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Facts
The assessee, engaged in wholesale distribution of Gold Winner Oil, filed a return for AY 2017-18. The case was selected for scrutiny due to cash deposits during demonetization. The assessee explained these deposits as legitimate sales proceeds from rural customers. The Assessing Officer (AO) treated Rs. 6,79,000 as unexplained income.
Held
The Tribunal held that the AO and CIT(A) erred in treating the cash deposits as unexplained. The assessee's business model involves cash transactions, and the deposits were supported by sales records, bank statements, and consistent cash flow patterns. The tribunal found no defects in the assessee's books of accounts and no evidence of suppressed sales.
Key Issues
Whether cash deposits made during the demonetization period, explained as legitimate business sales proceeds from rural customers, can be treated as unexplained income when supported by evidence and consistent business practices.
Sections Cited
69A, 115BBE, 143(3), 142(1), 68
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R. RAGHUNATHA
O R D E R
PER S.R. RAGHUNATHA, AM:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi dated 19.11.2024 for the Assessment Year 2017-18.
The assessee has raised the following grounds of appeal:- I. The order of the Learned Assessment Officer is against the Law, weightage of evidence, and all probabilities of the case.
- 2 - ITA. No:119/Chny/2025 II. The appellant submits that the cash deposits during the demonetization period represent proceeds from legitimate sales in the retail business of Gold Winner Oil. The business operates in rural, unbanked areas where cash transactions are the norm due to customers' lack of access to banking facilities. The cash deposits correspond to sales collections made from these customers, with detailed records substantiating the transactions. The appellant has filed month-wise sales abstracts, Sales Tax Returns, VAT Returns, and bank statements along with this Appeal as evidence. These documents align with the cash deposits, showing no discrepancies or suppression of sales. The appellant maintains that the demonetized Currency deposited was received from customers against their outstanding dues for prior supplies. The Assessing Officer (AO) failed to identify any irregularities in the appellant's records and has not disputed the sales proceeds reflected in the accounts. The absence of specific findings against the appellant's explanation confirms that the deposits were genuine and part of routine business transactions. The AO's decision to treat the deposits as unexplained income ignores the realities of the appellant's business environment and the evidence provided. The deposits were consistent with the appellant's operational practices, and no unusual activity was detected. III. The appellant contends that the AO failed to adhere to procedural requirements during the assessment. Despite the appellant providing all requested documentation, including sales records, bank statements, and tax returns, the AO dismissed the explanations without presenting valid reasons or contrary evidence. The A0's reliance on assumptions, such as questioning the time gap between cash withdrawals and deposits, demonstrates a lack of proper inquiry into the appellant's submissions. This approach violates the principles of natural justice, as it denies the appellant a fair opportunity to substantiate claims with relevant evidence. The appellant provided detailed records demonstrating the business's cash flow and operational practices. The A0's failure to evaluate these documents in light of the business's unique circumstances, including its reliance on cash transactions, constitutes a significant procedural lapse. It is well-established that assessment proceedings must be conducted based on factual evidence rather than speculative assumptions. The appellant's compliance with tax requirements and submission of transparent records should have been given due consideration. IV. The appellant's business involves cash-based transactions due to the nature of its customer base in unbanked rural areas. The deposits made during demonetization were a direct result of these sales and align with the consistent cash flow patterns observed in the business over time. The appellant has demonstrated that the deposits match the sales reported in tax returns, and no deviations have been found by the AO. The business practices, including accepting cash payments against supplies and depositing sales collections into the bank, are standard and well-documented. The A0's assertion that the deposits are unexplained disregards the operational - 3 - ITA. No:119/Chny/2025 realities of the business. Such practices are common in businesses operating in rural areas where cash remains the primary mode of transaction. The appellant has consistently declared income based on actual business activity, and the deposits made during the demonetization period are a continuation of this pattern. No evidence has been provided to contradict the appellant's claims or demonstrate that the deposits were derived from unexplained sources. V. The appellant has provided comprehensive records to substantiate the legitimacy of the cash deposits, including month-wise sales abstracts and tax returns. The AO has not identified any suppression of sales or discrepancies in the records. The appellant's detailed submissions demonstrate that the deposits were consistent with the declared income. The AO's failure to dispute the records or provide evidence of suppressed income indicates that the assessment lacks merit. The appellant asserts that the absence of contrary evidence confirms the validity of the explanation provided for the cash deposits. Tax assessments must be based on substantive evidence, not assumptions. VI. The appellant maintains that the addition of Rs.6,79,000/- as unexplained income is unjustified and contrary to the principles of fairness in taxation. The deposits have already been reflected as sales proceeds in the business accounts and subjected to tax. Treating these deposits as unexplained income results in double taxation. The appellant's records clearly demonstrate that the deposits Were part of routine business operations and not unexplained credits. Taxation of the same amount twice undermines the integrity of the assessment process. The appellant requests the tribunal to ensure fair taxation by deleting the addition, which is inconsistent with the evidence and the principles of equity. VII. The learned AO has failed to provide evidence or reasoning to justify the addition of Rs.6,79,000/- as unexplained income. The appellant has submitted extensive documentation, including bank statements, tax returns, and sales records, to substantiate the source of the deposits. The appellant contends that the A's decision is based on conjecture and lacks factual support. Tax assessments must be based on verifiable evidence, and the absence of such evidence renders the addition invalid. The appellant respectfully requests the tribunal to recognize the lack of substantiation by the AO and delete the addition to uphold the principles of justice and fairness. VIII. Such other grounds which may be urged at the time of hearing of the Appeal. It is, therefore, in the interest of justice, necessary and prayed that this Hon'ble Tribunal may be pleased to set aside the Order dated 19-11-2024 passed in DIN & Order No.ITBA/APL/S/250/2024-25/1070462171(1) and thereby allow this Appeal and thus render justice.
- 4 - ITA. No:119/Chny/2025 3. The brief facts of the case are that the assessee is an individual carrying on business of whole sale distribution of Gold winner oil in the name of “Selvi Traders”. The assessee filed the return of income for the A.Y. 2017-18 ON 30.03.2018 admitting a total income of Rs.3,14,070/-. The case was selected for complete scrutiny under CASS for the reason that the cash deposit during the year and abnormal increase in cash deposited during demonetisation period as compared to pre demonetisation period. The AO issued statutory notices to the assessee calling for information and accordingly the assessee submitted the month wise sales tax return, TDCC bank statements, statements of accounts, VAT return, evidence for bills and vouchers for expenses. The assessee explained the source of cash deposit was from sales and collection from book debts. The AO noted that the cash deposited in SBN was Rs.11,38,500/- during the demonetisation period and also found a cash balance as on 08.11.2016 as Rs.4,59,397/-. Since, the assessee was not falling in any of the exempted category as notified by the RBI to collect the SBN during the demonetisation period, the AO concluded the assessment by making an addition of Rs.6,79,000/- as unexplained money u/s.69A r.w.s. 115BBE of the Act by passing an order u/s.143(3) of the Act dated 26.12.2019.
- 5 - ITA. No:119/Chny/2025 Aggrieved by the order of the AO the assessee preferred an appeal before the ld.CIT(A), NFAC.
3.1 On perusal of the submissions of the assessee, the ld.CIT(A) was not convinced and hence confirmed the addition made by the AO by passing an order dated 19.11.2024 by holding as under : “The appellant superficial statements and documentation cannot be accepted. The Sales resulting in demonetized notes post demonetisation is not explained. The appellant has failed to explain the source of the SBNs deposited. Therefore, the addition made by the AO is confirmed. All other related grounds are dismissed”
Aggrieved, the assessee is in appeal before us.
The ld.AR for the assessee submitted that the ld.CIT(A) has erred in confirming the addition made by the AO without considering the submission made by the assessee. The ld.AR stated that the assessee had furnished the entire books of accounts before the AO along with the cash book showing the cash balance as on 08.11.2016 in support of explaining the source of cash. During the course of assessment, the assessee had submitted the month wise sales tax return, TDCC bank statements, statements of accounts, VAT return, evidence for bills and vouchers for expenses.
- 6 - ITA. No:119/Chny/2025 4.1 The ld.AR argued that the AO has not rejected the books of accounts maintained by the assessee by pointing out any defects. However, the action of AO in making the addition u/s.69A of the Act by considering the amount which has already been recorded in the books of accounts as revenue amounts to double taxation, which is not sustainable in law. Further, the ld.AR submitted that the acceptance of SBN was not prohibited as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, wherein the appointed date for prohibition of acceptance of SBN was notified as 31.12.2016. Therefore, the view taken by the AO and ld.CIT(A) is erroneous in bringing the deposit of SBN during the demonetisation period to the tune of Rs.6,79,000/-, which has been recorded in the books of accounts without pointing out any defects or rejecting the books of accounts. In support of the arguments the ld.AR relied on the decision of this Tribunal in the case of Raju Dinesh Kumar Vs. DCIT, in dated 19.01.2024, wherein the similar issue has been decided in favour of the assessee by deleting such addition made u/s.69A of the Act. In light of the above arguments the ld.AR for the assessee prayed for deleting the addition by allowing the grounds of appeal of the assessee.
- 7 - ITA. No:119/Chny/2025 5. Per contra the ld.DR supported the orders of the lower authorities.
6. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The undisputed fact of the case is that the assessee is running a retail business of Gold winner oil. The assessee’s business involves cash collection from the retail customers. During the assessment proceedings the assessee have furnished the books of accounts, cash book, VAT returns in support of the turnover, bank statements and sales records. Further, the assessee has explained the source of cash deposit was from the business, collected on account of sales made and from the trade debtors. We note that the AO and the ld.CIT(A) have not pointed out any defects or irregularities in the books of accounts of the assessee and further the same have not been rejected. In this scenario making an addition of Rs.6,79,000/- as unexplained money on account of the cash deposit made in SBN during the demonetisation period is not sustainable in law. Therefore, we do not countenance the action of the ld.CIT(A) in confirming the addition made by the AO for the reason that the assessee was not authorised to accept the SBN during the demonetisation period. Our view is also supported by the decision of this Tribunal in the case of - 8 - ITA. No:119/Chny/2025 Raju Dinesh Kumar Vs. DCIT (Supra) and the relevant portion is extracted below:
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 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.
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 - 9 - ITA. No:119/Chny/2025 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: “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 - 10 - ITA. No:119/Chny/2025 been pointed in the books of accounts as maintained by the assessee.
It could also be seen that during the course of assessment proceedings, various notices were issued u/s 142(1) from time to time calling numerous details from the assessee. The assessee was required to file numerous details including monthly cash flow statement, inventory of closing stock, copy of sales tax assessment order, monthly cash deposits and credits for various periods, ledger account for purchase and other expenditure, monthly sales gross receipts, monthly purchases, details of old notes and new notes deposited during demonetization period, the day book, Cash book, ledger maintained for business, cash balance as per cash book etc. All these details were duly submitted by assessee vide reply dated 12-12-2019. The assessee also submitted month-wise cash deposits in all bank accounts, details of old notes deposited at the time of demonetization period. Pertinently, the assessee also furnished details of name, address and PAN of cash depositors who deposited cash during demonetization period. The same has been detailed on pages 24 to 35 of the paper book. Apparently, the same could not be faulted with by Ld. AO. There is no allegation of any irregularity in the books of accounts.
We find that the only reasoning to treat the said deposits as unexplained cash credit u/s 68 is that the assessee was debarred from dealing in SBN after 08-11-2016. However, in the present case, the cash so received by the assessee is backed by sales carried out by the assessee as recorded in the books of accounts. Therefore, the source of cash is duly explained. The provisions of Sec.68 could be invoked only in cases when there was unexplained cash credit in the books of accounts maintained by the assessee. However, the assessee has duly identified the debtors from whom the cash was received and the same could not be disputed by lower authorities. The PAN of respective debtors as well as quantum of cash realized from each of them has duly been detailed by the assessee before Ld. AO during assessment proceedings. No defect has been pointed out in the books of accounts. In such a case, the credit could not be held to be unexplained cash credit and the impugned additions are not sustainable in law.
7. The SMC bench of this Tribunal in Mrs. Umamaheswari Vs. ITO (supra), on identical facts, deleted similar additions on the ground that the assessee had duly evidenced the source of cash deposit and therefore, addition could not be made u/s 68. Similar is another decision of SMC Raipur Bench in Rahul Cold Storage 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.
- 11 - ITA. No:119/Chny/2025 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.”
In this view of the matter and by following the decision of ITAT, Chennai Benches, we direct the AO to delete additions made towards source for cash deposits at Rs. 20,40,000/- u/s. 69A of the Act.”
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.
6.1 Further we note that 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 the appointed date, persons can transact in SBNs. However, the only requirement is, they should be able to establish source for said cash deposits. As already mentioned in the - 12 - ITA. No:119/Chny/2025 present case the assessee had furnished the books of accounts and also explained the source of cash deposits made in SBN, treated the same as unexplained money is not acceptable. Hence, in the present facts and circumstances of the case and respectfully following the decision of the tribunal (supra) we are of the considered view that the ld.CIT(A) has erred in confirming addition u/s.69A of the Act as unexplained money in respect of cash deposited in SBN during the demonetization period for the reason that the assessee was prohibited to accept the same. Therefore, we are inclined to set aside the order of the ld.CIT(A) and direct the AO to delete the addition made u/s.69A of the Act and recompute the income accordingly.
In the result, the appeal filed by the assessee is allowed Order pronounced in the open court on 21st April, 2025 at Chennai.