ITAT Pune Ruling: Treatment of Cash Sales During Demonetization
The period of demonetization in India witnessed a surge in scrutiny assessments, particularly regarding cash deposits made into bank accounts during the specified window. A critical legal question that frequently arises in appellate proceedings is whether such cash deposits should be treated entirely as unexplained cash credits or as business receipts subject to a profit margin.
In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Pune Bench, in the case of Aurangabad Steel Corporation Vs ITO, adjudicated on the taxability of cash deposits made during the demonetization period. The Tribunal held that where the source of cash deposits is linked to the regular business activity of the assessee and the books of account have not been rejected, the entire deposit cannot be added to the income. Instead, a reasonable estimation of profit should be applied.
Case Background and Facts
The appeal was filed by the assessee, Aurangabad Steel Corporation, a partnership firm engaged in the business of trading scrap. The dispute pertained to the Assessment Year (AY) 2017–18.
The Assessment Proceedings
The return of income for the relevant assessment year was filed by the assessee on October 31, 2017, declaring a total income of ₹3,25,560. The case was subsequently selected for "Complete Scrutiny" under the Computer Assisted Scrutiny Selection (CASS). The primary reason for selection was the observation of "low income in comparison to TCS receipts from scrap."
During the course of assessment proceedings conducted under Section 143(3) of the Income Tax Act 1961, the Assessing Officer (AO) focused on cash deposits amounting to ₹38,57,530 found in the assessee's bank account. These deposits were made during the demonetization period. Consequently, the AO treated these deposits as unexplained and made an addition of the entire amount to the assessee's income.
Appellate Proceedings before CIT(A)
Aggrieved by the assessment order dated December 27, 2019, the assessee preferred an appeal before the Learned Commissioner of Income Tax (Appeals)/NFAC, Delhi [CIT(A)]. The CIT(A), via an order dated June 17, 2025, passed under Section 250 of the Act, upheld the addition made by the AO. The assessee then moved the matter to the ITAT Pune.