif vs. CIT [1963] 50 ITR 1 (SC)
  • Sumati Dayal vs. CIT 214 ITR 801 (SC)
  • Oceanic Products Exporting Co. vs. Commissioner of Income-tax [2000] 241 ITR 497 (Ker)

The AO stressed that:

  • Under Section 68, the initial burden is on the assessee to explain the nature and source of credits.
  • The test of human probabilities and surrounding circumstances must guide the evaluation of evidence.

Assessee’s Defence Before the CIT(A)

Documents and Records Produced

Before the CIT(A), the assessee submitted that he had placed on record: