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Facts
The assessee, an individual running a retail business, deposited Rs. 1,11,67,000/- in cash during the demonetization period (Nov-Dec 2016). The Assessing Officer (AO) initiated reassessment, treating this as unexplained cash credit u/s 68, rejecting the assessee's explanation of festival season sales based on the 'human probability' theory. The CIT(A) subsequently deleted the addition, accepting the assessee's explanation supported by audited financials and increased turnover.
Held
The Tribunal upheld the CIT(A)'s decision, ruling that when sales are duly recorded in audited books and VAT returns, cash deposits cannot be treated as unexplained without rejecting the books. It emphasized that the 'human probability' test cannot override verifiable documentary evidence, and the assessee's explanation, supported by audited books and VAT data, proved the source of the deposits, rendering Section 68 inapplicable.
Key Issues
Whether cash deposits made during demonetization, explained as business receipts from festival sales, can be treated as unexplained cash credit u/s 68, and whether the 'human probability' theory can override documentary evidence such as audited books and VAT returns.
Sections Cited
250, 147, 142(1), 143(2), 68, 115BBE, 145(3)
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Order PER LALIET KUMAR, J.M: This appeal by the Revenue is directed against the order of the Ld. CIT(A)/NFAC, Delhi dated 12.03.2025 passed u/s 250 of the Income-tax Act, 1961 for the assessment year 2017–18.
In the present appeal Revenue has raised the following grounds: (i) Whether upon the facts and circumstances of the case and in law, the Ld. CIT(A) was rightly justified in deleting addition of Rs. 1,11,67,000/- on account of cash deposits from undisclosed sources u/s 68 r.w.s. 115BBE of the Income Tax Act ? (ii) Whether upon the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 1,11,67,000/ by holding that the assessee has proved the genuineness of transaction? (iii) The appellant craves leave to add, amend, modify, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.
2 (iv) It is prayed that the order of the Ld. CIT(A) may be revoked and that of the Assessing Officer may be restored.
Briefly, the facts of the case are that the assessee is an individual engaged in retail business of crockery and electronic goods under the proprietary concern M/s Aao Jee Store. The return of income for A.Y. 2017–18 was filed declaring total income of Rs.24,05,500/-. Based on information that the assessee had deposited Rs.1,11,67,000/- in cash in his bank account during the demonetization period (09.11.2016 to 30.12.2016), reassessment proceedings u/s 147 were initiated. 3.1 The AO observed that despite issuance of notices u/ss 142(1) and 143(2), the assessee failed to furnish satisfactory explanation along with supporting evidence. The explanation offered—that the cash represented festival season sales duly recorded in the books—was rejected by applying the theory of human probability. Relying on Sumati Dayal v. CIT (214 ITR 801) and Durga Prasad More (82 ITR 540), the AO held that no prudent person would hold invalid currency for long and deposit it in parts. The AO thus treated the entire deposit of Rs.1,11,67,000/- as unexplained cash credit u/s 68, taxable u/s 115BBE, and completed assessment at an income of Rs.1,37,21,355/-.
Against the order of the Assessing Officer the Revenue went in appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions and documentary evidence, held that the AO had made the addition merely on suspicion and without rejecting the books of account. It was noted that the assessee’s turnover had increased from Rs.4.34 crores in FY 2015–16 to Rs.5.56 crores in FY 2016–17, with a progressive gross profit ratio of 14% as against 12.31% in the preceding year. The monthly sales data showed that maximum sales occurred in October 2016, consistent with festival season business. The CIT(A) observed that the AO failed to verify sales or VAT records and had not established that the cash balance as per books was utilised elsewhere. Accordingly, the explanation that the cash deposits were from business receipts was accepted and the addition deleted.
3 5. Against the order of the Ld. CIT(A) the Revenue preferred in appeal before the Tribunal.
During the course of hearing the Ld. DR, supporting the order of the Assessing Officer, submitted that the AO had rightly invoked section 68 and the test of human probabilities. He relied upon the following paragraph of the assessment order, which, according to him, fully justified the addition: “In response to the final show-cause notice, the assessee has failed to substantiate his claim and no supporting evidence has been furnished; hence his earlier submission that the source of cash deposited is out of cash-in-hand generated from sales is not tenable. Applying the test of human probabilities as laid down by the Hon’ble Supreme Court in CIT v. Durga Prasad More (82 ITR 540) and *Sumati Dayal v. CIT (214 ITR 801), it is evident that no prudent person will hold such Specified Bank Notes in large number in his possession and deposit the same piecemeal on different dates. In the ordinary course, a person who possesses a large amount of invalid currency would deposit the same immediately in one go. The assessee’s conduct of depositing Rs.1,11,67,000/- in six instalments on 10-11-2016, 12-11-2016, 13-11-2016, 17-11-2016, 22-11-2016 and 28- 12-2016 is contrary to normal human behaviour. Even assuming, though not accepting, that the deposits represented trade receipts, the very act of accepting and depositing invalid notes after 8-11-2016 was against the intent of the Government and shows that the assessee was engaged in converting old notes into legal tender. The time-gap between the cash in hand and its deposit is too long and against human probability. Therefore, the explanation offered is rejected and the entire cash deposit of Rs.1,11,67,000/- is treated as unexplained cash credit under section 68 taxable u/s 115BBE.” 6.1 The Ld. DR contended that these findings were cogent and based on judicial precedent, and the Ld. CIT(A) erred in ignoring the “human probability” principle and deleting a well-founded addition.
The Ld. AR, on the other hand, supported the well-reasoned order of the Ld. CIT(A) and read out the relevant findings recorded therein. The Ld. AR invited attention to the following passages from the CIT(A)’s order: “It has been noticed from the reply submitted by the appellant that during the assessment proceedings he has duly submitted audited financial statements, purchase and sales ledger, cash book, bank statements, VAT returns and other documents to support his claim. As per the tax audit report, the appellant has shown a progressive turnover of Rs.5.56 crores and a gross profit ratio of 14% as compared to turnover of Rs.4.34 crores and gross profit ratio of 12.31% in the previous year.” “The appellant has reproduced the monthly sales data for FY 2015-16 and 2016- 17 which shows that maximum net sales of Rs.1.49 crores were made in October 2016 as compared to Rs.1.62 crores made in October–November of the previous 4 FY 2015-16. From the above, it is clear that the cash-in-hand and sales are maximum during the peak festival season. The appellant submitted documentary evidence such as cash book and sales ledger for 01.10.2016 to 08.11.2016, showing opening and closing cash balance of Rs.48,48,331.72 and Rs.1,22,04,982.72 respectively along with net sales of Rs.1,57,36,127.49.” “It could be gathered from the assessment order that the conclusion drawn by the AO by invoking human probability was based on presumption and not backed by any principle or provision of law. The AO failed to establish that cash withdrawn earlier was utilized elsewhere and therefore cannot explain the source of deposit. The appellant’s explanation that the cash deposited in the bank account during demonetization was out of cash in hand and sales up to 08.11.2016 from sale of stock as per books of account deserves acceptance.” “Accordingly, it is found that the addition of Rs.1,11,67,000/- u/s 68 r.w.s. 115BBE was unwarranted. The Assessing Officer is directed to delete the same and grant relief to the appellant. Thus, the ground raised
towards addition made u/s 68 stands allowed on law as well as on facts.” 7.1 The Ld. AR submitted that these findings are based on verified books and VAT returns. No discrepancy in stock, purchases or sales was found; the AO did not reject the books u/s 145(3). Hence, invoking section 68 was wholly unjustified. The deposits were fully explained as business receipts during the festival season.
8. We have considered the rival submissions and examined the record. It is undisputed that the assessee maintained audited books of account, which were neither rejected nor found defective by the Assessing Officer (AO). The CIT(A) has recorded that audited financials, cash book, sales ledger, and VAT returns were produced; turnover rose from Rs.4.34 crore to Rs.5.56 crore and gross profit improved from 12.31% to 14%. Peak-season sales in October 2016 were consistent with the previous year. These findings remain uncontroverted.
8.1 The addition of Rs.1,11,67,000/- is founded solely on the AO’s inference from the “human probability” test and the pattern of cash deposits made in six tranches between 10-11-2016 and 28-12-2016. The AO reasoned that “no prudent person” would hold SBNs and deposit in parts, and therefore treated the sum as unexplained u/s 68 r.w.s. 115BBE. 8.2 This approach is legally untenable. When sales are duly recorded in audited books and reflected in accepted VAT returns, the resultant cash cannot be treated as unexplained without first rejecting the books or proving the entries 5 to be sham. The AO did not verify the sale invoices or conduct even a test- check. The CIT(A) has rightly noted that the cash book for 01-10-2016 to 08-11- 2016 showed substantial festival-season sales and adequate cash balance, with no evidence that the cash was otherwise deployed.
8.3 Once audited accounts are accepted, the turnover and cash flow therein enjoy a presumption of correctness. VAT data also tallies with the declared turnover. High Diwali-season sales in both FYs 2015-16 and 2016-17 justify the assessee’s explanation of higher cash inflow. The “human probability” test cannot override contemporaneous, verifiable evidence. Mere suspicion cannot substitute proof. We concur with the CIT(A)’s findings.
8.4 The Delhi High Court in CIT v. Agson Global Pvt. Ltd. held that where cash deposits during demonetisation correspond to recorded cash sales and no contrary material is brought on record, such deposits cannot be treated as unexplained u/s 68. The ratio squarely applies here.
8.5 Consistent views of the Chandigarh Benches in KalaneedhiJewellers LLP v. DCIT, DCIT v. Roopam Silk International, and DCIT v. Roop Fashion further hold that (i) section 68 is inapplicable to recorded sales already credited to the P&L; (ii) absent book rejection or stock discrepancies, cash realised from sales cannot be re-characterised as unexplained; and (iii) the “human probability” theory cannot displace documentary evidence and accepted VAT records.
8.6 The AO’s reliance on Durga Prasad More and Sumati Dayal is misplaced. Those rulings permit drawing inferences only where evidence is lacking. Here, the assessee’s explanation is backed by audited books, VAT data, and cash trail—none of which were disproved.
8.7 The fact that deposits were made in tranches, including one on 28-12- 2016, is inconsequential as deposits within the notified window are permissible.
6 The decisive factor is the source, not the number of deposit slips, and the source stands proved through the books and VAT returns.
8.8 On the totality of facts, we hold that section 68 is not attracted. The assessee’s explanation is satisfactory and supported by records forming part of the assessment file. Following Agson Global (Del HC) and the consistent Tribunal view on demonetisation-era deposits, we uphold the CIT(A)’s deletion of Rs.1,11,67,000/-.
In the result, the appeal of the Revenue is dismissed.