Raj Kala Agarwal Vs ITO (ITAT Lucknow)
Recorded Cash Sales Cannot Be Branded Bogus Without Verification: ITAT Deletes Demonetisation Deposit Addition
Suspicion Cannot Replace Examination of Records
The Lucknow Tribunal deleted an addition of ₹24,59,000 concerning cash deposited during demonetisation. It held that where the assessee supported the deposits with a cash book, audited financial statements and VAT returns, the Revenue could not treat the underlying sales as bogus merely on suspicion.
The decisive failure was the absence of proper verification or cogent adverse material disproving the recorded sales. The Tribunal granted relief on the evidentiary merits of the addition, rather than restoring the matter for another round of assessment.
Cash Deposits Become the Subject of Scrutiny
The assessee carried on the business of trading in Bardana and filed her return on 6 November 2017, declaring total income of ₹10,07,820. Her case was selected for complete scrutiny under CASS.
The Assessing Officer issued notices, but the assessment order recorded non-compliance. He consequently completed the assessment using the material available and made the disputed addition concerning cash deposited in the assessee’s savings bank account during the demonetisation period.
The order also records that the Assessing Officer considered a ₹5 lakh peak-credit benefit and a separate deposit of ₹70,000 while determining the disputed amount.
The Commissioner (Appeals), through the National Faceless Appeal Centre, sustained the addition by order dated 6 August 2025. The assessee thereafter approached the Tribunal.
Business Receipts Supported by Documentary Evidence
The assessee explained that the bank deposits originated from cash available through regular business transactions, including cash sales recorded in her books.
Her representative relied on the cash book, audited accounts, financial statements, monthly VAT returns and a comparative statement of cash deposits. He argued that these records had not been properly appreciated by the authorities below.
A comparison placed before the Tribunal showed cash deposits of ₹42,25,000 for financial year 2015–16, against ₹30,29,000 for financial year 2016–17. The assessee relied on the lower deposits in the year under appeal to contest the suggestion that demonetisation had occasioned an artificial introduction of cash.
She also contended that no defect warranting rejection of her books had been identified and that recorded business sales could not be mechanically treated as unexplained credits.
Section 68 and Section 115BBE Objections
The assessee separately challenged the application of section 68, arguing that a bank statement or passbook does not constitute the assessee’s books of account. She also referred to relief granted on that issue in her own case for assessment year 2012–13.
Another ground questioned the application of the amended tax rate under section 115BBE for the year under consideration.
The Revenue defended the assessment, emphasising the opportunities provided and the alleged failure to satisfactorily establish the source of deposits. It further argued that, because the assessee claimed the money was recorded in her books and deposited from cash in hand, the transactions formed part of her accounts.
However, the Tribunal’s operative reasoning centred on the failure to disprove the business-sales explanation. It did not separately decide the bank-passbook argument or the section 115BBE rate controversy.
Sales Had to Be Tested Against Stock and Purchases
The Tribunal examined the documentary material and found that the Assessing Officer had not properly considered it. Instead, he had proceeded on the presumption that the cash sales were a device for introducing unaccounted money as business receipts.
The Tribunal held that the genuineness of the sales could have been examined through the stock position, corresponding purchases, VAT returns and other relevant records.
Once the assessee furnished those records, the Assessing Officer was required to make appropriate enquiries and bring adverse evidence on record before concluding that the sales were bogus.
The Tribunal noted that no material established that the VAT returns were false. Nor had any adverse finding of the VAT authorities concerning the declared sales been brought on record. No independent enquiry appeared to have been conducted with those authorities or other relevant parties to disprove the explanation.
Addition Deleted on Merits
The Tribunal concluded that an adverse inference based merely on suspicion or presumption could not stand when the assessee had furnished supporting documentary evidence and the Assessing Officer had failed to verify its correctness.
In the absence of further enquiry or cogent adverse material, the conclusion that the sales were bogus rested on conjecture and surmise.
Accordingly, the Tribunal directed deletion of the impugned addition. Although the appeal was described as partly allowed, the disputed cash-deposit addition was deleted; the relief was not a statistical allowance or remand.
Author’s Comments
The decision reinforces the importance of examining the underlying business records before branding recorded sales as fictitious. Demonetisation deposits may invite scrutiny, but the timing of a deposit does not establish an unexplained source.
Equally, audited accounts and VAT returns are supporting evidence rather than an absolute shield against investigation. The Revenue remains entitled to test sales against purchases, stock and cash movement.
The practical lesson is to present a coherent reconciliation connecting sales, available cash and bank deposits. Here, the decisive point was that the documentary explanation remained undisproved. The ruling should therefore be cited for its evidentiary principle, without presenting it as a separate decision on section 68’s bank-passbook objection or the amended section 115BBE rate.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi dated 06.08.2025 pertaining to the assessment year 2017-18. The assessee has raised the following grounds of appeal: –
“1. BECAUSE the ld. “CIT(A)” has erred in law and on facts in confirming the addition of Rs. 24,59,000/- made by the Assessing Officer u/s 68 of the Act treating cash deposits during demonetization period as unexplained cash credits, without properly considering the documentary evidence furnished by the “appellant”
2 BECAUSE the authorities below failed to consider that the source of cash deposits was duly explained as arising out of cash-in-hand available as on 08.11.2016 from regular business transactions, which were supported by audited books of accounts, cash book, and VAT returns filed with the Commercial Tax Department.
3. BECAUSE the authorities below failed to appreciate that the cash deposits in in bank accounts, which are alleged as unexplained cash credits, are from the proceeds of cash sales made by the “appellant” which are duly recorded in the books of accounts, rendering the provisions of section 68 of the Act inapplicable in the case of the “appellant”, particularly when no defect or discrepancy in the books of accounts was pointed out and books of accounts were not rejected by the ld. Assessing Officer.
4.1 BECAUSE the authorities below were not correct either in law or on facts in making/confirming the addition of Rs. 24,59,000/- by invoking provisions of section 68 of the Act on the basis of cash deposit of the said amount found in the bank statement of the assessee.
4.2 BECAUSE the provisions of section 68 of the Act are not applicable to the deposit found in the bank statement as the bank statement/passbook does not constitute books of account of the assessee.
4.3 BECAUSE on a due consideration that on identical facts in assessee’s own case for A.Y. 2012-13 cash deposit found as per the bank statement was held to be unsustainable by the then first appellate authority, the ld. CIT(A) in the year under appeal should have deleted the addition on the ground that bank passbook does not constitute books of accounts of the assessee.
5. BECAUSE on the facts and in the circumstances of the case the ld. “CIT(A)” ought to have held that the Assessing Officer was not correct in making addition u/s 68 and in charging the tax as per amended rate specified in section 115BBE of the Act as the amendment made by Taxation Laws (Second Amendment) Act, 2016 w.e.f. 15.12.2016 is applicable to the transactions made on or after 01.04.2017.
6. BECAUSE the case authorities relied upon by the authorities below are distinguishable from the facts of case of the “appellant”.
7. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice.
8. BECAUSE each ground taken in appeal is mutually exclusive and without prejudice to each other.
9 The appellant craves leave to add, delete or at the time of hearing of appeal.”
2. The effective grounds in this appeal is with regard to affirmation of the addition of Rs.24,59,000/- i.e. the amount found deposited in cash during the demonetization period from 09.11.2016 to 30.12.2016 and the addition could not have been made u/s 68 of the Act. Since as per the assessee, the bank statement does not constitute books of accounts of the assessee.
3. The facts in brief are that in this case, the assessee is engaged in the business of trading in Bardana and filed her return of income on 06.11.2017, declaring a total income of Rs.10,07,820/-. The case was selected for scrutiny under CASS for complete scrutiny. Thereafter, the Assessing Officer (“AO”, for short) issued various notices to the assessee; however, there was no compliance on the part of the assessee. Consequently, the AO proceeded to complete the assessment on the basis of the material available on record and made an addition of Rs.24,59,000/- on account of cash deposited in the assessee’s savings bank account during the relevant period. However, he allowed the benefit of peak credit to the extent of Rs.5,00,000/- and also considered the deposit of Rs.70,000/- made by the assessee in her savings bank account. Thus, he computed total income at Rs.34,66,820/- against Rs. 10,07,820/- as disclosed in the income tax return. Aggrieved by this, the assessee preferred an appeal before the Ld. CIT(A) who sustained the addition and dismissed the appeal of the assessee. Now, the assessee is in appeal before this Tribunal.
4. Apropos to the grounds of appeal, the Ld. Counsel for the assessee vehemently submitted that the authorities below failed to appreciate the facts of the case in right perspective. He contended that the material placed on record by the assessee was not properly considered. He further submitted that the Ld. CIT(A), in the impugned appellate order, has recorded the fact that the assessee had been carrying out sales in cash. He drew my attention to page No. 8 of the appellate order, he submitted that the cash sales during the period under consideration, i.e., from 09.11.2016 to 30.12.2016, were duly recorded in the books of account. He further drew my attention to the fact that the total cash deposits during the relevant period were Rs.42,25,000/- in A.Y. 2016-17, pertaining to F.Y. 2015-16, whereas the cash deposits during A.Y. 2017-18, pertaining to F.Y. 2016-17, were only Rs.30,29,000/-. Thus, according to him, there was, in fact, lower cash deposits during the relevant period. The Ld. Counsel further submitted that the impugned addition was made by the authorities below in a mechanical manner without properly appreciating the material available on record. He submitted that the assessee had duly maintained and furnished the cash book demonstrating the cash transactions. It was also pointed out that the books of account and financial statements of the assessee were duly audited and the sales were duly accounted for therein. He, therefore, contended that the finding of the Ld. CIT(A) doubting the genuineness of the sales was erroneous and contrary to the material available on record. Further, he submitted that the bank statement does not constitute the accounts of the assessee, hence invocation of the provisions of section 68 of the Act is erroneous.
5. Per contra, the Ld. Departmental Representative, supported the orders of the authorities below, opposed the submissions made by the Ld. Counsel for the assessee. He submitted that the Assessing Officer had provided multiple opportunities to the assessee; however, the assessee failed to satisfactorily explain the source of the cash deposits and failed to furnish adequate supporting evidence. He, therefore, contended that the Assessing Officer was justified in making the impugned addition. He submitted that under the facts of the present case, the transaction as recorded in the bank account of the assessee would firm part of his accounts hence there is no error in making addition u/s 68 of the Act. Ld. DR pointed out that the assessee has categorically stated that the money has been duly recorded in her books and made deposits out of cash on hand. Hence, there is no error in making addition u/s 68 of the Act.
6. I have heard the rival submissions and perused the material available on records. The short issue that arises for consideration is whether, under the facts and circumstances of the present case, the authorities below were justified in making the impugned addition. The contention of the assessee is that the cash deposits were duly supported by the cash sales recorded in the books of account. The assessee has also furnished the monthly VAT returns, cash book and a comparative chart of cash deposits. It is the contention of the assessee that despite furnishing the relevant documentary evidence in support of the sales and cash deposits, the authorities below proceeded to make the addition without properly examining the material placed on record. During the course of hearing, the Ld. Counsel for the assessee took me through the paper book filed by the assessee to buttress the contention that the relevant material was duly furnished before the authorities below.
7. The assessee had, inter alia, furnished a copy of the financial statements for the year ended 31.03.2017 and copies of the monthly VAT returns. On perusal of the assessment order, I find that the Assessing Officer has not properly considered the material furnished by the assessee and has proceeded on the presumption that the cash sales claimed by the assessee were a means of introducing unaccounted money into the business under the guise of business receipts. In my considered view, once the assessee has claimed that the sales were duly recorded in the books of account and were also reflected in the VAT returns, it was incumbent upon the Assessing Officer to examine the genuineness of such sales by making appropriate enquiries and bringing cogent adverse material on record. It is also relevant to note that the genuineness of the sales could have been examined with reference to the stock position, corresponding purchases, VAT returns and other relevant records. If, upon verification of the stock position and other relevant records, no adverse material is found, it cannot be conclusively inferred that the cash deposits are out of bogus sales recorded by the assessee for introducing unaccounted money in his books. I find that the authorities below have not brought on record any material to demonstrate that the VAT returns furnished by the assessee were false or that any adverse finding had been recorded by the VAT authorities with regard to the sales declared by the assessee. No independent enquiry appears to have been conducted from the concerned VAT authorities or any other relevant party to disprove the sales claimed by the assessee.
8. In my considered view, where the assessee has furnished the cash book, audited financial statements, VAT returns and other relevant documentary evidence in support of the sales and cash deposits, an adverse inference cannot be drawn merely on the basis of suspicion or presumption. In the absence of any further enquiry or cogent adverse material brought on record by the Assessing Officer, the conclusion that the sales were bogus would base on mere conjectures and surmises. Such a view cannot be sustained. Considering the totality of the facts and peculiar circumstances of the case, and particularly the fact that the assessee has furnished relevant documentary evidences and the AO failed to verify its correctness. Therefore, in the absence of such enquiry no adverse inference ccould be drawn. I, therefore, direct the AO to delete the impugned additions. The grounds raised in this appeal are partly allowed.
9. In the result, the appeal of the assessee in ITA. No.761/LKW/2025 is partly allowed.
Order pronounced in the open Court on 08/10/2026.
