Trading Company Vs ITO (ITAT Nagpur)
Summary: Demonetisation cash deposits under Section 69A of the Income Tax Act, 1961 cannot be explained merely by recording cash sales in audited books of account where the assessee fails to substantiate the genuineness of such sales through stock registers, quantitative details and contemporaneous supporting evidence.
Core Issue. Whether the addition of Rs. 76,78,441 under Section 69A of the Income Tax Act, 1961, representing unexplained cash deposits during the demonetisation period, was justified when the assessee contended that the deposits were sourced from opening cash in hand and regular business cash sales duly recorded in its audited books of account. The related issue was whether such an addition could be sustained without rejecting the books of account and whether the assessee was liable to tax under Section 115BBE.
Facts of the Case. The assessee, a partnership firm engaged in the business of running a kirana store, filed its return of income for Assessment Year 2017–18 on 3 November 2017, declaring total income of Rs. 5,00,750. During scrutiny assessment proceedings, the Assessing Officer obtained information from Nagpur Nagrik Sahakari Bank under Section 133(6) regarding deposits of specified bank notes during the demonetisation period. The bank reported deposits of old currency aggregating to Rs. 98,07,500 between 10 November 2016 and 23 December 2016.
The assessee disputed the correctness of the bank information and requested an opportunity to cross-examine the bank officials. The Assessing Officer rejected the request. Out of the total deposits, cash of Rs. 17,80,000 was accepted as explained, while the balance of Rs. 80,27,500 was treated as unexplained money under Section 69A. In the first appeal, the CIT(A) granted partial relief of Rs. 3,49,059 and confirmed the remaining addition of Rs. 76,78,441.
AO/CIT(A) Findings
The Assessing Officer considered the explanation offered by the assessee regarding the source of the cash deposits to be unsatisfactory and treated the balance amount as unexplained money under Section 69A. The CIT(A), after considering the assessment order, written submissions, documentary evidence and judicial precedents relied upon by the assessee, granted relief of Rs. 3,49,059 but sustained the addition of Rs. 76,78,441.
ITAT Findings
The Tribunal observed that the mere recording of cash sales in the books of account was not conclusive proof of their genuineness and that the burden rested upon the assessee to substantiate that the deposited cash emanated from genuine business transactions. The assessee had failed to produce day-to-day stock registers, quantitative details of goods traded or other primary evidence establishing the movement of goods corresponding to the alleged cash sales. The Tribunal further noted that no assessment order passed by the VAT authorities accepting the relevant sales had been placed on record.
The Tribunal also relied upon the tax audit report, particularly Column 35, which disclosed NIL quantitative details relating to items traded, raw materials, finished products and by-products. According to the Tribunal, the absence of quantitative records prevented independent verification of the correctness and genuineness of the alleged cash sales and their correlation with the cash deposits.
The contention that the addition resulted in double taxation was rejected because the addition was not made merely on account of depositing cash in the bank, but owing to the failure to satisfactorily establish the nature and source of the deposits through cogent and verifiable evidence. The Tribunal also noted that the assessee had initially disputed the bank information but subsequently did not press that contention.
Distinguishing the Delhi Tribunal decision in S. Balaji Mech-Tech Pvt. Ltd. v. ITO, ITA No. 556/Del/2024, dated 25 September 2024, the Tribunal observed that the assessee in that case had substantiated the source of deposits through contemporaneous evidence and supporting business records, including stock records. The Tribunal further held that rejection of the books of account is not a universal prerequisite for invoking the deeming provisions of the Act.
As regards Section 115BBE, the Tribunal recorded that the learned counsel had not adverted to the grounds concerning its application. Accordingly, the Tribunal found no infirmity in the CIT(A)’s order sustaining the addition.
Outcome
The ITAT Nagpur Bench dismissed the assessee’s appeal and upheld the addition of Rs. 76,78,441 under Section 69A of the Income Tax Act, 1961. The Tribunal held that the assessee had failed to discharge the burden of satisfactorily explaining the source of the demonetisation-period cash deposits through credible and verifiable evidence.
Cases Discussed
- Lakshmi Rice Mills vs. CIT [(1974) 97 ITR 258 (Patna)]
- S. Balaji Mech-Tech Pvt. Ltd. vs. ITO, ITA No. 556/Del/2024, dated 25.09.2024
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT NAGPUR
This appeal filed by the assessee is directed against the order of National Faceless Appeal Centre, Delhi, (for short, “CIT(A)”), dated 07/07/2025 passed under section 250 of the Income Tax Act, 1961 (for short, “Act”) which is emanating from the assessment order dated 28.12.2019 passed u/s. 143(3) of the Act by the ITO, Ward-4(5), Nagpur, for the Assessment Year (AY) 2017-18.
2. Assessee has raised the following grounds of appeal:
“1. On the facts and circumstances of the case and in law, the AO grossly erred in making and the CIT(A) grossly erred in confirming the addition of Rs. 76,78,441 under section 69A of the Income Tax Act, 1961 (hereinafter referred to as “Act”) ignoring the fact that the nature and source of the amount so deposited in bank account is duly explained and the said amount cannot be treated as unexplained as wrongly assessed by AO and further wrongly confirmed by CIT(A). The addition of Rs. 76,78,441 under section 69A is grossly illegal and deserves to be deleted as per law and in the interest of justice.
2. On the facts and circumstances of the case and in law, the addition confirmed to the extent of Rs. 76,78,441 representing cash deposited in the bank accounts under section 69A of the Act is illegal and which deserves to be deleted as per law and in the interest of justice.
3. On the facts and circumstances of the case and in law, the books of accounts and returned income of the Appellant having been accepted by the AO, the CIT(A) grossly erred in not accepting the sources of cash deposited forming part of books of accounts so accepted. The amount of Rs. 76,78,441 being duly reflected in books of accounts and the books of accounts having been duly accepted, the addition so made is illegal and liable to be deleted as per law and in the interest of justice.
4. The Appellant denies liability to be assessed to tax under section 115BBE as charged.
5. The Appellant craves leave to add, amend, alter, vary, and / or withdraw the above ground of appeal with the kind permission of the Hon’ble Tribunal.
3. Facts of the case in brief are that assessee, a partnership firm engaged in the business of running a Kirana store, filed its return of income for A.Y. 2017-18 on 03.11.2017 declaring a total income of Rs. 5,00,750/-. The return was selected for scrutiny and notices u/s. 143(2) & 142(1) of the Act were duly issued and served. In response, assessee furnished copy of return of income, computation of income, audit report, details of cash deposits, and ledger accounts of major expenses. Based on information available with the Department regarding cash deposits during the demonetisation period, Ld. AO noticed that assessee had allegedly deposited cash amounting to Rs. 2,24,50,000/- with Nagpur Nagrik Sahakari Bank. Accordingly, Ld. AO issued notice u/s. 133(6) to the bank seeking details of Specified Bank Notes (SBNs) deposited by the assessee and also called upon the assessee to explain the cash deposits made during the demonetisation period. In response to the notice u/s. 133(6), the bank furnished details indicating that the assessee had deposited old currency notes aggregating to Rs.98,07,500/- during the period from 10.11.2016 to 23.12.2016. Based on the information received from the bank, Ld. AO issued a further show-cause notice dated 07.12.2019 requiring the assessee to explain the said cash deposits. The assessee vide reply dated 18.12.2019, denied having made cash deposits of Rs. 98,07,500/- in Specified Bank Notes and contended that the figures mentioned in the show-cause notice were imaginary and incorrect. The assessee further requested an opportunity to cross-examine the officials of the bank whose information formed the sole basis of the proposed addition.
4. However, Ld. AO rejected the request on the ground that the information furnished by the bank did not require any cross-examination. Not being satisfied with the explanation furnished by the assessee, Ld. AO accepted cash deposits of Rs. 17,80,000/- made on 10.11.2016 and 11.11.2016 as explained, being cash available in hand. The balance amount of Rs.80,27,500/- (98,07,500 – 17,80,000) was treated as unexplained money u/s. 69A of the Act and added to the total income of the assessee.
5. Aggrieved by the assessment order passed by the Ld.AO, assessee carried the matter in appeal before the Ld.CIT(A). Ld. CIT(A), after considering the assessment order, written submissions and documentary evidences furnished by the assessee and after examining the judicial precedents relied upon by the assessee, partly accepted the contentions and granted relief to the extent of Rs. 3,49,059/- by holding that the said amount stood satisfactorily explained. However, in respect of the balance addition of Rs. 76,78,441/-, the Ld. CIT(A) concurred with the findings of the Ld. AO and confirmed the addition made u/s. 69A of the Act. Consequently, the appeal of the assessee was partly allowed.
6. Learned counsel for the assessee assailed the impugned order of the Ld. CIT(A) and submitted that the authorities below have erred in sustaining the addition u/s. 69A of the Act. It was contended that the entire cash deposited during the demonetisation period was duly recorded in the regular books of account, which were audited u/s. 44AB of the Act and no discrepancy whatsoever had been pointed out either by the auditor or by the Ld. AO in the books maintained by the assessee. Learned counsel submitted that cash deposited in the bank account during the demonetisation period represented the opening cash in hand available as on 08.11.2016 coupled with the regular cash sales generated in the ordinary course of the assessee’s business. It was further submitted that the sales were duly recorded in the books of account and the applicable VAT had also been discharged on such sales. Therefore, once the sales and the corresponding business income had been accepted by the Revenue, the cash generated therefrom and subsequently deposited into the bank account could not be treated as unexplained money u/s. 69A of the Act. According to the learned counsel, such an addition would amount to double taxation, which is impermissible in law. Learned counsel further contended that Ld. AO based the impugned addition solely on the information furnished by the bank u/s. 133(6) of the Act. The assessee had categorically disputed the correctness of such information and specifically requested an opportunity to cross-examine the bank officials whose statement formed the basis of the proposed addition.
It was argued that the assessment framed on the basis of third-party information, without permitting cross-examination, is in gross violation of the principles of natural justice and, therefore, cannot be sustained. In support of the above contentions, learned counsel placed reliance upon the judgment of the Hon’ble Patna High Court in Lakshmi Rice Mills vs. CIT [(1974) 97 ITR 258 (Patna)], wherein it was held that once the books of account are accepted as genuine and the cash balance reflected therein is sufficient to explain the high denomination currency notes held by the assessee, there is no further obligation upon the assessee to prove the source of receipt of each such note. It was submitted that when the cash sales recorded in the books have been accepted by the Revenue, the proceeds thereof, on being deposited into the bank account during the demonetisation period, cannot be regarded as unexplained money.
5.1 Learned counsel further drew our attention to the paper book comprising 367 pages containing, inter alia, the VAT audit report, audited financial statements, cash book for the period from 01.04.2016 to 31.03.2017, bank account statements, details of cash deposits and other supporting documents. Reliance was also placed on the decision of the Coordinate Bench of the Delhi Tribunal in S.Balaji Mech-Tech Pvt. Ltd. vs. ITO in ITA No.556/Del/2024 vide order dated 25.09.2024 and submitted that cash deposits duly recorded in the books of account cannot be brought to tax u/s. 69A merely because they were made during the demonetisation period. On the aforesaid submissions, learned counsel prayed that the addition sustained by the Ld. CIT(A) be deleted in its entirety and the appeal of the assessee be allowed.
6. Per contra, learned Departmental Representative (DR) vehemently supported the orders passed by the Ld. AO as well as the Ld. CIT(A). He submitted that assessee had made substantial cash deposits during the demonetisation period, which were sought to be explained by showing inflated cash sales in the books of account. According to the learned DR, the pattern of cash sales disclosed by the assessee revealed an abnormal and disproportionate increase during the period from October 2016 to December 2016 as compared to the preceding and succeeding months, thereby giving rise to a reasonable inference that the books had been manipulated with a view to introduce unaccounted cash in the guise of business receipts. Ld.DR further contended that assessee failed to substantiate the genuineness of the alleged cash sales by producing complete quantitative details of the goods traded.
It was submitted that no stock register or quantitative reconciliation of opening stock, purchases, sales and closing stock, along with details of raw materials, finished goods or by-products, was furnished to establish that the impugned cash sales represented genuine business transactions. In the absence of such corroborative evidence, the explanation offered by the assessee remained unsubstantiated. Ld DR argued that the burden cast upon the assessee under the provisions of the Act to satisfactorily explain the nature and source of the cash deposits had not been discharged. He, therefore, submitted that the Ld. AO was fully justified in treating the impugned cash deposits as unexplained money u/s. 69A of the Act and the Ld. CIT(A) had rightly confirmed the addition to the extent sustained. He accordingly prayed that the order of the Ld. CIT(A) be upheld and the appeal of the assessee be dismissed.
7. We have heard rival contentions of both the parties and perused the material available on record. The sole issue for our consideration is whether Ld. CIT(A) was justified in confirming the addition of Rs. 76,78,441/- made by the Ld. AO u/s. 69A of the Act in respect of cash deposits made by the assessee during the demonetisation period. The principal contention of the assessee is that the impugned cash deposits represented the opening cash in hand as on 08.11.2016 and cash generated from regular business sales duly recorded in the books of account. It is also the case of the assessee that the books of account were audited u/s. 44AB of the Act and, therefore, no adverse inference could have been drawn merely because the deposits were made during the demonetisation period. We are unable to persuade ourselves to accept the aforesaid contention. Mere recording of cash sales in the books of account is not conclusive proof of their genuineness. The burden squarely lies upon the assessee to substantiate that the cash deposited in the bank account emanated from genuine business transactions. In the present case, despite specific queries raised by the Ld. AO, the assessee failed to produce the primary evidence necessary to establish the genuineness of the alleged cash sales. A perusal of the paper book reveals that the assessee has not produced any stock register or day-to-day quantitative records maintained in the ordinary course of business to establish the movement of goods corresponding to the alleged cash sales. More importantly, the assessee has also failed to place on record any assessment order passed by the VAT authorities accepting the sales claimed to have been effected during the relevant period. In the absence of such contemporaneous documentary evidence, the explanation that the cash deposits represented genuine business receipts remains unsupported by credible and irrefutable evidence. Our attention was also drawn to the Tax Audit Report forming part of the paper book. We observe from page No. 363, particularly Column No. 35 thereof, that the tax auditor has himself reported ‘NIL’ against the particulars relating to quantitative details of items traded, raw materials, finished products and by-products. This categorical disclosure by the auditor clearly demonstrates that the assessee was not maintaining quantitative details of the goods dealt with in the course of its business. Consequently, the assessee has failed to establish any correlation between the alleged cash sales and the corresponding movement of inventory. In the absence of quantitative records, the correctness and genuineness of the cash sales cannot be independently verified. The contention of the learned counsel that the addition amounts to double taxation also does not merit acceptance in the facts of the present case. The addition has not been made merely because the cash was deposited in the bank account, but assessee failed to satisfactorily establish the nature and source of the impugned cash deposits with cogent and verifiable evidence, which have been accepted by any other statutory authority. Moreover, the assessee had tried to shift the stand because he challenged that the information by bank is wrong but later did not press upon it. Therefore, the provisions of section 69A have been rightly invoked by the Ld. AO to the extent sustained by the Ld. CIT(A). The reliance placed by the learned counsel on the decision of the Coordinate Bench in S. Balaji Mech-Tech Pvt. Ltd. vs. ITO (ITA No. 556/Del/2024, dated 25.09.2024) is misplaced. The facts obtaining in the said decision are clearly distinguishable from those of the present case. In that case, the Tribunal found that the assessee had substantiated the source of the cash deposits by producing adequate contemporaneous evidence and maintaining supporting business records. In the present case, however, the assessee has failed to produce day-to-day stock records, quantitative details of goods traded or any corroborative evidence from the VAT authorities accepting the impugned sales. Therefore, the ratio laid down in the aforesaid decision has no application to the facts of the present case. Having regard to the totality of the facts and circumstances of the case, we are of the considered view that the assessee has failed to discharge the burden cast upon it to satisfactorily explain the source of the cash deposits made during the demonetisation period. The explanation that the cash deposits represent proceeds from cash sales is tenuous, fragile, and unsupported by credible evidence. Consequently, the nature and source of the cash deposits remain unsubstantiated. Further, it is not a universal rule that the books of account must first be rejected before invoking the deeming provisions of the Act. Learned counsel has not adverted our attention to any day-to-day stock register, quantitative details or any sales bills. Thus, the entire audit trial of cash sales is not on firm grounds. Moreover, reliance on S.Balaji Mech-Tech Pvt. Ltd. (supra) is misplaced because there stock records were relied upon. The Ld. CIT(A), in our considered opinion, has rightly appreciated the facts and confirmed the addition to the extent of Rs. 76,78,441/-. We, therefore, find no infirmity in the impugned order warranting our interference as the same is cogent and judicious. Learned counsel did not avert on the grounds of application of section 115BBE. Accordingly, the grounds of appeal raised by the assessee are dismissed.
8. In sequitur, in the lines of elucidation above, appeal filed by the assessee stands dismissed.
Order pronounced on 31.08.2026 under Rule 34 of Income Tax (Appellate Tribunal) Rules, 1963
