INCOME TAX OFFICER-41.2.2 MUMBAI, MUMBAI vs. KALASH JEWELS, MUMBAI

In this appeal, the Revenue has raised the following grounds: -

The solitary issue that arises for our consideration pertains to the deletion of addition on account of cash deposited by the assessee during the demonetisation period.

The brief facts of the case are that the assessee is a partnership firm and is engaged in the business of retail sales of gold, silver, diamond jewellery and branded ornaments. For a year under consideration, the assessee filed its return of income on 31.10.2017, declaring a total income of Rs. 3,05,800/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was noticed that the assessee has deposited Specified Bank Notes (“SBN”) of Rs. 1,73,06,000/- during the demonetisation period. After considering the submissions of the assessee in response to the statutory notices, it was observed that the assessee maintained bank accounts with Axis Bank and State Bank of India. Further, from the cash book, it was noticed that the cash on hand as on 01.04.2016 was Rs. 9,71,112/-. On perusal of the cash book, it was noted that the assessee has a tendency to deposit cash into its bank account. However, despite cash sales/receipts of Rs. 52,07,745/- in the month of October 2016 and cash sales/receipts of Rs. 1,23,39,102/- in the first 8 days of November 2016, the assessee did not deposit any money in its bank account. Further, the cash sales in the first 8 days of November were also found to be abnormally high. It was also noted that out of the total cash deposit of Rs. 1,73,06,000/-, no bill exceeded Rs. 2 lacs. Accordingly, the Assessing Officer (“AO”), vide order dated 28.12.2019 passed under section 143(3) of the Act, held that it can be easily inferred that bogus cash sales below Rs. 2 lacs were booked only to avoid KYC provisions. It was further held that this process is used as a colourable device only to bring into books the unaccounted and unexplained money generated through out-of-book activities. The AO further held that in the year 2016, the festival of Diwali was on 30.10.2016, and the general trend is to buy gold before Diwali and not subsequently. Thus, the AO held that the sale of Rs. 1,22,00,002/- post Diwali in just 8 days of November 2016 is very difficult to accept. After taking into consideration the fact that the assessee’s shop is situated in Mulund West, Mumbai, the AO held that the customers from other areas would not purchase jewellery from the assessee's shop, and there is no apparent reason why so many people bought gold in the first 8 days of November 2016. The AO held that the assessee has not offered any justification for keeping cash of Rs. 1,73,06,000/- on hand, which was deposited during the demonetisation period. Accordingly, by treating the entire cash deposited in SBN during the demonetisation period as unexplained cash credit, the AO made an addition of Rs. 1,73,06,000/- under section 68 of the Act.

The learned CIT(A), vide impugned order, after taking into consideration the books of accounts and audited financial statements, held that none of these documents was rejected by the AO. The learned CIT(A) further held that the entire sales by the assessee, which have been recorded in his books of account, have been offered to tax and, therefore, any further addition would amount to double taxation. Accordingly, the learned CIT(A) deleted the addition made by the AO under section 68 of the Act on the basis that the cash deposited in the bank account during the demonetisation period has been duly substantiated by the assessee by way of relevant evidence/material. Being aggrieved, the Revenue is in appeal before us.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee is a trader of gold, silver, diamond jewellery and branded ornaments. The learned AR submitted that the assessee is maintaining regular books of accounts and has recorded all the sales and purchases. Further, the learned AR submitted that the assessee has also filed its VAT return for the year under consideration. Thus, it was submitted that the entire transaction of purchase and sale by the assessee is duly recorded in its books, which are maintained in the regular course of its business, and therefore, cash deposited in the bank account during the demonetisation period in SBN is only out of its regular business. Thus, the learned AR submitted that the same cannot be treated as unexplained cash credit under section 68 of the Act.

On the other hand, the learned Department Representative vehemently relied upon the findings of the AO, submitted that the learned CIT(A) did not deal with the findings of the AO, and there is no coherence in the pattern of sales and purchases by the assessee during the year under consideration.

We have considered the submission of both sides and perused the materials available on record. In the present case, there is no dispute regarding the fact that the assessee is engaged in the retail sales of gold, silver, diamond jewellery and branded ornaments. As the assessee, during the demonetisation period, deposited SBN to the extent of Rs. 1,73,06,000, during the assessment proceedings, the assessee was asked to substantiate the source of the cash deposited in the bank account. As per the assessee, the cash was deposited from the sale proceeds of gold, silver, and diamond jewellery. It is evident from the record that in support of its submission, the assessee has furnished bank statements, cash books, purchase bills, sales bills, purchase ledgers, VAT returns, confirmation from suppliers, stock registers, stock summaries, and audited financial statements. Thus, as per the assessee, the cash deposited during the demonetisation period was generated from the cash sales, which were duly offered for tax in the VAT return as well as in the Income Tax return. It is the plea of the assessee that the sales made by the assessee were out of the stock of inventory, which is duly substantiated from the stock register. We find that all these documents have also been placed on record before us by the assessee. Further, the assessee has also furnished the monthly cash flow working for the year under consideration. Further, we find that, to substantiate the availability of inventory sold during the year under consideration, out of which the cash deposited during the demonetisation period was generated, the assessee has also filed confirmations from various vendors in respect of the jewellery items purchased by the assessee. We find that despite the availability of all these documents, the AO neither disputed any of these documents nor rejected the books of account of the assessee, which were filed along with the Tax Audit Report. We find that the AO on the basis of an unsubstantiated presumption, such as jewellery sales only take place prior to Diwali, disagreed with the submissions of the assessee. It is evident from the perusal of the assessment order that the AO did not dispute the availability of stock with the assessee, which the assessee claimed to have been sold, resulting in the SBN being deposited during the demonetisation period. Further, we find that the AO also did not find any anomalies in the VAT return and in the audit report under the Maharashtra VAT Act, 2002, for the relevant period filed by the assessee, reflecting the sales.

Therefore, having considered the submissions and perused the material available on record, we are of the considered view that the findings of the AO regarding abnormal increase in sales, location of assessee’s shop and loans availed by the assessee are merely suspicion and conjectures, which are completely immaterial for making the impugned addition in light of the detailed documentary evidence furnished by the assessee. We are of the considered view that once the availability of stock has not been disputed by the Revenue and the various documents furnished by the assessee are not doubted, the cash deposited by the assessee during the demonetisation period, which is claimed to be the cash sales, cannot be treated as unexplained cash credit under section 68 of the Act. Therefore, since in the present case the assessee has duly proved the source of cash deposited during the demonetisation period, we do not find any infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO under section 68 of the Act. Accordingly, the impugned order passed by the learned CIT(A) is upheld, and the grounds raised by the Revenue are dismissed.

In the result, the appeal by the Revenue is dismissed. Order pronounced on 06–Aug-2026 as per Rule 34(4) of the ITAT Rules, 1963.