Chennai ITAT: Cash Deposits During Demonetisation Cannot Be Taxed Under Section 68 Merely on Suspicion; Refund of Business Advances Accepted

JBA Metal Company Vs ACIT (ITAT Chennai)

Chennai ITAT: Cash Deposits During Demonetisation Cannot Be Taxed Under Section 68 Merely on Suspicion; Refund of Business Advances Accepted

The Chennai ITAT held that cash deposits made in Specified Bank Notes (SBNs) during the demonetisation period cannot be treated as unexplained cash credits under section 68 merely because they were deposited after 8 November 2016, where the assessee furnishes a credible explanation supported by regularly maintained books of account. The assessee, engaged in the manufacture of MS billets, MS ingots and TMT rods, explained that the cash deposited represented refunds of business advances received from 57 purchase agents to whom advances had earlier been given for procuring metal scrap. The assessee produced its cash book, ledger accounts, bank statements, audited financial statements, tax audit report and a detailed list of the purchase agents. The Assessing Officer, however, rejected the explanation without making any independent enquiry and taxed ₹61.19 lakh under section 68 read with section 115BBE.

The Tribunal observed that the books of account had never been rejected under section 145, and the Assessing Officer himself had accepted the opening cash balance reflected in the same cash book. Having accepted the books to that extent, the Assessing Officer could not selectively reject only the entries relating to the refunds from purchase agents without identifying any specific defect or conducting verification. Significantly, no notice was issued to any of the 57 agents, nor was any material brought on record to establish that either the advances or the subsequent refunds were fictitious. The Tribunal reiterated that mere suspicion or disbelief cannot substitute evidence, and once the assessee furnishes a plausible explanation supported by contemporaneous records, the burden shifts to the Revenue to disprove it.

The Tribunal also found that there was no abnormal spike in cash deposits during the demonetisation period. In fact, despite an increase in turnover from ₹43.96 crore to ₹61.78 crore, the assessee’s cash deposits during the relevant financial year were substantially lower than those in the preceding year, demolishing the Revenue’s allegation that the deposits were unusual. Further, relying on the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 and its earlier decision in TASMAC, the Tribunal held that there was no statutory prohibition on voluntarily receiving or transferring SBNs in genuine commercial transactions prior to 31 December 2016, notwithstanding that the notes had ceased to be legal tender from 8 November 2016.

Holding that the essential conditions for invoking section 68 were absent, the Tribunal concluded that the cash deposits stood fully explained as refunds of business advances received in the ordinary course of business, duly recorded in the books and unsupported by any contrary evidence from the Revenue. The addition having been made purely on suspicion and surmises, the Tribunal deleted the entire addition of ₹61.19 lakh made under section 68 read with section 115BBE and allowed the assessee’s appeal.

Cases Discussed:

• JBA Metal Company Vs ACIT (ITAT Chennai) (Order pronounced on 13th July, 2026).
• Tamil Nadu State Marketing Corporation Limited (TASMAC), ITA No. 431/Chny/2023, dated 07.10.2024.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

The present appeal has been preferred by the Assessee against the order dated 29.07.2025 passed by the Learned Commissioner of Income Tax (Appeals)-1, Nashik [hereinafter referred to as “the Ld. CIT(A)”], arising from the assessment order dated 26.12.2019 passed by the Assistant Commissioner of Income-tax, Circle-1, Vellore [hereinafter referred to as “the AO”], u/s.143(3)of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2017-18.

2. The sole issue raised by the assessee before us to adjudicate is that whether the Id.CIT(A) is right in confirming the addition made by the AO of Rs.61,19,250/- on account of the cash deposit made into bank accounts in SBNs during the demonetisation period. In respect of this issue the assessee raised multiple grounds in their appeal memo.

3. The brief facts of the case emanating from the records are that the assessee is a partnership firm engaged in the business of manufacture of MS Billets, MS Ingots & TMT Rods. The assessee filed its return of income for the AY 2017-18 on 31.10.2017 by declaring a loss of Rs.11,84,50,927/-. The case was selected for comprehensive scrutiny under CASS. Accordingly, statutory notices were issued to the assessee. As per the information available with the Department, the assessee had made cash deposits in the bank accounts of Rs.72,15,000/- during the demonetization period in the form of SBNs. Accordingly, the AO asked the assessee to furnish the details in support of the cash deposits made. The assessee filed the details called for like opening cash in hand, cash deposits and withdrawals made both during the financial year 2015-16 and 2016-17. The assessee also provided the copy of cash book for explaining the details of opening and closing cash and cash deposits and withdrawals during the impugned assessment year. On perusal of the submissions along with the cash book, the AO found that the assessee had given advances to the Sub-vendors to procure metal scrap in small quantities. In support, the assessee filed a detailed excel sheet containing the names of the 57 agents and the amount returned by the purchase agents during the impugned year. Further, the assessee explained that the purchase agents to whom moneys were advanced to procure metal scrap in small quantities and send them in lorry loads to the factories, were collected back during the demonetisation period. The AO was not satisfied with the explanation provided by the assessee and the cash deposits in SBNs to the extent of Rs.72,15,000/-made into the bank accounts of the assessee from 09.11.2016 to 30.12.2016 treated as unexplained money of Rs.61,19,250/- after giving a credit of cash balance held as on 08.11.2016 of Rs.10,95,750/- and brought to tax u/s.68 of the Act r.w.s. 115BBE by passing an order u/s.143(3) of the Act dated 26.12.2019.

4. Aggrieved by the order of the AO, the assessee preferred an appeal before the Id.CIT(A). Before the Id.CIT(A), the assessee submitted the entire records, which were furnished before the AO along with the audited financials and tax audit report u/s.44AB of the Act as on 31.03.2017. Further, the assessee also stated that the books of account of the business has not been rejected by the AO and unilaterally rejected the explanation of the assessee and made the addition u/s.68 of the Act. Further, the assessee stated that when the facts are admitted and accepted in the assessment order, estimation of cash based on presumption and treating it as unexplained income is untenable. Further, the cash balance held as on 08.11.2016 of Rs.10,95,750/- has been considered and reduced from the total cash deposits of SBNs of Rs.72,15,000/- and rejected the explanation of cash returned/refunded by the purchase agents during the demonetization period, which is erroneous and cannot be accepted, since there was no bar in receiving the SBNs for any legal transactions upto 30.12.2016. However, the Id.CIT(A) was not convinced with the submissions of the assessee and dismissed the appeal by confirming the additions made by the AO by passing order dated 29.07.2025.

5. Aggrieved by the order of the Id.CIT(A), the assessee is in appeal before us. The Id.AR for the assessee assailing the action of the Id.CIT(A), submitted that both the authorities have erred in making the addition of Rs.61,19,250/-u/s.68 of the Act on account of cash deposits made in SBNs during the demonetization period. In support of the appeal, the Id.AR filed a paper book consisting of 145 pages containing the return of income, tax audit report for the impugned year, audited financials as on 31.03.2017, details submitted before the AO like statement of bank accounts, ledger account of import of scrap purchases, written submissions made before the Id.CIT(A), etc. The Id.AR further submitted that the assessee’s turnover has increased from Rs.43.96 crores to Rs.61.78 crores from the F.Y. 2015-16 to 2016-17. Further, he submitted that the cash deposits are made in the course of regular business transaction i.e. out of sales and other advances received / refunded. During the financial year 2015-16, the assessee had deposited Rs.15.74 crores as against the cash deposits made during the financial year 2016-17 of Rs.8.25 crores only. The Id.AR further stated that the cash deposits between 09.11.2015 to 31.03.2016 was Rs.7.3 crores compared to cash deposits of Rs.2.25 crores from 09.11.2016 to 31.03.2017. Therefore, there was no abnormal increase in the cash deposits made during the impugned assessment year.

6. Further, the Id.AR submitted that the Specified Bank Notes (cessation of liabilities) Ordinance, 2016 (subsequently passed as an Act), was towards cessation of liability of Reserve Bank of India, in respect of SBNs, is from 31.12.2016. The Ordinance clearly specifies that on and from the specified date, being 31.12.2016, it is illegal for any person to hold, transfer or receive SBNs. This would mean that prior to 31.12.2016 there is no bar in any person holding, transferring or receiving SBNs if a currency is not a legal tender, only the recipient may refuse and cannot be forced to receive currency which is not legal tender. When both Parties to the transaction agree, there is no prohibition for one party to transfer (give) and the other party to receive SBNs in the course of a legal transaction prior to 31.12.2016. In support of his arguments the Id.AR relied on the decision of the Chennai Tribunal in the case of Tasmac vide ITA No.:431/Chny/2023 dated 07.10.2024. In view of the above arguments, the Id .AR prayed that the addition sustained by the Id.CIT(A) needs to be deleted.

7. Per contra, the Id.DR supported the orders of the lower authorities and prayed for dismissing the appeal of the assessee by upholding the order of the Id.CIT(A).

8. We have carefully considered the rival submissions, perused the assessment order, the impugned order passed by the Id.CIT(A), the documentary evidence placed in the paper book and the judicial precedent relied upon. The sole controversy arising for our consideration is whether the authorities below were justified in treating the cash deposits of Rs.61,19,250/- made by the assessee in SBNs during the demonetisation period as unexplained cash credits under section 68 of the Act.

9. From the facts available on record, it is evident that the assessee is a partnership firm engaged in the business of manufacture of MS Billets, MS Ingots and TMT Rods. It is also not in dispute that the assessee maintains regular books of account, which are duly audited u/s.44AB of the Act. The return of income, audited financial statements, tax audit report and other statutory records have been accepted by the Department. Significantly, neither in the assessment order nor in the appellate order has any finding been recorded that the books of account maintained by the assessee are incorrect or incomplete. The AO has not invoked the provisions of section 145 of the Act nor rejected the books of account. Therefore, the entries recorded in such regularly maintained books carry due evidentiary value unless rebutted by cogent material.

10. The records further reveal that during the assessment proceedings, the assessee furnished complete details explaining the source of the cash deposits. The assessee produced the cash book, ledger accounts, bank statements, details of opening cash balance, details of cash withdrawals and deposits, and a detailed statement containing the names of 57 purchase agents along with the amounts refunded by each of them. The consistent explanation of the assessee was that advances had been made to these purchase agents in the ordinary course of business for procurement of metal scrap from various small suppliers situated in different locations. Since the procurement could not be completed in certain cases, the advances were returned by the purchase agents during the demonetisation period and the same were deposited into the bank account. These transactions were duly recorded in the regular books of account and formed part of the audited financial statements.

11. We find that the AO has not disputed the fact that advances were originally given to the purchase agents. The existence of such advances is borne out from the books of account and has not been found to be fictitious. Likewise, the AO has not conducted any enquiry either by issuing notices to the purchase agents or by examining any of the 57 agents whose names and refund details were specifically furnished by the assessee. No material has been brought on record to establish that the refunds claimed by the assessee were non-genuine or that the entries recorded in the books were manipulated. The explanation has merely been rejected on the basis of suspicion that such refunds could not have been received in SBNs during the demonetisation period. Such an approach, in our considered opinion, is legally unsustainable. It is a settled principle of law that when an assessee maintains regular books of account and furnishes a plausible explanation supported by contemporaneous documentary evidence, the burden shifts upon the Revenue to disprove such explanation by bringing positive material on record. Mere disbelief or conjecture cannot substitute evidence. The addition u/s.68 of the Act cannot be sustained merely because the AO entertains doubts regarding the explanation without conducting any independent verification.

12. An important aspect emerging from the assessment order itself is that the AO has accepted the opening cash balance of Rs.10,95,750/- as on 08.11.2016 and accordingly granted credit while making the impugned addition. Thus, the AO himself has accepted the correctness of the cash book to that extent. Having accepted the books of account and the cash book, the AO could not selectively reject only the subsequent entries relating to refunds received from the purchase agents without demonstrating any specific defect therein. Such selective acceptance and rejection of the same books of account is impermissible in law.

13. We also find substantial merit in the submissions of the Id.AR regarding the comparative pattern of cash transactions. The material placed before us demonstrates that the turnover of the assessee has increased from Rs.43.96 crores in Financial Year 2015-16 to Rs.61.78 crores during Financial Year 2016­17. Despite such increase in turnover, the aggregate cash deposits during Financial Year 2016-17 were only Rs.8.25 crores as against cash deposits of Rs.15.74 crores in the immediately preceding year. Similarly, the cash deposits during the period from 09.11.2016 to 31.03.2017 amounted to only about Rs.2.25 crores, whereas during the corresponding period of the preceding financial year, the assessee had deposited approximately Rs.7.30 crores. These figures clearly demonstrate that there was no abnormal increase in cash deposits during the demonetisation period. On the contrary, the cash deposits during the relevant year were substantially lower than those made in the preceding year. This factual aspect completely demolishes the foundation on which the Revenue has proceeded to treat the impugned deposits as suspicious.

14. We further find considerable force in the submissions advanced by the Id.AR regarding the legal permissibility of receipt of SBNs during the demonetisation period. The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, subsequently enacted as the Specified Bank Notes (Cessation of Liabilities) Act, 2017, provided that the cessation of liability in respect of SBNs would take effect from the specified date, namely 31.12.2016. The statutory prohibition against holding, transferring or receiving SBNs became operative only from the specified date. Consequently, prior to 31.12.2016, there existed no statutory embargo preventing parties from voluntarily receiving or transferring SBNs in respect of lawful commercial transactions. Merely because the notes ceased to be legal tender from 08.11.2016 does not lead to the conclusion that every commercial transaction involving such notes prior to 31.12.2016 automatically became illegal or non-genuine. Where both parties voluntarily accepted the currency in discharge of a lawful business obligation, such transactions cannot be ignored in the absence of any statutory prohibition.

15. The above legal position has also been considered by the Chennai Bench of the Tribunal in the case of Tamil Nadu State Marketing Corporation Limited (TASMAC) in ITA No.431/Chny/2023 dated 07.10.2024, wherein it has been held that receipt of SBNs during the permissible period cannot by itself constitute a valid ground to treat such receipts as unexplained income, particularly when the transactions arise from genuine business dealings duly recorded in the regular books of account. The ratio laid down therein squarely applies to the facts of the present case.

16. We further observe that the addition has been made u/s.68 of the Act. The essential precondition for invoking section 68 is that the explanation offered by the assessee regarding the nature and source of the credit must either be absent or be found unsatisfactory on the basis of objective material. In the present case, the assessee has furnished a complete explanation supported by the cash book, ledger accounts, bank statements, audited books of account and detailed particulars of the 57 purchase agents who refunded the advances. The Revenue has not brought any material to disprove the explanation. No enquiry has been conducted with any of the agents. No evidence has been collected to establish that the advances themselves were fictitious or that the refunds were fabricated. In these circumstances, the statutory conditions necessary for invoking section 68 remain unfulfilled.

17. The Id.CIT(A), while confirming the addition, has merely endorsed the reasoning adopted by the AO without independently appreciating the documentary evidence produced by the assessee. The appellate authority has failed to consider the fact that the books of account were accepted, that the explanation regarding the refunds was supported by documentary evidence, that there was no abnormal increase in cash deposits during the demonetisation period, and that the receipt of SBNs during the relevant period was not prohibited under law. The appellate order, therefore, cannot be sustained.

18. Having regard to the entirety of the facts and circumstances of the case, we are of the considered opinion that the cash deposits made by the assessee during the demonetisation period stood duly explained as representing refunds of business advances received from purchase agents in the ordinary course of business. The explanation furnished by the assessee is supported by relevant records maintained in the regular course of business and has not been rebutted by any cogent evidence brought on record by the Revenue. The addition has been made merely on suspicion and surmises, which cannot take the place of legal proof. Accordingly, we hold that the authorities below were not justified in invoking the provisions of section 68 of the Act and taxing the sum of Rs.61,19,250/- u/s.115BBE of the Act. We therefore set aside the order of the Id.CIT(A) and direct the Assessing Officer to delete the addition of Rs.61,19,250/- by allowing the grounds raised by the assessee.

19. In the result the appeal of the assessee is allowed.

Order pronounced in the court on 13^th July, 2026 at Chennai.