Kent Cables Pvt. Ltd. Vs ACIT (ITAT Delhi)
BOOK ENTRY IS NOT A MAGIC WAND—ABNORMAL DEMONETISATION CASH SALES MUST BE PROVED WITH CUSTOMERS, COLLECTIONS & UNDERLYING BILLS U/S 68/145(3)
Background
The assessee-company was subjected to scrutiny assessment u/s 143(3). During the proceedings, the AO noticed an abnormal increase in cash deposits immediately before & during the demonetisation period. According to the AO, the deposits did not correspond with the normal business pattern or the details & evidence furnished by the assessee.
The assessee claimed that the cash represented genuine business receipts comprising cash sales & recoveries from debtors. The AO, however, rejected the books u/s 145(3) & treated ₹1,60,24,414 as unexplained cash credit u/s 68 r.w.s. 115BBE.
The CIT(A) confirmed the addition. The assessee therefore approached the Tribunal with a single ground challenging the addition.
Why the Authorities Doubted the Cash Sales
The CIT(A) found that the assessee had offered different explanations at different stages. Initially, the assessee claimed that the unusually high cash deposits arose because its sales representatives had efficiently recovered outstanding amounts from customers in rural areas of Bihar & Uttar Pradesh.
Later, the assessee claimed that new products had been launched, which became popular due to improved marketing & resulted in substantially higher sales. However, no convincing evidence relating to the new product launch, additional advertising expenditure or special marketing campaign was produced.
The timing of the increase was also considered suspicious. Cash sales before & after the disputed period remained comparatively low. The spike occurred mainly during October 2016 & the first eight days of November 2016, immediately preceding the announcement of demonetisation on 8 November 2016.
The geographical pattern created another doubt. If the increased recoveries came from rural customers in Bihar & Uttar Pradesh, the authorities expected the collections to be reflected through the Delhi depot, which was geographically closer to those areas. Instead, the abnormal cash sales were recorded through the Jaipur depot.
Most significantly, the assessee recorded 61 sale bills on 8 November 2016 alone, each for an amount below ₹2 lakh. The authorities considered this structured pattern indicative of possible manipulation because customer-wise details & satisfactory supporting evidence were not produced.
The AO gave credit for estimated genuine cash sales of ₹59,883 & the gross profit of ₹11,10,803 already offered to tax, but added the balance amount of ₹1,60,24,414.
Assessee’s Contentions
The assessee argued that it was regularly engaged in business involving cash sales & that the disputed receipts were duly recorded in its books. The corresponding cash was deposited into the bank account, while VAT liability was also recognised on the sales.
Its accounts were audited u/s 44AB. The books contained particulars of sales & amounts realised from customers. According to the assessee, the increased cash availability resulted from substantial collections from debtors, greater demand for its products & improved marketing efforts.
The assessee contended that merely because a large proportion of annual cash sales occurred between October & December 2016, the recorded sales could not be treated as unexplained cash credit, particularly when they formed part of audited accounts & VAT returns.
Revenue’s Stand
The Department emphasised that recording entries in the books did not establish their genuineness. The explanations regarding rapid recoveries from rural areas & increased sales following new product launches were inconsistent & unsupported by documentary evidence.
No proof of advertising expenditure, product launches or customer-wise collections was furnished. The assessee also failed to explain why collections supposedly made in Bihar & Uttar Pradesh appeared in the Jaipur depot.
The 61 sale bills recorded on the very date of demonetisation, each carefully remaining below ₹2 lakh, required examination with reference to the identities of purchasers, supporting invoices, movement of goods & actual receipt of consideration.
ITAT’s Findings
The Tribunal acknowledged that the assessee had recorded the cash sales in its books & accounted for VAT. Nevertheless, it held that these circumstances alone did not satisfactorily prove the explanations regarding the exceptional increase in sales or recovery from debtors.
The assessee’s assertions remained self-serving in the absence of plausible supporting evidence. At the same time, the Tribunal considered that the controversy required a more detailed factual examination instead of outright confirmation of the entire addition.
Accordingly, the CIT(A)’s order was set aside & the matter was remitted to the AO for fresh adjudication.
The assessee was specifically directed to furnish full details of debtors from whom amounts were allegedly realised during the relevant period. It was also required to explain the basis of the 61 sale bills recorded on 8 November 2016 & produce all underlying evidence supporting those transactions.
The AO was authorised to conduct such inquiries as considered necessary. However, adequate opportunity was required to be granted to the assessee before passing the fresh order.
Decision
The addition was neither finally confirmed nor deleted. The entire issue concerning the alleged unexplained cash sales of ₹1,60,24,414 was restored to the AO for fresh examination. The appeal was partly allowed for statistical purposes.
Key Takeaway
Cash sales already recorded in audited books & VAT returns cannot be rejected merely because they occurred during demonetisation. Equally, those entries do not become genuine merely because they appear in the books.
Where there is an abnormal last-minute spike, contradictory explanations, multiple bills below ₹2 lakh & absence of customer-wise evidence, the assessee must establish the commercial reality through invoices, debtor ledgers, stock movement, purchaser details & collection records.
Books may record the cash—but when the pattern is unusual, evidence must tell the story.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, DELHI BENCH
1. This appeal arises from order dated 06.02.2026, passed by Ld. CIT(A)-24, Delhi, u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”).
1.1 In this case, the Ld. AO, vide order dated 25.12.2019, passed an order u/s 143(3) of the Act, through which, after a detailed finding of fact, an amount of Rs.160,24,414/- was added u/s 68 of the Act r.w.s. 115BBE of the Act. In brief, the finding is that there was an abnormal increase in cash deposits just prior to and during the demonetization period, which was not in conformity with the details and evidences filed by the assessee. On this basis, the provisions of Section 68 of the Act were invoked and the impugned addition was made.
1.2 The aggrieved assessee approached the Ld. CIT(A) where he could not succeed on the basis of following finding in the impugned order:
“5.1.3 However, upon careful examination of the facts and circumstances of the case, the contentions of the appellant are not found acceptable. The AO has brought on record specific and concrete evidence demonstrating the abnormal and suspicious pattern of cash sales during the demonetization period. The appellant gave contradictory explanations at different stages – first claiming that excess cash was due to fast recovery by sales representatives from rural areas of Bihar and UP, and later changing the stance to claim that new products were launched which became popular. No evidence of any advertising expenses or new product launch was provided despite specific queries. The pattern of cash sales before and after the suspicious period remained consistently low, with the spike occurring only in October 2016 and the first 8 days of November 2016, immediately before demonetization was announced. The claim that sales increased in rural areas of UP and Bihar is contradicted by the fact that the abnormal cash sales were shown in the Jaipur depot and not in Delhi depot which is closer to these areas. The structured nature of 61 sale bills on 08.11.2016 alone, each just below Rs.2 lakhs, clearly indicates manipulation of books of accounts. The AO has rightly rejected the books of accounts u/s 145(3) and the subsequent invocation of section 68 is justified as the assessee has failed to explain the source of huge cash deposits during demonetization period. The reliance placed by the appellant on various case laws in misplaced as those cases dealt with situations where the sales were found to be genuine and supported by proper evidence, which is not the case here. The acceptance of VAT returns by Commercial Taxes Department does not automatically bind the Income Tax authorities when there is specific evidence of manipulation and bogus entries. The AO has given due credit for estimated genuine cash sales of Rs.59,883/- and gross profit of Rs.11,10,803/- already offered to tax, and the balance addition of Rs.1,60,24,414/- is fully justified and sustainable. Accordingly, Ground No.1 stands DISMISSED.”
1.3 The aggrieved assessee is now before the ITAT with a single ground challenging the action of authorities below in adding the impugned amount u/s 68, r.w.s. 115BBE of the Act.
2. Before us the Ld. AR argued with the help of detailed paper books and written submissions. It was the submission that the assessee was having some sales in cash and the same was deposited in the bank account. It was the submission that the accounts were duly audited u/s 44AB of the Act and ample justification was provided to the Ld. AO for the cash deposits. It was stated by the Ld. AR that the assessee had substantial realization from debtors and also due to advertisement etc the product of the assessee saw a huge demand during the period when the cash deposits are seen. It was the submission that the books of account contained details of sales made and payments realized. The Ld. AR assailed the findings of the authorities below wherein it has been alleged that a very large proportion of cash sales has taken place in the months of October to December, 2016 even when the same have been reflected in the books of account.
2.1 The Ld. DR took us through the findings of then Ld. AO and specifically pointed out pages 14 & 15 of the Ld. AO where it has been mentioned that the assessee gave contradictory explanations at various stages. At first it was claimed that the excess cash was deposited due to efficient recovery from rural areas of Bihar and U.P. by the sales representative of the assessee. It was pointed out that the assessee changed his stance later on to claim that the cash deposits represented enhanced sales due to launch of new products and more efficient marketing. It was pointed out that no evidence of any advertising expenses or details of any new product being launched was provided before the Ld. AO. It was pointed out that if the sales representatives made better collection from rural areas of Bihar and U.P. then why the realizations are reflected in Jaipur depot and not the Delhi depot, which is geographically proximate to those two states. It was also pointed out that some 61 sale bills were recorded on 08.11.2016 alone, each below Rs.2,00,000/-, where details of the persons from whom such amounts were realized, were not produced before the Ld. AO. For this purpose, the Ld. DR took us through the finding on page 16 of the Ld. AO’s order.
3. We have considered the rival submissions and have gone through the records before us. We find that while the assessee has recorded the cash sales in his books of account and has also booked VAT on the same, we find that the explanation for enhanced sale or even better realization from debtors has not been specifically proved satisfactorily. In the absence of plausible evidences and explanations such contentions are merely self-serving arguments. Considering the totality of facts and circumstances of the case, it is felt that the facts deserve to be re-examined in this case and the Ld. AO needs to re-examine the contention of the assessee, and any evidence that he may file to justify the excessive cash sales during the period under consideration. For this purpose, we set aside the impugned order and remit this matter back to the file of Ld. AO. We also direct that the assessee would file details of all the debtors etc. realized during this period. Also, the basis of the 61 sale bills booked on 08.11.2016, would need to be presented before the Ld. AO with all underlying evidences. The Ld. AO would be free to conduct any enquiries as deemed fit. Needless to say, ample opportunities would be provided to the assessee for presenting his case.
4. In the result, the appeal is partly allowed for statistical purposes.
Order pronounced in the open court on 09.09.2026
