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Facts
The assessee, engaged in the gold and jewelry business, reported cash sales and deposited Rs. 63,00,000/- during the demonetization period. The Assessing Officer (AO) treated these deposits as unexplained. The AO also disallowed Rs. 14,96,530/- under Section 40A(3) for cash payments exceeding Rs. 20,000/- where the vouchers were not sufficiently authenticated.
Held
The Tribunal held that the AO's premise for treating cash deposits as unexplained was incorrect, as cash sales were a regular feature of the business and the total cash sales in the current year were significantly lower than the previous year. Regarding Section 40A(3), the Tribunal found that individual payments within vouchers were below Rs. 20,000/-, but directed the AO to verify the authenticity and purpose of these expenses.
Key Issues
Whether cash deposits during demonetization were unexplained, and whether cash payments exceeding Rs. 20,000/- were hit by Section 40A(3) without proper substantiation.
Sections Cited
143(3), 40A(3), 68, 145(3), 115BBE, 270A, 271AAC, 234A, 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI TR SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
1. This appeal is filed by the assessee against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 20.06.2025 for the Assessment Year (A.Y.) 2017-18 in the proceeding u/s 143(3) of the Income Tax Act.
The brief facts of the case are that the assessee had filed its return of income for the A.Y. 2017-18 on 15.08.2017 declaring total income of Rs. 7,88,810/-. The case of the assessee was selected for scrutiny under CASS. The AO noticed that the assessee had made cash deposits of Rs.63,00,000/- in his bank account during the demonetisation period from Abdhi Jewels Private Limited Vs. ITO, AY- 2017-18 2 09.11.2016 to 13.12.2016. The AO was not satisfied with the explanation of the assessee regarding the source of cash deposits. Therefore, the entire cash deposit of Rs. 63,00,000/- made in the bank account during demonetization period was treated as unexplained and added to income. Further, the AO had also made addition of Rs. 14,96,530/- u/s. 40A(3) of the Act as well as certain other additions. The assessment was completed u/s. 143(3) of the Act on 31.12.2019 at total income of Rs. 86,07,939/-.
Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed.
Now the assessee is in second appeal before us. The following grounds have been taken in this appeal:
The order passed by lower authorities is invalid, bad in law and required to be quashed.
2. Ld. NFAC erred in law and on facts in confirming addition of Rs. 63,00,000/- u/s 68 of the Act ignoring submission of the appellant.
3. Ld. NFAC erred in law and on facts in confirming action of AO of rejecting books of accounts u/s 145(3) of the Act without pointing out any discrepancies.
4. Ld. NFAC erred in law and on facts in confirming action of Rs. 14,96,530/- u/s 40A(3) of the Act ignoring submission of the appellant.
Ld. NFAC erred in law and on facts in confirming action of AO in taxing addition made by him at special rate as per section 115BBE of the Act.
6. Initiation of penalty proceedings u/s 270A is unjustified.
7. Initiation of penalty proceedings u/s 271AAC is unjustified.
Charging of interest u/s 234A, 234B and 234C are unjustified.
Abdhi Jewels Private Limited Vs. ITO, AY- 2017-18 3 5. The first ground taken by the assessee pertains to addition of Rs. 63,00,000/- on account of unexplained cash deposits in the bank account. Shri Parin Shah, the Ld. AR of the assessee explained that the assessee is engaged in business of manufacturing and trading of gold, silver and other precious ornaments and that the cash sales is a regular feature of the business of the assessee. He explained that the cash sales were made in all the months not only in the current year but also in the preceding financial year and that the entire cash deposit of Rs. 63,00,000/- made in the bank account during the demonetisation period represented the cash balance of the assessee. The Ld. AR submitted that the cash sales made in the current year was substantially lower than the cash sales in the preceding financial year. Under the circumstances, the AO was not correct in holding that there was disproportionate increase in cash sales in the current year. He submitted that the AO had made the addition on the basis of incorrect facts and wrong presumption and the entire cash deposit was duly explained by the assessee.
Per Contra, Shri Abhijit, the Ld. SR-DR supported the orders of the lower authorities.
We have considered the rival submissions. There is no dispute to the fact that the cash sales is a regular feature of business activity of the assessee. Before the AO, the assessee had furnished month wise details of cash sales made in the current year as well as in the preceding financial year, which is reproduced in the assessment order. The Assessing Officer did not dispute these cash sales. We deem it proper to reproduce the Abdhi Jewels Private Limited Vs. ITO, AY- 2017-18 4 month wise cash sales of the assessee, as detailed in the assessment order, for a better understanding of the facts.
Month AY-2017-18 AY-2016-17 % of increase April 5,93,983 59,80,078 9.93 May 84,048 60,52,440 1.38 June 5,44,968 59,30,672 9.18 July 30,370 21,41,501 1.41 August 60,892 69,79,190 0.87 September 3,13,144 58,90,940 5.31 October 35,91,476 42,11,955 85.26 Till 8th November 32,73,368 18,93,801 172.84 09th to 30th 0 14,78,919 0 November December 1,31,198 43,55,603 3.01
8. The AO had rejected the explanation of the assessee for the reason that the cash sales in the month of October’16 was much higher compared to the cash sales of earlier months. On this basis he had concluded that the cash sales figure was manipulated to explain the cash deposits in the bank accounts. Merely because the cash sales in the month of October’16 was higher, the authenticity of the sales cannot be doubted. As per normal trend in the jewellery business, the sales are higher during the festive months of October and November. In fact, the cash sales of Rs.35,91,476/- in the month of October 2016 was correspondingly lower than the cash sales of Rs. 42,11,955/- made in the month of October 2015. Thus, the conclusion of the AO that the cash sales in October’16 was abnormally high, is not found to be correct considering the cash sales made during the festive months in the preceding year. Apart from this observation, no other evidence was brought on record by the AO to dispute the authenticity of the cash sales shown by the assessee. In fact, the total cash sales shown in the current financial year was Rs.99,25,617/- only, which was much less than the cash sales of Rs. 4,92,09,552/- in the preceding financial year. Thus, the basic premise on which the cash Abdhi Jewels Private Limited Vs. ITO, AY- 2017-18 6 deposits were treated as unexplained by the AO, is found to be incorrect. The finding given by the AO that there was disproportionate increase in cash sales in the current year is totally wrong, considering the sales figures as reproduced earlier. The percentage of increase as worked out by the AO is also found to be incorrect. The AO had made the addition on the basis of incorrect facts and wrong presumptions. In the absence of any other evidence to disprove the cash sales made by the assessee, we do not find any justification for treating the cash deposits in the bank accounts, which represented cash sales, as unexplained. Therefore, the addition of Rs. 63,00,000/- as made by the AO on account of unexplained cash deposits in the bank account, is deleted. The ground taken by the assessee is allowed.
The next ground pertains to addition of Rs. 14,96,530/- made u/s. 40A(3) of the Act. In the course of assessment, the AO found from the cash book that the assessee had made certain cash payments exceeding Rs. 20,000/-. Further the AO was also not satisfied with authenticity of cash vouchers, as signature of the recipient was not appearing in many of the vouchers. Therefore, after excluding the salary payments made in cash, the balance cash expense of Rs. 14,96,530/- was disallowed u/s. 40A(3) of the Act. Shri Parin Shah, the Ld. AR of the assessee explained that as per the software utilized by the assessee, all the cash payments made on a particular day were clubbed together and entered in the accounts under voucher. Thus, the amount of cash payment of a particular date as per voucher was found in excess of Rs. 20,000/-. However, the individual payment made to the different persons under the common voucher was less than Rs. 20,000/- and thus the payments were not hit Abdhi Jewels Private Limited Vs. ITO, AY- 2017-18 7 by the mischief of section 40A(3) of the Act. He, therefore, submitted that no disallowance u/s. 40A(3) of the Act was called for, as the payment to individual persons was less than Rs. 20,000/- in each case. As regarding authenticity of payments, the Ld. AR submitted that the assessee may be allowed another opportunity to produce the complete details of the persons to whom the payments were made so that the authenticity of the payments can be verified by the AO.
Per contra, Shri Abhijit, Ld. Sr. DR supported the order of the lower authorities. He submitted that the AO had disallowed the cash expense of Rs.14,96,530/- not only under the provision of section 40A(3) of the Act, but also for the reason that he was not satisfied with the authenticity of the payments. The Ld. SR-DR submitted that the complete details of the parties to whom the payments were made as well as the purpose of payment, was not explained by the assessee. He, therefore, supported the order of the AO on this issue.
We have considered the rival submissions. Copy of certain vouchers which were hit by the mischief of section 40A(3) of the Act, has been brought on record in the paper-book filed by the assessee. It is found therefrom that though a particular voucher is for an amount exceeding 20,000/-, the individual payment made to different persons is below Rs. 20,000/-. For example, the voucher No. CP/340 dated 10.09.2026 is found to be as under:
The above voucher for Rs. 47,500/- was in respect of payment made to four different persons for amounts below the limit of Rs. 20,000/-. Thus the contention of the assessee that the individual payment made to different persons in the voucher for a particular date was below Rs. 20,000/-, is apparently found to be correct. However, the complete address of the parties and the purpose of payment is not found appearing in the vouchers. Since the AO had also doubted the authenticity of the expenses, we deem it proper to set aside the matter to the file of AO with a direction to allow another opportunity to the assessee to produce evidence in respect of authenticity of the cash expenses. The assessee is also directed to furnish complete name and address of the parties to whom the cash payments were made and also to explain the nature of expense. The assessee is free to produce any other evidence to establish the authenticity and genuineness of the cash expenses. The AO will have liberty to conduct inquiry in respect of evidences brought on record by the assessee, as deemed fit and thereafter to decide the matter in accordance with the provisions of law. In the result, the ground taken by the assessee is allowed for statistical purpose.
The appeal of the assessee is allowed for statistical purpose.
Order pronounced in the Court on 26/03/2026 at Ahmedabad.