Mumbai ITAT Deletes Demonetisation Addition – Cash Deposits from Recorded Jewellery Sales Cannot Be Taxed under Section 69A on Mere Suspicion

Star Jewels Vs ITO (ITAT Mumbai)

Mumbai ITAT Deletes Demonetisation Addition – Cash Deposits from Recorded Jewellery Sales Cannot Be Taxed under Section 69A on Mere Suspicion

Summary: The ITAT Mumbai deleted the addition made under Section 69A read with Section 115BBE of the Income-tax Act, 1961 in respect of cash deposits made during the demonetisation period, holding that the deposits were supported by recorded cash sales and regular books of account. The assessee, a retail jewellery partnership firm, explained that the cash deposits arose from cash sales and available cash balance, supported by audited financial statements, cash book, cash sales register, stock register, bank statements and day-wise cash balances. The Tribunal found that neither the Assessing Officer nor the CIT(A) had rejected the books of account or identified any defects in the cash book, stock register, sales register, purchase records, quantitative details or availability of stock, and there was no finding that the sales invoices were fabricated. It held that the addition was based only on suspicion arising from higher cash sales during the demonetisation period, which could not substitute for evidence. As the CIT(A) had also accepted that the documentary evidence prima facie supported the sales, the Tribunal held that sustaining 50% of the addition without any specific defect was unsustainable, deleted the entire addition, allowed the appeal on merits, and left the legal grounds open.

The Mumbai Bench of the Income Tax Appellate Tribunal held that cash deposits made during the demonetisation period cannot be treated as unexplained money under section 69A merely because cash sales witnessed an abnormal increase, when the sales are duly recorded in the books of account and supported by documentary evidence. The Tribunal deleted the entire addition, observing that suspicion, however strong, cannot substitute evidence.

The assessee, a partnership firm engaged in the retail jewellery business, had declared a turnover of ₹6.14 crore, including cash sales of ₹69.60 lakh, and deposited ₹32.93 lakh in its bank accounts during the demonetisation period. The assessee explained that the deposits represented genuine cash sales effected in the normal course of business and produced the cash book, audited financial statements, stock register, sales register, bank statements, and day-wise cash balance to substantiate the claim.

The Assessing Officer, however, treated the cash deposits as unexplained money under section 69A read with section 115BBE, primarily on the ground that the cash sales on 8 November 2016 (₹22.53 lakh) and the overall cash sales during the demonetisation period were disproportionately higher than the corresponding period of the previous year. The CIT(A), while accepting that the documentary evidence prima facie supported the sales, sustained 50% of the addition on an ad hoc basis, granting relief for the balance amount.

The Tribunal found that neither the Assessing Officer nor the CIT(A) had rejected the books of account, nor had they pointed out any defect in the cash book, stock register, sales register, purchase records or quantitative details. There was also no finding that the assessee lacked sufficient stock to effect the sales or that any sales invoices were fabricated. The entire addition rested solely on suspicion arising from the increase in cash sales during demonetisation.

Relying on its earlier decision in Lalit R. Jagawat (HUF) and the decisions in Vishva and Devji Diamond Pvt. Ltd. and Charu Agarwal, the Tribunal reiterated that once the books of account are accepted and the cash sales are supported by contemporaneous records, corresponding cash deposits cannot be assessed as unexplained money under section 69A. The Tribunal also observed that the CIT(A), after accepting the genuineness of the books and documentary evidence, could not sustain 50% of the addition on a purely ad hoc basis without identifying any specific defect. Accordingly, the entire addition was deleted and the assessee’s appeal was allowed.

Author’s Comments:

This decision is another important addition to the growing body of demonetisation jurisprudence. The Tribunal has emphatically held that an abnormal rise in cash sales, by itself, is not sufficient to invoke section 69A. Where the Revenue accepts the books of account, finds no discrepancy in stock or sales records, and does not establish fabrication of invoices, cash deposits representing recorded business receipts cannot be branded as unexplained money merely on suspicion. Equally significant is the Tribunal’s rejection of the ad hoc approach adopted by the CIT(A), reaffirming that additions under section 69A must rest on cogent evidence rather than estimates or conjectures.

Cases Discussed

• Star Jewels Vs ITO (ITAT Mumbai)
• Lalit R. Jagawat (HUF) vs. DCIT, ITA No. 634/Mum/2025, date of pronouncement 01.07.2025.
• DCIT v/s Vishva and Devji Diamond Pvt. Ltd., 171 taxmann.com 474 (Chennai Trib.) (2024).
• Charu Agarwal v/s DCIT.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeal of the assessee filed against the order of NFAC, Delhi [for brevity “Ld. CIT(A)], for Assessed Year 2017-18, order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), date of order 11.09.2025. The impugned order emanated from the order of the Ld. Income Tax Officer Ward 19(3)(4), Mumbai (for brevity ‘Ld. AO’), order passed under section 143(3), date of order 29.12.2019.

2. The brief facts of the case are that the assessee, a partnership firm engaged in the retail jewellery business, filed its return of income on 31.10.2017 declaring a total income of Rs.7,72,485/-. During the relevant previous year, the assessee reported a total turnover of Rs.6,14,10,031/-, which included cash sales of Rs.69,60,470/-. During the demonetization period, i.e., from 08.11.2016 to 30.12.2016, the assessee deposited cash aggregating to Rs.32,93,480/- into its bank accounts. The assessee explained that the cash deposits were made out of the available cash balance and cash sales effected in the ordinary course of business, particularly during the festive season when cash transactions were comparatively higher. It was also submitted that demonetization was merely a coincidental event and had no bearing on the genuineness of the cash deposits. The assessee furnished the cash book and details of the opening cash balance, cash sales, and closing cash balance for the relevant period. However, the Ld. AO rejected the explanation and treated the cash deposits of Rs.32,93,480/- as unexplained money under Section 69A of the Act, adding the same to the total income of the assessee. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A) by challenging on both legal grounds & merit. The Ld. CIT(A) confirmed the 50% of addition made by the Ld. AO and the rest amount the relief was granted. Being aggrieved the assessee filed an appeal before us by challenging both on legal grounds & on merit.

3. The Ld. AR filed a paper book comprising pages 1 to 80, which has been taken on record. The Ld. AR submitted that the cash of Rs.32,93,480/-deposited by the assessee during the demonetization period was out of its regular business sales. It was contended that, during the demonetization period, the sales comprised both cash and credit transactions. However, the Ld. AO, merely on suspicion, rejected the cash sales and treated the cash deposits as unexplained money, thereby making an addition under section 69A read with section 115BBE of the Act. The Ld. AR further submitted that, during the course of the assessment proceedings, the assessee had furnished detailed documentary evidence in support of the cash deposits. The said documents have also been placed before the Bench and form part of the Assessee’s Paper Book (APB). The relevant details are as follows:

4. However, without rejecting the books of account maintained by the assessee and despite the documentary evidence placed on record, the Ld. AO proceeded to treat the cash deposits as unexplained and made the impugned addition, which was added to the total income of the assessee. The Ld. AO recorded the reasons for making the addition in paragraphs 4.6 to 5 of the impugned assessment order, which are reproduced below:

“4.6 The aforesaid submission of the assessee is considered but the same is not found acceptable for the reason that cash deposit during the period 09.11.2016 to 31.12.2016 is Rs. 32,93,480/- where as corresponding period of last year it was only 4,94,148/- when the situation of corresponding period was same, the only situation change is demonetization period. Further, it can also be seen that during the year under consideration assessee total cash sales is Rs. 69,60.470/- out of this in a day Le, on 08.11.2016 the cash sale is Rs. 22.53,690/- is not acceptable. There is every possibility that the assessee has made post bills
date to justify the cash sale on 08.11.2016

• • In view of the above discussion following points emerges in the assessee case:
  • The sources of deposits of old currency notes (SBNs) were not explained.
  • It is apparently clear that the cash deposits made in the bank accounts during F Y 2016-17 relevant to AY 2017-18, especially during demonetisation period, are unexplained and from d from undisclosed sources, the same was not offered for taxation purposes. ME TAX DEPART
  • Where the assessee was unable to prove that in his normal business or otherwise, they were possessed of so much cash, it was held that the assessee started under a cloud and must dispel that cloud to the reasonable satisfaction of the assessing authorities to hold that the amount represented income from some undisclosed source.
  • In this case, provisions of Section 69A of IT Act, 1961 are clearly attracted.

4.7. Section 69A of the Act deals with Money etc. owned by the assessee and found in possession including in the bank accounts of the assessee which remained unexplained.

Section 69A-Unexplained Money

“Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money. bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing] Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.

5. In the present case, the assessee had deposited Cash as appearing in the bank account of the assessee aggregating amounting to Rs. 32,52,370/- which is treated as unexplained money. The assessee found to be the owner of the Money appearing in bank accounts, established through details submitted by the assessee. The assessee was found owner of the Money but the explanation offered by the assessee is not satisfactory regarding the source of such Money found in her bank accounts. The Income earned during the year has not been offered and taxes due there upon has not been paid.”

5. The Ld. AR advanced his arguments and stated that the only on basis of the doubt and in surmises and conjectures the addition as made. The assessee had maintained the sufficient stock before the announcement of demonetization on 08.11.2016. The identical issue is duly considered by the coordinate Bench of ITAT Mumbai in the case of Lalit R Jagawat HUF vs DCIT ITA No.634/Mum/2025, date of pronouncement 01.07.2025. The relevant observation in para no.16 is reproduced as below:

“16. Moreover, the AO had accepted the assessee’s entire sale and purchase offered in the books of account as genuine. Therefore, the addition made by the AO on account of cash deposited during the demonetisation period on the pretext that the assessee had created an artificial scenario in its books of account where unaccounted income was shown by them as cash sales and then deposited into bank accounts. In this regard, there is no evidence/proof of the said observation made by the AO. Since there is no evidence with the explanation put forth by the assessee is justified with reference to various documents, such as Cash book [day wise] – Showing names of persons whom sales is made, Party wise purchases with Name/ Address /PAN, Party wise sales with Name/Address /PAN, Purchase Register – month wise/Party wise also, Sales Register – Date wise / Item Wise and Bank Statement of all bank. And further, such cash deposit has been shown as sales in the P&L account and has also been offered for taxation. Therefore, in our view, no addition should have been made in the case of the assessee. Reliance is being placed upon the decision of the coordinate of ITAT in case of DCIT v/s Vishva and Devji Diamond Pvt. Ltd. 171 taxmann.com 474 (Chennai Trib.) (2024), wherein it has been held that where assessee, engaged in trading business of gold and diamond jewellery, claimed that cash deposited in bank account during demonetization period pertained to sale proceeds of gold and diamond jewellery collected from its customers, since assessee’s claim was backed up by relevant evidences, impugned addition made under section 69A, read with section 115BBE treating cash sales as bogus was to be deleted. Copy of the order is enclosed herewith as Annexure-1.

Further, reliance has also been placed upon the decision of the coordinate bench in Charu Agarwal v/s DCIT, wherein the coordinate bench of the ITAT has held that held that where cash deposited by assessee was out of cash sales which had been accepted by Sales Tax/VAT Department and not doubted by Assessing Officer and there was sufficient stock available with assessee to make cash sales, sales made by assessee out of existing stock were sufficient to explain deposit of cash (obtained from realization of sales) in bank account and, thus, cash deposits could not have been treated as undisclosed income of assessee.”

6. The Ld. DR argued that a comparison of the assessee’s cash sales during the corresponding periods clearly revealed an abnormal increase in cash sales during the demonetization period. It was pointed out that the assessee’s cash sales for November 2015 amounted to Rs.4,06,991/-, whereas the cash sales for November 2016 surged to Rs.31,55,590/-. According to the Ld. DR, this substantial and unexplained increase in cash sales clearly indicates that the alleged cash sales were nothing but a colourable device adopted to introduce unaccounted cash into the books and thereby evade taxes. The Ld. DR, therefore, strongly supported the orders of the revenue authorities and submitted that the addition had been rightly made and sustained. The Ld. DR further invited our attention to paragraphs 6(c) to 6(d) of the impugned appellate order, which are reproduced below:

“6(c). I have carefully considered the facts of the case, the submissions of the appellant, and the assessment order. The issue to be decided is whether the cash deposits of Rs.37,52,370/-during the demonetization period were fully explained as arising out of genuine cash sales.

On examination, it is the appellant has maintained books of account and recorded cash sales. The documentary evidences produced prima facie support the occurrence of sales. However, the magnitude of cash sales on 08.11.2016 i.e., of Rs. 22,53,690/-, being disproportionately high compared to earlier periods, creates doubt about the genuineness of the entire claim.

In this context, while the AO is justified in questioning the abnormal sales pattern coinciding with demonetization, outright rejection of the appellant’s books and treating the entire cash deposits of Rs.37,52,370/- as unexplained would also not be fair. The possibility of genuine cash sales during the festive season and high demand due to declare of demonetization cannot be ruled out.

Judicial precedents have held that where books of account are maintained and sales are recorded, the entire deposits cannot be treated as unexplained unless specific defects in stock or invoices are established. Considering the above, part of the deposits should be accepted as explained, while a portion representing possible inflation in sales must be sustained as unexplained. Accordingly, it would be reasonable to treat 50% of the cash deposits, i.e., Rs. 18,76,185/-, as unexplained u/s.69A of the Income Tax Act, 1961 and the balance Rs. 18,76,185/- is directed to be deleted.

6(d). Accordingly, the grounds raised by the assessee are partly allowed. The addition u/s,69A of the Income Tax Act, 1961 is restricted to Rs.18,76,185/- and the balance addition is deleted.”

7. We have heard the rival submissions and perused the material available on record. The assessee is a partnership firm engaged in the retail jewellery business and had deposited cash amounting to Rs.32,93,480/- during the demonetization period. The consistent explanation of the assessee has been that the cash deposits represented proceeds from genuine cash sales recorded in the regular books of account. In support of its claim, the assessee produced the audited financial statements, cash book, cash sales register, bank statements, stock register and day-wise cash balance, all of which form part of the Assessee’s Paper Book. We find that neither the Ld. AO nor the Ld. CIT(A) has rejected the books of account maintained by the assessee. No defect has been pointed out in the cash book, stock register, sales register, purchase records or quantitative details. There is also no finding that the assessee did not possess sufficient stock to effect the sales or that any of the sales invoices were fabricated. The entire addition has been made merely on the basis of suspicion arising from the higher volume of cash sales during the demonetization period. Such suspicion, however strong, cannot take the place of evidence. We further note that the Ld. CIT(A), while sustaining 50% of the addition, has himself recorded a finding that the documentary evidence prima facie supports the occurrence of the sales and that outright rejection of the books and the entire cash deposits would not be justified. The Ld. CIT(A) also acknowledged that the possibility of genuine cash sales during the festive season and immediately after the announcement of demonetization could not be ruled out. Having accepted the genuineness of the books and the documentary evidence, the ad hoc sustenance of 50% of the addition, without any cogent basis or specific defect, is unsustainable in law. The Coordinate Bench of the Tribunal in Lalit R. Jagawat (HUF) (supra) has held that where the books of account are accepted, sufficient stock is available, and the cash deposits are duly supported by the cash book, sales register and other documentary evidence, no addition under section 69A of the Act can be made merely on suspicion that the cash sales were artificially inflated during the demonetization period. Similar principles have also been laid down in Vishva and Devji Diamond Pvt. Ltd.(supra) and Charu Agarwal (supra), wherein it has been held that once the cash sales are duly recorded in the regular books and supported by adequate evidence, the corresponding cash deposits cannot be treated as unexplained money under section 69A of the Act. Respectfully following the aforesaid judicial precedents and considering the facts of the present case, we hold that the impugned addition sustained by the Ld. CIT(A) under section 69A read with section 115BBE of the Act is devoid of merit.

Accordingly, the addition is directed to be deleted in its entirety. The assessee succeeds on the merits of the case.

Since the appeal has been allowed on merits, the legal grounds raised by the assessee are rendered academic in nature and, therefore, require no separate adjudication. Accordingly, the same are left open.

8. In the result, the appeal of the assessee bearing ITA No.7672/Mum/2025 is allowed.

Order pronounced in the open court on 07th day of July 2026.