ITAT Lucknow Dismisses Revenue's Appeal: Section 68 Addition of ₹2.64 Crore Deleted Where Cash Deposits Traced to Genuine Business Sales

Background and Overview

The Income Tax Appellate Tribunal, Lucknow Bench, recently pronounced a significant ruling in ITO Vs Khanna Sales (India) Pvt. Ltd., dismissing the Revenue's challenge to the deletion of an addition of ₹2,64,19,000 made under Section 68 of the Income Tax Act, 1961. The ruling, delivered on 16.02.2026, carries particular relevance for assessees engaged in trading activities who faced scrutiny over cash deposits made during the demonetisation period in November 2016.

The core question before the Tribunal was whether cash deposits made during the demonetisation window could be treated as unexplained credits under Section 68 merely because the pattern of cash sales deviated significantly from prior periods, even when the assessee's books of account remained unrejected and purchases and sales had been independently verified.

Facts of the Case

The Assessee and its Business Operations

The assessee, Khanna Sales (India) Pvt. Ltd., is a private limited company engaged in the trading of Supari and Kattha. Its annual turnover exceeded the prescribed threshold, making it liable for tax audit under Section 44AB of the Income Tax Act, 1961. Its accounts were duly audited both under the Income Tax Act, 1961 and the Companies Act, 2013.

Cash Deposits During Demonetisation

During the demonetisation period, the assessee deposited an aggregate sum of ₹2,83,19,000 across its accounts held with Punjab National Bank, YES Bank, and HDFC Bank. All deposits were made in Specified Bank Notes. When called upon to explain the source of these deposits during assessment proceedings for Assessment Year 2017-18, the assessee stated that the amounts represented proceeds from cash sales made in the ordinary course of its trading business, duly reflected in its books of account and disclosed in VAT returns filed with the Uttar Pradesh Commercial Tax Department.

Assessing Officer's Findings and Addition

The Assessing Officer (AO) conducted a detailed month-wise comparison of cash sales, cash-in-hand positions, and bank deposits across Financial Years 2015-16 and 2016-17. The following observations were central to the AO's reasoning:

• Total cash sales during FY 2016-17 registered an increase of 236.51% over the corresponding prior year figures
• Cash sales in October 2016 and up to 8th November 2016 reflected a 791% increase over the same period in FY 2015-16
• Prior to September 2016, no substantial cash sales had been reported by the assessee in FY 2016-17
• Once demonetisation was announced on 8th November 2016, cash sales virtually ceased
• In FY 2015-16, out of a turnover of approximately ₹25.3 crores, cash sales amounted to only ₹1.07 crores
• In contrast, during AY 2017-18 when the total turnover was ₹5,98,56,167, total cash sales stood at ₹3,62,31,285, of which ₹1,37,21,025 was attributed to October 2016 alone

The AO further examined the purchase register and noted that after 29th September 2016, no purchases were recorded for the month of October. Subsequently, between 1st November 2016 and 5th November 2016, purchases totalling ₹1,55,11,009 were recorded — entirely from entities described as related concerns or sister entities. The AO found no traceable nexus between these purchases and corresponding payments, and concluded that a fabricated channel of purchases and sales had been constructed solely to legitimise the deposit of unaccounted cash.

The AO also referred to a survey conducted at the assessee's premises on 11.12.2015, during which stock worth approximately ₹1 crore was reportedly found buried under a damaged structure. The AO found it suspicious that this undisclosed stock had been used nearly a year later as the basis for cash sales.

Relying on the decisions of the Hon'ble Supreme Court in Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC), Sunil Siddharthbhai vs. CIT 156 ITR 507 (SC), and Mcdowell and Co., 154 ITR 148 (SC), the AO held that income tax authorities are entitled to look through transactions and examine their underlying genuineness. He accepted only ₹19,00,000 as explained sales based on the assessee's own historical sales trends and added the balance ₹2,64,19,000 to the assessee's income under Section 68 of the Income Tax Act, 1961.

Proceedings Before CIT(A), NFAC

Assessee's Submissions

Before the Commissioner of Income Tax (Appeals), NFAC, the assessee produced a comprehensive set of records including: