ITAT Delhi Deletes Demonetisation Addition for Cash Sales Properly Recorded in Books

Basant Kumar Aggarwal Vs ITO (ITAT Delhi)

Summary: The ITAT Delhi deleted an addition of ₹9.41 crore made under Section 68 read with Section 115BBE on cash deposits during the demonetisation period, holding that the Assessing Officer and CIT(A) had proceeded merely on suspicion and assumptions without any concrete evidence. The assessee, a bullion trader, had deposited ₹26.89 crore in cash and explained the deposits as proceeds from cash sales recorded in the books during October and early November 2016. The Tribunal noted that the Revenue had not disputed the availability of stock, genuineness of purchases and sales, VAT returns, cash book entries, or the existence of sufficient cash balance. It held that books of account cannot be rejected under Section 145(3) and additions cannot be sustained merely because the tax authorities considered the pattern of cash sales or retention of cash as commercially improbable. In the absence of direct evidence showing manipulation or fictitious sales, the ad hoc addition of 35% of deposits was unsustainable and was accordingly deleted.

Core Issue: Whether an ad hoc addition under section 68 could be sustained in respect of demonetisation cash deposits when the assessee’s cash sales, stock records, purchases, cash book and availability of cash balance were accepted and the addition was made merely on suspicion regarding the timing of cash deposits.

Facts: The assessee, engaged in the bullion and jewellery business, filed his return of income for AY 2017-18 declaring income of ₹64.93 lakh. During the demonetisation period, he deposited cash of ₹26.90 crore in his bank account. The assessee explained that the deposits were made out of cash sales of ₹19.82 crore in October 2016 and ₹6.89 crore in the first week of November 2016, which were duly recorded in the books of account and supported by stock records, VAT returns and cash book. The case was selected for scrutiny on account of abnormal cash deposits during demonetisation. The assessee furnished books of account, stock records, sales registers, purchase records and cash ledger to establish that the cash deposited represented recorded business receipts.

AO’s Findings: The AO observed that the assessee had shown unusually high cash sales of ₹19.82 crore in October 2016 and ₹6.89 crore in the first week of November 2016 but had not deposited the October cash sales in the bank immediately. According to the AO, no prudent businessman would retain such huge cash balances while simultaneously incurring interest expenses and carrying on regular banking transactions. The AO suspected that the assessee had introduced unaccounted cash into the books by creating fictitious cash sales to explain demonetisation deposits. He held that the books of account had been manipulated, rejected them under section 145(3), and made an ad hoc addition of 35% of the cash deposits amounting to ₹9,41,32,500 under section 68 read with section 115BBE, treating the same as unexplained cash credits.

CIT(A)’s Findings: The CIT(A) acknowledged that the assessee’s sales and purchases were duly reflected in the books and matched with VAT returns. The CIT(A) also recorded a categorical finding that the assessee possessed sufficient cash balance of ₹26.93 crore as on 08.11.2016 and that there was no dispute regarding stock availability, cash balance or cash deposits being reflected in the books. Nevertheless, the CIT(A) upheld the addition on the reasoning that in earlier years cash sales were regularly deposited in the bank, whereas in the relevant year substantial cash sales were shown only in October and November 2016 and deposited during demonetisation. According to the CIT(A), this pattern was contrary to normal business practice and suggested that the assessee had concocted cash sales merely to justify demonetisation deposits. The addition under section 68 was therefore sustained.

ITAT Findings: The Tribunal noted that the most significant finding recorded by the CIT(A) himself was that the genuineness of sales, purchases, stock position, cash ledger and availability of cash balance were not disputed. The Tribunal emphasized that once quantitative details of purchases, sales and stock stood accepted and the cash deposited in the bank was shown to be available in the books, there was no legal basis to sustain an addition merely because the tax authorities doubted the business wisdom of retaining cash and depositing it later. The Tribunal held that no explanation could be rejected merely on notions of business probability or prudence unless supported by direct or substantial evidence showing that the cash recorded in the books was not actually available. In the present case, there was no such evidence. The addition was founded solely on suspicion, conjecture and assumptions. The Tribunal further observed that the AO himself had resorted to an arbitrary estimation of 35% of deposits without any rational basis, demonstrating that the addition was purely ad hoc. Since accepted stock records, purchases, sales and cash balances supported the assessee’s explanation, the addition under section 68 could not survive. Accordingly, the entire addition of ₹9.41 crore was deleted.

Case Laws Relied Upon:

1. Pankaj Gupta vs. Principal Chief Commissioner of Income Tax (distinguished on facts).

2. Principal Commissioner of Income Tax vs. R.G. Buildwell Engineers Ltd..

3. Principal Commissioner of Income Tax vs. R.G. Buildwell Engineers Ltd..

4. S.M.I.L.E. Microfinance Ltd. vs. ACIT.

5. Mukesh Gupta vs. DCIT.

6. Sunil Garg vs. DCIT.

7. ITO vs. Neeraj Kumar Prop. M/s Neeraj Metal.

Final Conclusion: The Tribunal held that the addition was based purely on suspicion and ad hoc estimation despite the accepted genuineness of sales, purchases, stock records and availability of cash balance. Since the Revenue failed to bring any direct evidence showing that the recorded cash sales were fictitious or that the cash was unavailable for deposit, the addition of ₹9.41 crore under section 68 read with section 115BBE was deleted and the assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is preferred by the Assessee against the order dated 03.09.2025 of the Ld. Commissioner of Income Tax (Appeals)-26, Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) DIN & Order No : ITBA/APL/S/250/2025-26/1080296440(1) arising out of the order dated 12.12.2019 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the ITO, Ward-47(4), New Delhi for AY: 2017-18.

2. The assessee had filed original return declaring income of Rs.64,93,410/- and the case of assessee was selected for scrutiny to examine the issue of abnormal increase in cash deposit during demonetization period as compared to pre-demonetization period and large value cash deposit during demonetization period. Assessee had furnished necessary information and documents called for but assessing officer was not satisfied and concluded as follows:

“The reply of the assessee is considered. It is found assessee has not submitted any explanation in respect steep high cash sale in the months of October and November (in first week only) 2016. Further why assessee has kept Rs. 198226543 with himself without depositing it in the bank account where as it was doing other regular banking transactions during this period Assessee was incurring interest expense and having several other expense pending. Income of the assessee as per his ITR is only Rs. 64,93,410 and as such he can’t leave his cash sale balance of Rs. 19,82,26,543 unused. As such reply of the assessee is found without any merit and as such the same is rejected. After examination of reply of the assessee and facts of the case observation of assessing officer in this case is given here under:-

“6.1 Statement for the F.Y. 2014-15, 2015-16 & 2016-17 regarding cash sale and cash deposited in the bank account has been obtained. The statement is here under:-

—

6.2 The assessee has booked cash sale of Rs. 19, 82, 26,543/- in the month of October, 2016 and Rs. 6, 88, 56,281/- in the month of November, 2016 in a week prior to demonetization period. This trend of the assessee has not been observed in any week as well as any month in F.Y. 2016-17.

6.4 After comparing the above F.Y. statements it has also been revealed that assessee is depositing amount of cash sale in bank when the figure is reaching to a particular stage. But in the month of October, 2016 he has booked cash sale of Rs. 19,82,26,543/- which is highest cash sale booked by the assessee in any month. However, surprisingly he has not deposited single rupee in the bank out of this cash sale.

6.5 Cash sale made in the first week of November, 2016 of Rs. 6, 88, 56,281-was also deposited in the bank after demonetization. Moreover, cash sale of Rs. 6, 88, 56,281/- in a week makes it very high looking to the fact that it is a period after Diwali.

6.6 No business man will keep his cash unused (cash sale of October, 2016 of the assessee amounting to Rs. 19,82,26,543/-) in his hand when he is paying interest paid to bank O/D a/c amounting to Rs. 1,52,845/- and on car loan Rs. 63,112/-. At the same time claim of the assessee that he kept his cash balance of Rs. 19, 82, 26,543/- without depositing the same in bank account is not acceptable. It is also found that assessee was doing regular bank transaction during the month of October, 2016 yet he was not depositing his cash balance in the bank account.

Conclusion

7. On the basis of observation drawn at Para No. 6 above, assessing officer reached to a conclusion that concocted cash sale has been booked by the assessee to adjust his undisclosed income during the demonetization period

7.1 Assessee was having sufficient stock which he has pretended that he has sold and cash received from the sale is deposited in the bank. This connotation of the assessee is not accepted because no business man will keep cash in hand while he has to pay interests on loans as well as other expenditures are pending. Therefore it is held that part of the cash deposit made by the assessee is his unaccounted cash amount which he was forced to deposit in his bank account because of the decision of Govt. of India and respect of demonetization. The assessee has created bogus cash sale in his books of accounts in order to create source for such unaccounted cash deposits.

7.2 Actually assessee has sold his such stock (stock pertains to cash sale of October and 1st week of November, 2016) out of the books, may either, after the demonetization period or during it (in new currency notes but has not shown in these receipts in the books). However, in order to adjust his undisclosed money during demonetization period he has booked concocted cash sale in the month of October, 2016 and November, 2016 and on paper claims that he sold such stock.

7.3 Concocted cash sale is booked through manipulation in books of account and in this case assessees have manipulated his books of account and therefore, book result of the assessee is not reliable. Therefore, the same is rejected u/s 145(3) of the Income Tax Act, 1961.

Decision

8. In view of above facts and circumstances of the case addition of 35% of Rs.26,89,50,000/- i.e. Rs. 9,41,32,500/- of the cash deposit in the bank in demonetization period as being manipulated and held as unexplained cash deposited by the assessee. Keeping the view of the facts of the case and its previous year details and all aspects of the case it is held that, Rs. 9, 41, 32,500/- i.e. 35% of the total cash deposit in the bank in demonetization period amounting to Rs. 26,89, 50,000/- is added back to the income of the assessee u/s 68 of the Income Tax Act, 1961. Penalty proceedings u/s 271AAC (1) of the Income Tax Act, 1961 is hereby initiated separately. It is specifically mentioned that the addition is being made u/s 115BE of the income Tax Act 1961.”

3. The ld. CIT(A) has sustained the same and for completeness we reproduce the relevant part

“7.3 The contention of the appellant and material available on record have been perused. Return for the A.Y. 2017-18 was filed by the assessee on 29.10.2017 at an income of Rs. 64,93,410/- after claiming deduction under chapter VIA of Rs.1,69,075/. The case was selected in scrutiny through CASS on the following main issues: –

1. Abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period.

2. Large value cash deposit during demonetization period.

During the month of November, 2016, the appellant had made cash deposit Rs. 26,89,50,000/- in its bank account. The appellant contented that the cash deposits is out his cash on hand and from the cash sales which is mainly in the month of October and November, 2016 as the festival session like Diwali, Bhai Dhuj and Dhanteras. All these festivals are auspicious in buying and gifting jewellery items. Further, the appellant submitted that the cash sales for the year under consideration is much less than the last years sale which is Rs. 118 Crs. as compared to this year’s sale which is around Rs. 26 Crs. Further, the appellant submitted that the amount of sale and purchase entered in the books of accounts tallied with VAT returns, thus authenticity of sales and purchases made by the appellant during the year under consideration cannot be doubted. On perusal of cash ledger submitted by the appellant, it is substantiating that the appellant had sufficient cash balance as on 08.11.2016 Le. of Rs. 26,93,49,391/- for depositing the cash into the bank account and all the cash sales made by the assessee during the month of October, 2016 had been duly recorded in the books of accounts. There is no dispute as to availability of stock, cash balance and cash deposited in the bank account out of the cash available in hands.

7.4 The contention of the appellant is not acceptable in view of the following narrated facts. On perusal of the cash comparison of cash sales and cash deposited chart depicted at page no. 8 and 9 of the Assessment Order, it has been found that the appellant in AY 2016-17 has made cash sales from the month of April and simultaneously deposited the same in the bank accounts throughout the year. However, in the year under consideration i.e. AY 2017-18, the appellant has shown cash sales only in the month of Oct. and Nov., 2016, and deposited the cash amount of Rs. 26,89,50,000/- in the bank account in the month of November, 2016. It is common practice in the business that the person is doing cash sales than he will deposit the cash regularly in its bank account and moreover record the sales either in cash or through banking channel in its books of accounts. It has come to the notice from the details submitted by the appellant that the appellant had declared cash sales and deposited the cash in the bank account regularly during the AY 2016-17. But here the appellant had declared cash sales only in the month of October and November, 2016 and deposited cash of Rs. 26,89,50,000/- in the month of November,2016. It was an afterthought and appellant had declared cash sales only for two months, which is just before, the demonetization period as it was mandatory to deposit the Specified Bank Notes (SBN)in the bank account. The appellant had deposited the SBN in its bank account and later concocted the story of cash sales of bullion. Further, the cash sales for the month of October, 2016 have been shown as Rs. 19,82,26,543/- but this amount was only deposited in the month of November, 2016. As we know margin in the bullion sales is very low, therefore the dealers deposited the cash in the bank account regularly as they have to make payments for the purchase of bullion. It is quite surprising since, the appellant had deposited the cash arising out of cash sales in the month of October, 2016 in the month of November, 2016. The appellant further contented that there is no bar on cash sales. The contention of the appellant is considered, however, the appellant failed to establish the fact that how, the cash sales only restricted to the month of Oct. & Nov., 2016 and there were no sales except these months during the AY 2017-18. Further, the appellant has not submitted cash books for AY 2018-19 which can substantiate the reasons of the appellant. Actually, the appellant has made a concocted story to justify the cash deposited during the demonetization period.

7.5 From, the above narrated facts, it is obvious that the appellant had not made any cash sales but it is an afterthought which appellant has applied to justify the cash deposited during the demonetization period. Therefore, the AO was right to hold that the appellant had not maintained his books of account properly and manipulated his accounts, therefore, rejected the books of accounts. Further, since, the addition has been made u/s 68 of the Act on account of cash credits. The provisions of Sec. 115BBE were held to be applicable from the assessment year 2013-2014. This section is contained in Chapter XII of the Income Tax Act, 1961. The title of the section is “Tax on income referred to in section Sections 68, 69, 69A, 69B, 69C or 69D -the specified sections. Any income falling under the above said section shall be subject to tax at a flat rate of 30%. This section has been amended by the Taxation Laws(Second Amendment has increased the rate of tax from 30% to 60%) Act, 2016 to be made applicable from assessment year 2017-18 onwards. Hence, the issue raised by the appellant do not have validity and hence, dismissed.”

4. The assessee is in appeal and has raised following grounds:

“1. On the facts and circumstances of the case, the order passed by the Learned Commissioner of Income Tax (Appeals), [“hereinafter referred to as CIT (A)] is bad, both in the eye of law and on the facts.

2. On the facts and circumstances of the case, the learned CIT(A), has erred both on facts and in law in confirming the action of AO despite the fact that notice issued u/s 143(2) of the Income Tax Act (hereinafter referred to as ‘Act) and consequent assessment order passed by the AO are invalid, non-est and liable to be quashed as notice under section 143(2) of the Act has been issued violating the mandatory guidelines issued by CBDT vide Instruction no. 225/157/2017/ITA.II dated 23.06.2017.

3. On the facts and circumstances of the case, the learned CIT(A), has erred both on facts and in law in rejecting the contention of the assessee that the assessment order under section 143(3) of the Act passed by the AO is illegal, invalid and liable to be quashed as the same has been passed without assumption of valid jurisdiction upon the assessee and without there being any valid order passed under section 127 of the Act.

4. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on fact and in law, in confirming the addition of Rs. 9,41,32,500/- made by the AO on account of cash deposits under section 68 read with section 115BBE of the Income Tax Act, 1961

(ii) That the abovesaid addition has been confirmed rejecting the detailed submissions and explanations along with the evidences brought on record by the assessee to justify the source of deposit made in the bank account.

(iii) That the abovesaid addition has been confirmed despite the fact that the same has been made arbitrarily on estimation basis at the adhoc rate of 35% of total cash deposits without there being any justification of the same.

5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the abovesaid addition, rejecting the contention of the assessee that cash deposits were made out of cash sales which were already recorded in the books of accounts, and any further addition by the AO will lead to double taxation of the same amount in the hands of the assessee.

6. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the abovesaid addition despite the fact that the same has been made by the AO by rejecting the books of account of the assessee, without pointing out any specific defect as contemplated under section 145(3) of the Income Tax Act.

7. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming the above addition despite the fact that addition has been made by the AO, without pointing out any defect in the evidences furnished by the assessee during the assessment proceedings.

8. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO despite the fact that the assessee has been maintaining proper books of accounts and cash sales were made out of the purchases that have not been doubted and rejected by the AO.

9. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition, despite the fact that the assessee has been regularly maintaining books of accounts, audited as per law and nothing adverse were pointed out by the AO during the course of assessment proceedings.

10. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming the addition made by the AO despite the fact that the same has been made by indulging in surmises and conjectures without bringing on any direct evidence against the assessee, only on the basis of presumption and assumption.

11. Without prejudice to the above, the learned CIT(A) has erred both on facts and in law in confirming the AO’s action of charging tax under section 115BBE of the Act at an exorbitant rate of 60% with surcharge of 25% despite the fact that the provisions of section 68 as well as provisions of section 115BBE are not applicable.

12. Without prejudice to the above, the learned CIT(A) has erred in law in confirming the retrospective application of the amendment brought by The Taxation Laws (Second Amendment) Act, 2016 under Section 115BBE, effective from 01.04.2016, despite the Act being notified only on 15.12.2016.

13. The appellant craves leave to add, amend or alter any of the grounds of appeal”

5. On hearing both sides we find that the contention raised by the assessee are primarily the same as were raised before ld. CIT(A). The thrust of contention of ld. Counsel for assessee was on the proposition that in any case without pointing out specific defects as per Section 145(3) the books of account were rejected and the addition on adhoc basis could not have been made. It was contended that assessing officer cannot indicate in surmises and conjectures and cannot reject the explanation of the assessee without any corroborative evidences. It was also submitted that in the light of aforesaid decision of Hon’ble Madras High Court in Smile Microfinance Ltd. Vs. ACIT (2025) 479 ITR 172 Section 115BBE is not applicable for AY: 2017­18. Ld. Counsel has relied the following decisions to support these submissions, i.e. Sunil Garg Vs. DCIT, Central Circle-II, Faridabad, Haryana 2025 (1) TMI 905 dated 16.01.2025 (ITAT Delhi); ITO, Ward 58 (2), New Delhi Vs. Neeraj Kumar Prop. M/s Neeraj Metal and (vice-versa) 2025 (2) TMI 290 dated 06.02.2025 (ITAT Delhi); Shri Kamal Sharma Vs. DCIT, Central Circle-II, Faridabad 2024 (10) TMI 1628 dated 24.10.2024 (ITAT Delhi); Gorja Steel Processors, Vs. DCIT, Central Circle, Ghaziabad, ITAs, No. 2905 to 2907/De1/2022 dated 08.10.2024 (ITAt Delhi); Pr.CIT-7 Vs. R.G. Buildwell Engineers Ltd. 2017 (12) TMI 1614 dated 22.12.2017; Pr.CIT-7 Vs. R.G. Buildwell Engineers Ltd. 2018 (10) TMI 252 dated 01.10.2018 (SC); Shri Mukesh Gupta Vs. The DCIT-6 (1)(2), Bengaluru 2023 (1) TMI 174 dated 05.12.2022 (Karnataka HC); Anupam Industries Ltd. Vs. ACIT, (2025) 180 taxmann.com 678 dated 17.11.2025 (ITAT Ahmedabad); ITO, Ward 4 (1)(1) Ahmedabad Vs. Shri Govindam Agro Foods Pvt. Ltd. Ahmedabad 2025 (11) TMI 1837 dated 07.11.2025 (ITAT Ahmedabad); Pr. CIT Vs. M/s Remfry And Sagar (2025) (10) TMI 1064 dated 15.10.2025 (Delhi HC).

6. Ld. DR has primarily relied the relevant observation of assessing officer which are also supplemented by observations of Ld. CIT(A).

7. We have given thoughtful consideration in the material on record and what immediately strikes are the findings of Ld. CIT(A) that the genuineness of sales and purchase and stocks as reflected in the books of accounts and corroborated by the VAT returns have not been doubted and therefore in concluding part of para 7.3 ld. CIT(A) has observed as follows:

“On perusal of cash ledger submitted by the appellant, it is substantiating that the appellant had sufficient cash balance as on 08.11.2016 i.e. of Rs. 26,93,49,391/- for depositing the cash into the bank account and all the cash sales made by the assessee during the month of October, 2016 had been duly recorded in the books of accounts. There is no dispute as to availability of stock, cash balance and cash deposited in the bank account out of the cash available in hands.”

8. We find that ld. CIT(A) has sustained the adhoc additions made by the assessing officer on gross suspicion alone as to how there could be cash sales only in the Month of October and November while in previous assessment year cash sales were made from the Month of April onwards and deposits were made simultaneously in the bank account throughout the year. These observations and conclusions of ld. CIT(A) to sustain adhoc additions appear to have too far stretched the rules of probability and prudence as applicable in assessment proceedings. No explanation of assesse can be rejected questioning the prudence to hold the cash or deposit of cash unless there is something in the form of direct or substantial evidence which establishes that the cash was merely reflected in the book and was otherwise not available. However, in the case in hand there is no such evidence as a quantitative details with regard to sales, purchase and stocks stand admitted. Reliance of ld. DR on the decision of Hon’ble Supreme Court in the case of Pankaj Gupta Vs. Pr.CIT (2025) 175 taxmann.com 238 (SC) is not applicable to the facts and circumstances as in the present case there is nothing on record to doubt the cash sales and merely adhoc disallowance was made which shows that except for doubting the cash sales on superfluous basis there was no evidence otherwise.

9. As a consequence, the ground are sustained. The appeal of the assesse is allowed.

Order pronounced in the open court on 03.06.2026