ITAT Mumbai Rules in Favour of Jeweller on Demonetisation Cash Deposits Under Section 69A

Background and Context

During the demonetisation window from 08.11.2016 to 30.12.2016, many jewellery businesses faced scrutiny for substantial cash deposits of Specified Bank Notes (SBNs). One such case, Star Jewels Vs ITO (ITAT Mumbai), addressed whether cash deposits arising from recorded jewellery sales could be treated as unexplained money under Section 69A read with Section 115BBE of the Income Tax Act 1961 merely on grounds of suspicion and unusual increase in cash sales.

The assessee was a partnership firm engaged in retail jewellery trading. For Assessment Year 2017-18, it had:

  • Filed its return of income on 31.10.2017 declaring total income of Rs.7,72,485/-
  • Reported total turnover of Rs.6,14,10,031/-
  • Included cash sales of Rs.69,60,470/- within that turnover
  • Deposited Rs.32,93,480/- in bank accounts during the demonetisation period

The Assessing Officer (Ld. AO) treated these cash deposits as unexplained money under Section 69A, despite the assessee’s contention that these arose from recorded cash sales and available cash balance in the ordinary course of business.

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ultimately deleted the entire addition, giving important guidance on the tax treatment of demonetisation-related cash deposits when proper books and documentation are maintained.

Facts of the Case

Business Profile and Return Filing

  • The assessee is a partnership firm in the retail jewellery segment.
  • Return for AY 2017-18 was filed on 31.10.2017, declaring income of Rs.7,72,485/-.
  • Total turnover for the previous year was Rs.6,14,10,031/-.
  • Cash sales within this turnover stood at Rs.69,60,470/-.

Cash Deposits During Demonetisation

Between 08.11.2016 and 30.12.2016, the assessee deposited cash aggregating Rs.32,93,480/- in its bank accounts. The assessee explained that:

  • The deposits came from:
    • Cash sales effected during the period, and
    • Existing cash balance
  • Sales were carried out in the normal course of business, coinciding with the festive season, when jewellery purchases and cash transactions are relatively higher.
  • Demonetisation was an incidental event and did not affect the genuineness of the sales or the deposits.

To substantiate this, the assessee placed the following records before the Ld. AO and the Tribunal:

  • Audited accounts for FY 2016-17
  • Cash book for the entire year
  • Bank statements for 01.04.2016 to 31.03.2017 for all bank accounts
  • Statement showing day-wise cash balance from 01.11.2016 to 13.11.2016 (opening balance, cash sales and closing balance)
  • Cash sales ledger/register for the entire financial year
  • Stock statement/stock register for FY 2016-17
  • Summary reconciling cash deposits with bank accounts and related sale invoices

Assessment Proceedings and Addition Under Section 69A

Despite these records, the Ld. AO rejected the assessee’s explanation with respect to the cash deposits during the demonetisation window.

Key aspects of the Ld. AO’s reasoning included:

  • Comparison of cash deposits during 09.11.2016 to 31.12.2016 with the same period in the preceding year:
    • Current year deposits: Rs.32,93,480/-
    • Corresponding prior year deposits: Rs.4,94,148/-
  • Observation that cash sales on 08.11.2016 alone were Rs.22,53,690/- out of total cash sales of Rs.69,60,470/- for the year.
  • Suspicion that there was “every possibility” of back-dated or post-dated billing to justify the high cash sales on 08.11.2016.
  • Conclusion that:
    1. Sources of SBN deposits were not satisfactorily explained.
    2. Cash deposits during demonetisation were allegedly from undisclosed sources.
    3. The assessee had not proved possession of such cash in the normal course of business.

On this basis, the Ld. AO invoked Section 69A and treated the cash deposits (quantified in the order at Rs.32,52,370/-) as unexplained money, taxable under Section 115BBE.

First Appeal Before CIT(A)

The assessee challenged the assessment order before the National Faceless Appeal Centre, Delhi (Ld. CIT(A)), on both legal and factual grounds.

The `Ld.