Panaji ITAT Rules Demonetisation Deposits as Poultry Business Receipts; Applies 2% Profit Estimation, Rejects Section 115BBE Levy

Case Overview: Yamanappa Bagayi Vs ITO (ITAT Panaji) — Assessment Year 2017-18

The Panaji bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in the matter of Yamanappa Bagayi Vs ITO (ITAT Panaji), concerning cash deposits made during the demonetisation period and a disallowance raised under Section 40A(3) of the Income Tax Act, 1961. The Tribunal's decision carries substantial implications for assessees engaged in cash-intensive businesses such as poultry farming, particularly those who faced scrutiny over deposits made in November–December 2016.

This was the second round of proceedings before the Tribunal, as the earlier order dated 25.08.2023 had been recalled pursuant to MA No.13/PAN/2023 dated 17.03.2026. The appeal was directed against the order dated 23.11.2022 passed by the National Faceless Appeal Centre (NFAC), Delhi, which had itself arisen from the Assessment Order dated 28.12.2019 framed under Section 143(3) of the Income Tax Act, 1961.

Background and Facts of the Case

The assessee, Yamanappa Bagayi, operated a poultry farming enterprise under the name "Bagai Poultry Farm" situated at Losasur, Gokak. For Assessment Year 2017-18, the assessee filed a return of income on 30.10.2017, declaring total income of Rs. 9,49,450/-.

The case was selected for scrutiny through CASS, following which valid statutory notices were issued. During the assessment proceedings, the Assessing Officer (AO) identified two significant issues:

  1. Cash deposits of Rs. 54,26,000/- made during the demonetisation window, treated as unexplained money under Section 69A of the Income Tax Act, 1961.
  2. Disallowance of Rs. 93,29,812/- under Section 40A(3) of the Income Tax Act, 1961, on the allegation that the assessee had made cash payments exceeding the prescribed statutory limit towards purchases from various vendors.

As a consequence, the AO assessed total income at Rs. 1,57,05,262/-, a figure vastly inflated compared to the declared income.

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), but the appeal was dismissed. The matter was thereafter carried before the ITAT Panaji.

Issue 1: Cash Deposits During Demonetisation — Addition Under Section 69A

Assessee's Submissions

The assessee's counsel argued before the Tribunal that the cash deposits of Rs. 54,26,000/- represented nothing more than routine cash sales proceeds arising from the poultry business. To substantiate this position, the assessee placed on record cash flow statements covering the preceding year, the year under consideration (AY 2017-18), and the subsequent year. These statements collectively demonstrated that cash sales and corresponding deposits were a consistent and recurring feature of the business throughout the year — not an isolated or unusual occurrence.

ITAT's Analysis and Findings

The Tribunal carefully examined the nature of the deposits and the surrounding circumstances. Several factual findings emerged:

  • Cash sales were a regular business feature: The cash flow statements submitted by the assessee prima facie established that deposits into the bank account were aligned with cash sales activity, forming part of the ordinary business cycle of Bagai Poultry Farm.