ARROW CLOTHING PRIVATE LIMITED,AHMEDABAD vs. THE ITO, WARD-1(1)(3), AHMEDABAD

The solitary issue in the present appeal relates to addition made to the income of the assessee on account of cash found deposited in his bank account during demonetization period the source of which remained unexplained. The assessee is a company engaged in the business of industrial washing of various kinds of garments on job-work basis. The assessee had deposited cash of Rs. 30,84,500/- in the following bank accounts during demonetization period:

The assessee attributed the source of the same to opening balance as on 01.10.2016, cash withdrawals, cash receipt from employees as cash Arrow Clothing Pvt. Ltd. vs. ITO Asst.Year –2017-18 - 3 - receipt from parties to whom sales had been made on account of sale of own machinery, sale of damaged garments and cash sales prior to demonetization immediately before demonetization from 01.04.2016 to 08.11.2016. The assessee submitted that the transactions were corroborated by entries in his books of accounts duly supported with vouchers and the books of accounts were duly audited. The Assessing Officer, however, rejected the assessee’s explanation noting several anomalies in the same. He noted a sharp increase in cash sales in pre- demonetization period and abnormal increase in cash deposit during this period and further he found that the cash sales shown prior to the demonetization period was not duly supported with proper bills. He found the copies of invoices to mention incomplete description and the narration to be general in nature. The Assessing Officer, therefore, concluded the cash sales to have been inflated by the assessee to cover up the unaccounted money deposited during demonetization. He rejected the books of accounts of the assessee noting the above anomalies and added the entire cash deposited during demonetization period of Rs. 30,84,500/- to the income returned by the assessee as unexplained credit u/s 68 of the Act, subjecting it to tax at the special rate prescribed under Section 115BBE of the Act.

The Ld. CIT(A) found merit in the order passed by Assessing Officer including the rejection of books of accounts and the addition made on account of unexplained cash deposited during demonetization period. However, he noted that the cash deposits relating to cash sales made by the assessee were duly considered while computing the income returned by Arrow Clothing Pvt. Ltd. vs. ITO Asst.Year –2017-18 - 4 - the assessee to tax. He therefore reduced the amount of cash deposits from the profits returned by the assessee and subjected the same to tax separately at the special rate prescribed under Section 115BBE of the Act.

Aggrieved by the same, the assessee has come up in appeal before us challenging:

We have heard both the parties.

Taking up first the aspect of rejection of books of accounts of the assessee, the Ld. CIT(A) has noted the following facts in his order relating to the infirmities in the explanation furnished by the assessee on account of source of cash deposits in the bank account being attributable to cash sales made by the assessee:

A perusal of the above would reveal that he noted sharp increase in cash sales in the pre-demonetization period i.e. between 01.04.2016 to 08.11.2016. The Assessing Officer has noted the facts relating to the same at the Para 8.1 (i) of his order as under:

The assessee has also been noted to have deposited abnormally huge amount of cash in the impugned year from the 01.04.2016 to 31.12.2016 as compared to deposit in the same period of the preceding year. The Assessing Officer records the facts relating to the same at Para 8.1 (iii) as under: (iii) Irregular and unreliable pattern of cash deposit in pre & demonetization period. The same is depicted as under: Month A.Y. 2016-17 A.Y. 2017-18 % increase From 01st April to 4.44 lakhs 52.28 lakhs 1077% 31st December 10.1 As is evident from the above cash deposited in the impugned year up to the demonetization period shows an abnormal increase of 1077% as compared to the cash deposited in the same period in the preceding year.

The assessee has also been noted to have abnormally large cash in hand in the pre-demonetization period as compared to that in the same period of the preceding year. The Assessing Officer has noted facts relating to the same at para 8.1 (ii) of his order as under:

Ld. Counsel for the assessee was unable to controvert any of the factual findings of the Ld. CIT(A) regarding the abnormal increase in the cash sales,the cash in hand with the assessee and the cash deposited in the bank account during the demonetization period of the impugned year as compared to the preceding year. He was also unable to controvert the fact that the cash sales were not supported with genuine and authenticated evidences.

Taking the aspect of addition made on account of cash deposit pre- demonetization period, though we completely agree with the Ld. CIT(A) that the same cannot be attributed to the cash sales made by the assessee however, at the same time, we have noted that the assessee had opening cash in hand as on 01.10.2016 of Rs.1,40,079/- and the cash withdrawal from bank between 01.10.2016 to 08.11.2016 to the tune of Rs. 11,38,662/-. Since anomalies have been found only in the explanation of the cash deposits vis-à-vis the cash sales made by the assessee, and no anomalies have been recorded vis-à-vis opening cash balance as on Arrow Clothing Pvt. Ltd. vs. ITO Asst.Year –2017-18 - 9 - 01.10.2016 as also cash withdrawals from the bank during the demonetization period of Rs. 11.38 lakh, the assessee we hold is entitled to benefit of the said two amounts, approximating Rs. 12.70 lakhs, for the source of cash deposited in the bank account during the demonetization period. The remaining amount of cash deposited in the bank account, we hold, remains unexplained and addition to the said extent is confirmed by us.

As to the aspect of applicability of tax rate prescribed under Section 115BBE of the Act on the addition confirmed we see no reason to differ with the Ld. CIT(A). The Division Bench of the Hon’ble Kerala High Court has in a writ petition filed before it in the case of Maruthi Babu Rao Jadav vs. ACIT W.A. No. 984 of 2019 dated 23.09.2020 categorically held the tax rates under Section 115BBE of the Act are applicable for the assessment year i.e. A.Y. 2017-18. The relevant findings of the Hon’ble High court at para 11-13 of its order is as under:

The assessee contends that the seizures were made prior to the amendment. The affidavits admitting the ownership of amounts seized were also submitted prior to the amendment. The assessee was not aware of the enhanced tax liability when the admissions were made before the authorities. The assessee has also made an attempt to relate the amendments to the demonetization of the specified currencies announced on 08.11.2016 which contention we reject at the outset. The subject amendments which are relevant for Arrow Clothing Pvt. Ltd. vs. ITO Asst.Year –2017-18 - 10 - our consideration have no direct link with the demonetization introduced or the taxation and investment regime of Pradhaan Mantri Garib Kalyan Yojana 2016 brought in under Chapter IX A of the 2nd amendment Act. The 2nd amendment Act as is clear from the Statements of Objects and Reasons, was to curb, evasion of tax and black money as also plug loopholes in the IT Act and to ensure that defaulting assessees are subjected to higher tax and stringent penalty provision. Both the measures spoken of herein were to further the said objects and there cannot be any nexus assumed nor is it discernible.

Section 115 BBE was inserted by Finance Act 2012 w.e.f 01.04.2013. As on 01.04.2016 the financial year in which the subject seizures occurred Section 155BBE provided for 30% tax on income refereed to in Sections 68, 69, 69A, 69B, 69C and 69D. The same was amended by the 2nd Amendment Act; w.e.f. 01.04.2017, enhancing the rate to 60%. Hence there was no new liability created and the rate of tax merely stood enhanced which is applicable to the assessments carried on in that year. The enhanced rate applies from the commencement of the assessment year, which relates to the previous financial year.”

In view of the above we see no reason to disagree with the LD.CIT(A) confirming the applicability of tax rate as prescribed under Section 115BBE of the Act in the impugned year, A.Y. 2017-18, on the addition confirmed under Section 68 of the Act.

Since all the grounds raised before us by the assessee stand dealt with as above, the appeal of the assessee is partly allowed in above terms. This Order pronounced in Open Court on 27/02/2026