ASOK SPARKS ,VIRUDHUNAGAR vs. ACIT, CIRCLE-1, VIRUDHUNAGAR

6. The NFAC, Delhi failed to appreciate that in any event having not independently examined the nature of the cash deposits made earned from the sale of firecrackers, the consequential sustenance of the entire addition as unexplained credit in terms of Section 68 of the Act was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

7. The NFAC, Delhi failed to appreciate that the findings in relation there on in the impugned order were wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

8. The NFAC, Delhi failed to appreciate that the entire re-computation of taxable total income was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

9. The NFAC, Delhi failed to appreciate that having not adhered to the prescription of faceless appellate regime, the consequential appellate order passed should be reckoned as bad in law.

:-3-: ITA. No:93/Chny/2025

11. The Appellant craves leave to file additional grounds/arguments at the time of hearing.

4. Aggrieved by the order of the AO the assessee preferred an appeal before the ld.CIT(A), NFAC.

5. The assessee submitted a written submission before the ld.CIT(A), NFAC as detailed below:  The addition on account of cash made by the AO is erroneous since the same was duly accounted for in the books of accounts as business receipts. The AO without verifying the books of accounts for the transactions recorded, the additions were :-4-: ITA. No:93/Chny/2025

made u/s.68 of the Act on the ground that the assessee ought not to have received SBNs.

 The assessee has maintained proper books of accounts, wherein all the transactions of sale of fireworks, realization, bank deposits were properly recorded. Thereby it cannot be treated as unexplained or undisclosed.

 The Income Tax Act itself a self-contained code and how the income should be computed is also properly provided and therefore the demonetized currency deposited relating to business transaction could not be treated as unexplained and hence additions cannot be made u/s.68 of the Act.

 Further, the assessee stated that in the firework industry, during non seasonal period the customers used to give advance to purchase fireworks at a discount rate. Using the demonetization period the customers of the assessee had booked for fireworks at a discounted rate. Therefore, there is no justification to treat these cash advances as unexplained cash credit u/s.68 of the Act.

 The outstation parties had directly deposited the SBN in the bank account and after furnishing the name, PAN, address along with the evidence for having supplied the goods, the parties are identified and are genuine in nature and hence no additions is called for on these deposits.

 The assessee is a registered dealer under VAT and had been filing monthly VAT returns and these transactions also properly recorded in the books of accounts as business transactions and thereby the AO cannot simply treat the same as unexplained income.

6. However, the ld.CIT(A), NFAC was not convinced with the submissions of the assessee and dismissed the assessee’s appeal by confirming the order of the AO by passing an order dated 27.11.2024.

7. Aggrieved by the order of the ld.CIT(A), the assessee is before us.

:-5-: ITA. No:93/Chny/2025

8. The ld.AR for the assessee submitted that the ld.CIT(A) has erred by confirming the action of the AO in making addition of cash deposit in SBNs without rejecting the books of accounts and by doubting the genuineness of the opening balance of creditors as on 31.03.2016. Further, the ld.AR submitted the paper book in support of his grounds of appeal 157 pages consisting of Audited financials of assessee as on 31.03.2017, Tax audit report in Form 3CB and 3CD, return of income, summary of cash deposits from 01.04.2015 to 31.03.2018, Bank pass sheet of City Union bank, Assessment Order passed by the commercial tax department, ledger account of CST & VAT payment, Purchase ledger for the financial year 2016- 17 and invoices raised for sales made to the parties Agra Lalit Traders, Lucknow Royal fireworks, Allahabad Prayag Trading Agencies along with the respective ledger accounts to show the sales and amount received from them. The ld.AR stated that the assessee has been regularly filing the VAT returns and has declared the Sales made to the above said parties corresponding to the cash deposited in SBN during the demonetisation period in the city union bank account of the assessee. Further, the ld.AR drew our attention to the pass sheet in page No.75 of the PB and shown that these amounts are deposited in SBN during the demonetisation period directly into the current account held by the assessee by the customers’ existing at Allahabad, Kanpur and Lucknow. Similarly, the ld.AR took us through the ledger account of the above said customers (Page No.88, 95 & 104 of the paper book) wherein the sales bills raised (Page Nos. 89 to 94 of paper book – Lalit Traders, Agra) (Page Nos. 96 to 103 of paper book – Royal Fireworks, Lucknow) (Page Nos. 104 to 110 of paper book – Prayag Trading Agencies, Allahabad) have been duly accounted against the cash deposits in SBNs made by the customers into the current account held by the assessee in City Union bank. The ld.AR also argued that :-6-: ITA. No:93/Chny/2025 the said sales invoices have been duly recorded in the books of accounts and shown to the Sales tax department in the monthly returns filed as CST turnover and discharged the applicable CST. Further, the ld.AR also submitted audited financials along with the audit report of the assessee as on 31.03.2016 in (page No.1 to 12 of Paper Book II) to show that the balances of the customers are carried from earlier financial year and their ledger accounts (Page No.13 to 20 of paper book II) and also subsequent assessment year 2018-19 and shown us the business transactions carried out with them.

10. Therefore, the ld.AR submitted that both the AO and that of the ld.CIT(A) have erred in treating the cash deposit made in SBN by the customers of assessee to its bank account as unexplained money inspite of furnishing the entire details of :-7-: ITA. No:93/Chny/2025 corresponding sales, books of accounts, audited financials with tax audit report without rejecting the books of accounts. Hence prayed for setting aside the order of the ld.CIT(A) and delete the addition made by the AO.

:-8-: ITA. No:93/Chny/2025

by holding as under: “9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts borne out from the record clearly indicate that the assessee is running a dhall mill and manufacturing various kinds of dhalls. The facts brought on record by the AO further indicated that the assessee procures various kinds of pulses from local market and manufacturing into various kinds of dhalls and sells to unregistered dealers in cash. The assessee has filed comparative cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17 and also cash sales and cash deposits for the month of October & November, 2015 and October & November, 2016. On perusal of details filed by the assessee, which has been reproduced by the AO in the assessment order, we find that there is no abnormal variation in cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17. Further, the cash sales achieved by the assessee for FY 2015-16 is higher than the cash sales reported for FY 2016-17. From the details filed by the assessee, it is abundantly clear that there is no sudden increase in cash sales during demonetization period when compared to earlier Financial Years. Further, the assessee has filed cash book and other details to prove availability of cash in hand as on 08.11.2016 at Rs.71,76,208/-. In fact, the AO is not disputed the fact that the assessee has filed cash book and as per said cash book, cash in hand as on 08.11.2016 was at Rs.71,76,208/-. If you go by the nature of business of the assessee and sales trend, it is undoubtedly clear that the assessee’s sales predominantly in cash, and thus, the cash in hand shown by the assessee as on :-9-: ITA. No:93/Chny/2025 08.11.2016 appears to be genuine and bona fide. To this extent, in our considered view, the reasons given by the AO to reject explanation of the assessee for source for cash deposits into bank account is devoid of merits.

10. Having said so, let us come back to the explanation of the assessee with regard to source for remaining cash deposits. The assessee claims that he is into manufacturing of various kinds of dhalls and sells to unregistered dealers in cash. The assessee claims that he has collected cash in demonetized currency from customers even after 09.11.2016 and said cash receipts is not violation of Specified Bank Notes (Cessation of Liabilities) Act, 2017. We find that although, the Government of India & RBI issued various notifications and circulars barring people transacting in SBNs, but, as per Specified Bank Notes (Cessation of Liabilities) Act, 2017, no person shall accept or transact any SBNs from the appointed date. As per said Act, appointed date is 31.12.2016. From the above, it is very clear that up to appointed date, persons can transact in SBNs. However, the only requirement is, they should be able to establish source for said cash deposits. This principle is further fortified by the decision of the ITAT Chennai Bench in the case of Amar Sparklers Factory v. ITO in order dated 11.10.2023, where the Tribunal after considering relevant facts has held as under: 7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. In so far as addition of Rs. 6,62,783/-, we find that the assessee itself has admitted shortage of source in their cash flow statement filed before the AO. Therefore, from the above, it is undoubtedly clear that the assessee could not explain source for cash deposits to the extent of Rs. 6,62,783/- and thus, we are of the considered view that, there is no error in the reasons given by the CIT(A) to sustain additions made towards cash deposits to the tune of Rs. 6,62,783/-. In so far as addition of Rs. 20,40,000/- towards advance received from group concerns, it was an argument of the appellant that group concerns have paid advance in cash during demonetization period and deposited into IDBI bank account. In this regard, the appellant has filed necessary details including PAN nos. and confirmation letters from the group concerns to prove receipt of trade advance. The Assessing Officer has not disputed these facts, however made additions only on the ground that the assessee should not have accepted cash in specified bank notes after 08.11.2016. We find that this issue is covered in favour of the assessee by the decision of ITAT, Chennai Benches in the case of M/s. Micky Fireworks Industries vs ACIT in dated 26.07.2023, where the Tribunal under identical set of facts deleted additions made by the Assessing Officer, and the findings of the Tribunal is reproduced as under:

:-10-: ITA. No:93/Chny/2025 “4. From the facts, the undisputed position that emerges is that the assessee has made sale of fireworks during festival season. The sales are duly accounted for by the assessee in the books of accounts. The accounts have duly been audited. The assessee has realized debtors out of such sale in SBN which have been deposited in the bank account of the assessee. The cash deposited by the assessee has duly been accounted for in the books of accounts. The Ld. AO has not alleged any bogus sales or back dated sales made by the assessee. No defect has been pointed in the books of accounts as maintained by the assessee.

:-11-: ITA. No:93/Chny/2025 Vs. ITO (supra) wherein it has similarly been held that when the deposits were sourced out of business receipts duly recorded in the books of accounts, no such addition could be made u/s 68. The other cited decision of Bangalore Tribunal is also on similar lines.

8. Considering the facts and circumstances of the case, we find force in assessee’s case and therefore, delete the impugned addition as made u/s 68. We order so. The Ld. AO is directed to re-compute the income of the assessee.”

11. In the given facts of the present case, there is no dispute with regard to the fact that the assessee’s sales predominantly in cash. It is also an undisputed fact that there is no abnormal variation in total sales, cash sales and cash deposits for two Financial Years. The assessee is also able to file various evidences, including month-wise purchase and sales and cash book to prove availability of cash in hand as on 08.11.2016. Therefore, we are of the considered view that going by the nature of business of the assessee and also details submitted for two Financial Years, the explanation offered by the assessee towards source for cash deposits into bank account during demonetization period, is bona fide and acceptable. The AO and the Ld.CIT(A) without considering the relevant submissions of the assessee simply made addition towards cash deposits u/s.69A r.w.s.115BBE of the Act. Thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete the addition made towards cash deposits u/s.69A r.w.s.115BBE of the Act.”

contentions of the assessee. Accordingly, the order of the learned CIT(A) is set aside, and the AO is directed to delete the addition made under Section 68 read with Section 115BBE of the Act. Consequently, the grounds raised by the assessee in this regard are allowed.

Order pronounced in the open court on 28th April, 2025 at Chennai.