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Facts
The assessee appealed against the CIT(A)'s order dismissing their appeal against the AO's addition of Rs. 31,90,000/- for unexplained cash deposits during demonetization and disallowance of Rs. 13,82,437/- as unexplained expenses. The AO had noted an abnormal increase in cash deposits during the demonetization period compared to previous periods and disbelieved the assessee's explanation of these deposits being from cash sales. The CIT(A) upheld these additions.
Held
The Tribunal found that the AO did not specifically ask for the assessee's books of accounts to justify sales or expenditures and that the assessee had submitted most of the requested information. The Tribunal also noted that the sales were declared to the Commercial Tax Department and accepted. Therefore, the Tribunal restored the matter to the CIT(A) to consider the assessee's submissions that were not considered by the AO and to examine the explanation for cash deposits and expenses.
Key Issues
Whether the addition on account of unexplained cash deposits during demonetization and disallowance of expenses are justified, considering the assessee's submissions and declared sales.
Sections Cited
142(1), 144, 68, 115BBE, 272A(1)(d)
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Income Tax Appellate Tribunal, LUCKNOW ‘B’ BENCH, LUCKNOW
A.Y. 2017-18 Ranjeet Singh, vs. The DCIT / ACIT-4, 459, Ameer Nagar, Aishbagh, Lucknow-226001 Lucknow-226004 PAN: AFSPS0877G (Appellant) (Respondent) Assessee by: Sh. Rakesh Garg, Advocate Revenue by: Sh. Amit Kumar, DR Date of hearing: 23.07.2025 Date of pronouncement: 16.10.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the assessee against the orders of the ld. CIT(A), NFAC dated 22.03.2024, wherein the ld. CIT(A) has dismissed the appeals of the assessee against the orders of the ld. Assessing Officer passed on 21.12.2019. The grounds of appeal are as under: -
01. Because the CIT(A) has erred on facts and in law in upholding an addition of Rs.31,90,000/- being cash deposited in bank during demonetization period as unexplained, the same is contrary to facts, bad in law, be deleted.
02. Because the entire cash deposited in bank is part of the sale proceeds and realization of debts, the addition made is purely on suspicions and surmises, such addition is contrary to facts, bad in law, be deleted.
03. Because there being no change in the method of accounting regularly followed by the assessee and the same having being consistently accepted, the books of account having not been rejected, the stock tally not disputed, the accounts being tax audited, there was no reason for the AO to disbelieve the cash deposited in the bank treating the same as unexplained, the addition of Rs.31,90,000/- upheld by the CIT(A) be deleted.
04. Because the amount of Rs.31,90,000/- being cash deposited in bank being part of sale proceeds and cash receipts already charged to revenue for the purposes of computation of income, separate addition of the same has resulted into double taxation, not permitted by law, the addition made be deleted.
Ranjeet Singh A.Y. 2017-18 05. Because the computation of income as done by the AO based on "income as retuned", there was no occasion to disbelieve the books of account as maintained and make separate addition on account of cash deposited in bank as unexplained, the same be deleted.
Because the CIT(A) has erred on facts and in law in upholding the addition of Rs. 13,82,437/-, being 25% of the entire indirect expenses debited to P&L Account on adhoc basis without pointing out any defect in the same which disallowance is contrary to facts, bad in law be deleted.
7. Because the complete details of the expenses being available and there being no remarks of the auditors, the accounts being tax audited, the same being an evidence in itself, there was no reason, for the AO to disallow 25% of the same on adhoc basis, merely on conjectures and surmises, the same be deleted.
Because in any case and in all circumstances the order passed by the CIT(A) upholding the addition and the disallowances made is bad in law, be quashed.”
The facts of the case are that the assessee filed a return of income for the assessment year 2017-18 on 31.10.2017, declaring a total income of Rs.19,04,680/- . The case was taken up for scrutiny for examining the issue of, “abnormal increase in cash deposits during the demonetization period as compared to pre- demonetization period”. The assessee had made cash deposits of Rs.31,90,000/- in its bank accounts with HDFC Bank, Naka Hindola, Lucknow, wherein it had deposited Rs. 2,40,000/- on 13.11.2016 and in State Bank of India, Aishbagh, Lucknow, wherein it had deposited a sum of Rs. 29,50,000/- on various dates between 11.11.2016 and 24.11.2016. The ld. AO records that no response was received to initial notices issued under section 142(1) of the Act and even in response to the penalty notice under section 272A(1)(d) of the Act and therefore, a notice under section 144 was issued to the assessee. In response, the assessee filed a reply in which it was submitted that he was running a proprietorship firm in the name of M/s Ranjeet Plywood Industries and was also a partner of M/s Inder Plywood Industries. He enclosed the computation of income and copy of ITR for the year, details of bank account, copy of trading and profit & loss account and written submissions. The ld. AO asked him to show cause as to why his claim of Rs.29,50,000/- cash being deposited out of cash sales made prior to demonetization and out of cash in hand, should not be disbelieved as he was unable to produce any supporting documents such as list of identifiable persons with their name, PAN, Ranjeet Singh A.Y. 2017-18 addresses etc., to whom the sales were made etc,. The ld. AO also noticed that the assessee shop was in the close vicinity of the bank and yet the cash had not been deposited at one go but through multiple transactions on various dates. She therefore, directed the assessee to produce books of accounts, bills and vouchers, sales bills, sales ledger, VAT returns, name, PAN and addresses of sale parties to whom cash sales were made etc,. The ld. AO does not record what the submission of the assessee was, in her assessment order but states that the assessee claimed to have engaged in cash sales in the month of October, 2016. She observed that the assessee had not done any cash sale in any other month during the financial year 2016-17 and even in the previous year had only made minuscule cash sales in September and October of 2015-16. She therefore, held that the cash sale as reported by the assessee during the month of October, 2016 were not explained by past trends and she further noticed that the assessee had a history of low cash in hand which had only increased in the month of October, 2016. From the same, she concluded that the assessee did not maintain any cash balance in its books and now being caught by Department, he had fabricated a story around its cash withdrawals to explain cash deposits by fabricating cash sales. The ld. AO further pointed out that there was a huge increase in cash deposit in the F.Y. 2016-17 as compared to the F.Y. 2015-16. She also observed that it was not as though the cash had been deposited in one go, but in multiple instalments right up till 30.11.2016 and there was no reasonable explanation for not depositing that which was claimed to be cash in hand, at the beginning of the period of demonetization, in one go. The ld. AO, therefore, held that the assessee had also not furnished any explanation for holding such a high cash balance in the months of September and October, 2016, contrary to its previous record and she therefore, held that the pattern of the assessee was against the test of human probabilities, as laid down by the Hon’ble Supreme Court in the case of Durga Prasad More vs. CIT 82 ITR 540 and Sumati Dayal vs. CIT 214 ITR 801. The ld. AO also observed that no cash withdrawal had been made by the assessee after demonetization. She considered the VAT returns submitted by the assessee and held that even though the assessee had shown these sales in her Ranjeet Singh A.Y. 2017-18 returns to the Commercial Tax Department of U.P., but because the due date of filing of monthly VAT return is the 20th day of the succeeding month in which sales were made, the assessee had enough time to give legal shape to undisclosed cash through issue of bogus / non genuine cash sale invoices. She noticed that the assessee had intentionally made sales invoices below Rs. 2,00,000/- to save itself from the obligation of obtaining PAN and these sales were made in the month just before demonetization. From the same, she concluded that the amount credited in the books on account of sale, was fit to be regarded as unexplained cash credit and after relying upon various case laws, she brought the same to tax under sections 68 and 115BBE of the Income Tax Act. Besides this, the ld. AO perused the trading and profit & loss account of M/s Ranjeet Plywood Industries and observed that the assessee had debited a huge amount of expenses under various heads. She asked the assessee to substantiate this claim of expenses by producing documentary evidence and books of accounts, but she records that the assessee neither attended the case nor furnished evidences to substantiate the expenses that had been so debited to the P & L account. Therefore, the ld. AO, after relying upon decision of the Hon’ble ITAT in the case of Kanu Kitchen Kulture (Pvt.) Limited vs. DCIT (2014) 49 taxman.com 64 (Delhi-Trib) and the Hon’ble Supreme Court in the case of CIT vs. Imperial Chemical Industries Pvt. Limited (1969) 74 ITR 17 (SC) made an addition of Rs. 13,82,437/- by disallowing 25 % of such expenses as unexplained. Accordingly, the assessee was assessed at an income of Rs. 64,77,110/-.
Aggrieved with the said order, the assesse went in appeal to the ld. CIT(A). The ld. CIT(A) recorded in his order that he had given six opportunities to the assessee to furnish submissions in support of the grounds of appeal but the assessee had failed to made any compliance. From the same, the ld. CIT(A) concluded, that the assessee had no evidence to substantiate the grounds it had taken and it had not brought anything on record to controvert the findings of the ld. AO. Thus, there was no material before the ld. CIT(A) to counter effectively the position adopted by the ld. AO on the concerned issues dealt with in the assessment Ranjeet Singh A.Y. 2017-18 order. However, without prejudice to that argument, the ld. CIT(A) decided to decide the case on merits. He reproduced extracts from the assessment order and pointed out that the assessee had failed to submit any documentary evidence to back up his claims, which appear as mere assertions without any hard evidence to hold it up. Since the assessee had not produced any additional facts, there was not much scope for discourse on the issue dealt with by the ld. AO and also there was no material to establish the claims of withdrawals made by the assessee to explain the corresponding income / cash deposits during the year. Thereafter, placing reliance upon various decisions of various courts, which laid the onus upon the assessee to effectively explain the sources of deposit and also to explain expenditure incurred by it, the ld. CIT(A) confirmed the additions made by the ld. AO and dismissed the appeals of the assessee.
4. The assessee is aggrieved at this summary dismissal of his appeal and has accordingly come before us. Sh. Rakesh Garg, Advocate (hereinafter referred to as the ld. AR) pointed out that the ld. CIT(A) was unjustified in dismissing the assessee’s appeal out of hand because the cash that had been deposited into the bank account had been made out of sales and neither had the books of accounts been rejected by the ld. AO nor had the availability of stock been called into question by the ld. AO. The ld. AR drew our attention to the reply filed by the assessee on 2.12.2019, wherein the copy of the cash book for the demonetization period had been attached with the reply. He also invited our attention to page 5 of his paper book, which contained the response made the assessee on 2.12.2019 and from the same, he pointed out that copies of the bank statement, bank book and cash transaction details had also been filed on that date. The ld. AR further submitted that the sales of the assessee had been duly declared before the Commercial Taxes Department of the Government of Uttar Pradesh in the form of VAT returns for the period ending 31.12.2016 and he filed copies of the acknowledgment of VAT returns for the periods ending on 30.06.2016, 30.09.2016 and 31.12.2016. He also filed a copy of the U.P. VAT XXIV return for the tax period ending on 30.06.2016, Ranjeet Singh A.Y. 2017-18 30.09.2016, 31.12.2016 and 31.03.2017. The ld. AR also invited our attention to page 18 of his paper book which contained the VAT order passed by the Commercial Taxe Authorities, so as to demonstrate that the said VAT returns had been accepted by the Commercial Taxes Department of the Government of Uttar Pradesh. Therefore, the ld. AR submitted that the sales of the assessee stood accepted and the cash that had been received on account of those sales could not be regarded as unexplained. The ld. AR, thereafter, invited our attention to the notice under section 142(1) issued on 12.09.2019 and pointed out that the assessee had not been asked to produce its books of accounts as per the terms of that notice. Accordingly, since it had made compliance to the notice under section142(1), producing all that it was required to produced, the sales of the assessee could not be rejected on the grounds that it had not produced its books of accounts and similarly the expenses claimed by the assessee could not be rejected on the grounds that it had not produced its books of accounts. It was prayed that the ld. CIT(A) had passed a totally one-sided order without considering any of these facts and therefore, his order was fit to be quashed. Accordingly, it was prayed that the order of the ld. CIT(A) be quashed and the returned income filed by the assessee be accepted.
5. On the other hand, Sh. Amit Kumar, Sr. DR (hereinafter referred to as the ld. DR) pointed out that the ld. AO had clearly observed the patter of sales made by the assessee over the last two years and had pointed out how the assessee had only increased its cash sales just prior to the period of demonetization. The ld. Sr. DR pointed out that the ld. AO had clearly brought out how the assessee had only indulged in cash sales to any great extent, just prior to deposit of cash during demonetization period. As this was completely out of tune with the trading pattern exhibited by the assessee in the past or since, the ld. AO was justified in concluding that the apparent was not real and since the assessee had failed to prove the sales with reference to PAN numbers, sales invoices, addresses of the assessees to whom it claimed to have sold the amounts in question, the decision of the ld. AO to make the addition was justified. Furthermore, the ld. DR submitted that it was the duty of Ranjeet Singh A.Y. 2017-18 the assessee to substantiate all expenses claimed by it before the ld. AO. However, the assessee has not produced any documentary evidence to prove the expenses claimed by it. Accordingly, the AO was justified in making the disallowance on account of unexplained expenditure also.
6. We have duly considered the facts and circumstances of the case. It is fairly clear from a perusal of notice under section 142(1) that was issued by the ld. AO that the assessee was never specifically asked to produce its books of accounts before the ld. AO, to justify its claim of sales or its claim of expenditures. It was handed over a detailed questionnaire and from a perusal of the reply that has been furnished by the assessee, it is seen that most of the information that the assessee was asked to submit to the ld. AO had, in fact, been submitted to her. We also observe that the assessee has duly declared the sales made by him to the Commercial Taxes Department of U.P. and that the Commercial Taxes Department of the Government of U.P. has accepted the VAT returns filed by him. Therefore, before the ld. AO could hold the cash deposits to be unexplained, she was required to call for the books of accounts, point out inaccuracies in the submissions made by the assessee, call into question the stock position of the assessee and disprove the sales of the assessee from which the cash deposited in the bank account is stated to have originated. However, we find that the ld. AO has not done any of the exercises but has rather chosen to disbelieve the claims of the assessee on the ground that they are not supported by previous or subsequent patterns. We believe that the same was not a proper approach because the previous patterns cannot be conclusive proof of the sale not having taken place if the sale receipts were otherwise supported by sufficient stock, depletion of that stock and sales made on account of that stock that had been duly declared to and accepted by a Commercial Taxe Authorities. We observe that the ld. CIT(A) has relied purely on the assessment order on account of the fact that the assessee has not made any compliance before him. Therefore, the assessee has not had an opportunity to substantiate the fact of its sales before the ld. CIT(A) or demonstrate that the expenses claimed by it were Ranjeet Singh A.Y. 2017-18 duly explained by its books of accounts. We, therefore, believe it is in the interest of justice that the matter should be restored back to the file of the ld. CIT(A) for considering the submissions of the assessee that have not been considered by the ld. AO and for examining whether the cash deposited in the bank account is explained out of the sales of the assessee and further for examining whether the expenses made out of the books of accounts are justified and supported by due evidence. We direct the assessee to make the necessary compliances before the ld. CIT(A) so that the ld. CIT(A) may have occasion to consider the matter on its merits. Accordingly, as the matter stands restored to the file of the ld. CIT(A), the appeal of the assessee is held to be allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 16.10.2025 in the Open Court.