ITAT Mumbai Quashes Demonetization-Era Cash Deposit Addition Where Books of Account and VAT Returns Were Accepted Without Adverse Finding
Case Overview
Case Name: Paaneri Exim Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Assessment Year: 2017-18
**ITA No.😗* 1994/Mum/2026
Date of Order: 25th May 2026
The Mumbai Bench of the Income Tax Appellate Tribunal rendered a significant ruling in favour of the assessee engaged in the retail trade of sarees and dress materials, directing deletion of an addition of ₹1,90,82,500 that had been made on account of cash deposits during the demonetization period. The Tribunal found that the addition lacked any factual or legal basis, given that the assessee's books of account had never been rejected, its sales were duly reflected in quarterly VAT returns that stood accepted by the State authorities, and no discrepancy had ever been identified in any of the underlying records.
Background: Delay Condonation and Admission of Appeal
Before proceeding to the merits, the Tribunal addressed a preliminary procedural objection. The appeal had been lodged with a delay of 25 days beyond the prescribed limitation period. The assessee placed on record an affidavit sworn on 04.05.2026 by the Director, Mr. Virji Debraj Gada, explaining that the director responsible for managing the income-tax affairs of the company had been dealing with a medical emergency during the relevant period.
The Departmental Representative raised no meaningful opposition to the condonation of this delay. Taking into account the medical exigency faced by the director and the absence of any serious objection from the Revenue, the Tribunal condoned the delay and proceeded to adjudicate the appeal on its substantive merits.
Facts of the Case
Nature of Business and Return Filed
The assessee, Paaneri Exim Pvt. Ltd., is a company engaged in the retail sale of sarees and dress materials. For Assessment Year 2017-18, it filed its return of income declaring:
- Total income: ₹35,83,710
- **Book profit under
Section 115JB😗* ₹37,38,748
The assessee's accounts were regularly subject to audit under Section 44AB of the Income Tax Act, 1961.
Scrutiny and Addition by the Assessing Officer
The case was selected for scrutiny, and the Assessing Officer (AO) directed the assessee to furnish particulars of cash deposits made during the demonetization window. The AO ascertained that a sum of ₹1,90,82,500 in Specified Bank Notes (SBNs) had been deposited in the assessee's bank accounts between 09.11.2016 and 31.12.2016.
The assessee submitted a response in compliance with the notice issued under Section 142(1) of the Act, along with supporting documentary evidence. However, the AO observed that the cash in hand as on 08.11.2016 stood at ₹1,96,53,133, which was dramatically higher compared to the cash in hand as on 08.11.2015, which was ₹31,29,162. The AO treated this disproportionate increase — amounting to over 500% — as indicative of unexplained cash, held the assessee's explanation unsatisfactory, and made an addition of the entire amount of ₹1,90,82,500 to the total income.
First Appellate Stage
The assessee carried the matter before the Commissioner of Income Tax (Appeals) [NFAC], Delhi, which upheld the AO's addition without granting any relief. The relevant observations of the CIT(A), as reproduced in the Tribunal order, are noted below: