ITO Vs Krishna Kanwar (ITAT Jaipur)
Demonetisation Deposits Explained by LPG Cash Sales: ITAT Upholds ₹1.05 Crore Addition Deletion
Introduction
The Income Tax Appellate Tribunal, Jaipur Bench, upheld deletion of an addition of ₹1,05,00,000 under Section 69A, concerning cash deposited during demonetisation by an authorised LPG distributor.
The Tribunal found that the deposits were supported by cash sales ledgers, VAT output records and denomination-wise details. The purchases and sales were recorded in audited books, and the Assessing Officer had not established that those transactions were bogus.
Dismissing the Revenue’s appeal, the Bench held that the CIT(A) had correctly deleted the addition. The decision rested on the evidence connecting the deposits to business receipts and the absence of material disproving that explanation.
Facts of the Case
The assessee, Krishna Kanwar, a war widow, operated an LPG distribution business as an authorised dealer of Indian Oil Corporation, under the name M/s. Vikram Krishna Indane.
She filed her return declaring total income of ₹8,66,670, supported by audited financial statements and the tax audit report in Form 3CB/3CD.
The Assessing Officer noticed cash deposits of ₹1.05 crore during 9 November to 30 December 2016. He sought supporting details, including bank statements, purchase and sales registers, ledger extracts and denomination-wise particulars.
Taking the view that the assessee had not produced adequate returns, bills and vouchers, he treated the entire deposits as unexplained money under Section 69A read with Section 115BBE and completed assessment under Section 143(3).
The CIT(A) deleted the addition through an order dated 3 March 2026. The Revenue challenged that relief before the Tribunal.
Revenue’s Grounds of Appeal
The Revenue argued that audited books and ledger entries did not conclusively establish the genuineness of the transactions.
It contended that complete supporting documents had not been produced and that the assessee had not satisfactorily established customer identities or the genuineness of the alleged cash sales.
The Department also challenged the proposition that non-rejection of books under Section 145(3), by itself, prevented an addition under Section 69A. It maintained that Section 69A operated independently.
The Tribunal therefore examined the substantive evidence supporting the deposits rather than relying solely on the existence of audited accounts.
Evidence Supporting the Deposits
The CIT(A)’s findings, reproduced and accepted by the Tribunal, recorded that the assessee had furnished ledger accounts showing cash sales during demonetisation and the corresponding VAT output ledger.
She also produced denomination-wise deposit details distinguishing old currency from other notes, bank deposit slips and purchase bills from Indian Oil Corporation supporting procurement of LPG stock.
These records connected the cash deposited with the assessee’s business operations.
The Tribunal noted that retail LPG distribution involved substantial cash transactions, particularly where the business operated in rural areas. The nature of the business was therefore relevant when evaluating the explanation.
No Finding of Bogus Purchases or Sales
A central consideration was that the Assessing Officer had not recorded any finding that purchases were bogus or sales were fictitious or inflated.
The audited books had not been rejected under Section 145(3). Nor had the Department produced material showing that the cash book entries were manipulated or fabricated.
The CIT(A) distinguished incomplete verification of some supporting records from proof that the entire deposits represented unexplained income.
The Tribunal agreed that, where the cash sales ledger tallied with VAT output records and the transactions remained undisproved, the addition could not be sustained merely because certain documents were not produced to the Assessing Officer’s satisfaction.
Business Volume and Gross Deposit Addition
The CIT(A) also considered that the assessee’s annual turnover exceeded ₹6 crore.
Against that business volume, deposits of ₹1.05 crore during the relevant period were not considered abnormal or disproportionate. Daily sales were systematically recorded, and denomination details corresponded with the demonetisation timeline.
The Assessing Officer had not undertaken a comparative analysis with earlier years to demonstrate an abnormal increase in cash sales.
The appellate authority further observed that adding the entire deposits, despite their demonstrated business connection, effectively treated gross business receipts as income.
These observations formed part of the reasoning supporting deletion; the Tribunal did not direct any alternative profit estimation.
Tribunal’s Decision
The Tribunal concluded that the assessee had established the relevant cash sales through ledger accounts, VAT records and currency particulars.
Since the purchases and sales were reflected in audited books and had not been shown to be bogus, it found the addition unsustainable on the facts.
The Bench held that there was no illegality or perversity in the CIT(A)’s order and dismissed the Revenue’s appeal.
Significance of the Ruling
The decision highlights the importance of a documented link between cash deposits and recorded business sales. Audited accounts were supported here by purchase records, VAT ledgers and denomination reconciliation.
The relief therefore followed from the combined evidence and the Revenue’s failure to disprove it, rather than a blanket rule protecting every demonetisation deposit recorded in books.
Cases Discussed
- CIT Vs Jai Kumar Bakliwal (Rajasthan High Court); 366 ITR 217 — Discussed in the quoted CIT(A) reasoning on additions founded on suspicion.
- CIT Vs Khandelwal Constructions — Cited in the quoted appellate reasoning; source provides no case number or reporter citation.
- CIT Vs P.K. Noorjahan (Supreme Court); 237 ITR 570 — Discretion under Section 69A.
- CIT Vs Gotan Lime Khanij Udyog (Rajasthan High Court); 256 ITR 243 — Discussed in connection with estimation of business income.
- CIT Vs Kanhaiyalal Jangid — Discussed in the quoted appellate reasoning; source provides no case number or reporter citation.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
The Appellant, Income Tax Officer by filing the present appeal, sought to set aside the impugned order dated 03.03.2026 passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘CIT(A)’] qua assessment year 2017-18 on the grounds inter-alia that:-
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,05,00,000/- relying upon books of accounts, audit report and ledger extracts furnished by the assessee without appreciating the facts that the assesse failed to produce complete supporting evidences such as bills vouchers, GST/VAT Returns and other conclusive evidence to substantiate the genuineness of cash deposits made during demonetization period.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that mere entries in books of account do not conclusively establish genuineness of 2 transactions, particularly when substantial cash deposits were made during demonetization period and the assessee could not satisfactorily established the identity of customers and genuineness of alleged cash sales.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that mere production of books of accounts and sale & purchase register does not automatically explain the source of cash deposits, especially when the genuineness of the alleged cash sales during demonetization was rightly examined by the AO.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that addition under section 69A cannot be made since the books of account were not rejected under section 145(3), ignoring the settled legal position that section 69A operates independently and addition can be made even when books are not rejected.
5. The appellant craves leave to add alter, amend OR withdraw any ground of appeal at the time of hearing.”
2. Briefly stated, facts necessary for consideration and adjudication of the issued at hand are : The assessee being a war widow is into the business of LPG distribution as an authorized dealer of Indian Oil Corporation in the name and style of M/s Vikram Krishna Indane. The assessee filed her return of income declaring total income at Rs. 8,66,670/- on the basis of audited financial in Form 3CB/3CD. The Assessing Officer on noticing that there was a cash deposit to the tune of Rs. 1,05,00,000/- in the account by the assessee during demonetization period 09.11.2016 to 30.12.2016, issued show cause notice to furnish various details including bank statement, purchase and sale registered, ledger extracts, demonization wise break-up her deposit in audit report. On failure of the assessee to produce GST/VAT return, bills and vouchers proceeded to treat the entire cash deposit of Rs. 1,05,00,000/- as unexplained money u/s 69A r.w.s. 115BBE of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and thereby framed the assessment u/s 143(3) of the Act.
3. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal, who has deleted the addition by allowing the appeal. Being aggrieved with the impugned order passed by the Ld. CIT(A), Revenue has come up before the Tribunal by way of filing the present appeal.
4. Ld. DR for the appellant/Revenue relied upon by the assessment order.
5. We have heard Ld. ARs for the assessee and Ld. DR for the Revenue and perused the record available on file.
6. Undisputedly, the assessee who is running LPG distribution outlet being an authorized dealer of Indian Oil Corporation in the name and style of M/s Vikram Krishna Indane. It is also not in dispute that during the demonetization period i.e. from 09.11.2026 to 30.12.20216, the assessee has deposited cash amount of Rs. 1,05,00,000/- in the bank. It is also not in dispute that while making addition of Rs. 1,05,00,000/- as unexplained money u/s 69A, the Assessing Officer has not rejected the books of account u/s 145(3) of the Act, which are duly audited in Form 3CB/3CD. It is also not in dispute that in the business of retail LPG distribution, most of the business is carried out in cash, particularly when the assessee is carrying on its business in the rural area.
7. In the backdrop of the undisputed facts, when we examine the impugned order passed by the Ld. CIT(A), it is well reasoned order deleting the addition made by the AO. Operative thereof is extracted for ready perusal as under:-
“In the present case, the assessee is a regular business concern engaged in LPG distribution with substantial turnover. The audit report furnished under section 44AB confirms that proper books of account were maintained and audited. The audit report also certifies that the financial statements give a true and fair view of the state of affairs of the assessee. The fact that the books were audited has not been disputed by the Assessing Officer.
The assessee has furnished ledger accounts showing cash sales during the demonetization period. The VAT output ledger corresponding to such sales has also been produced. The denomination-wise details of cash deposits specifying old currency and other notes were also placed on record. Bank deposit slips evidencing actual deposit of cash into bank accounts were furnished. Purchase bills from Indian Oil Corporation evidencing procurement of LPG stock were also produced.
A perusal of the above evidences demonstrates that the cash deposits were not unrecorded money but were directly linked to the business operations of the assessee. The Assessing Officer has not recorded any finding that the purchases from IOCL were bogus. He has also not recorded any finding that the sales reffected in the books were fictitious or inflated. There is no rejection of books under section 145(3). There is also no material brought on record to show that the cash book entries were manipulated or fabricated…
The approach of the Assessing Officer appears to be premised on the inability to verify GST/VAT returns and vouchers to his satisfaction. However, inability to verify certain supporting documents does not ipso facto lead to the conclusion that the entire cash deposits represent unexplained income, especially when the primary books of account are maintained and audited.
The Hon’ble Rajasthan High Court in the case of CIT v. Jai Kumar Bakliwal has held that where the books of account are maintained and not rejected, addition under sections 68 or 69A cannot be sustained merely on suspicion. Similarly, in CIT v. Khandelwal Constructions, the jurisdictional High Court has observed that when sales are accepted and purchases are not disputed, treating the resultant cash as unexplained is legally unsustainable.
Further, the Hon’ble Supreme Court in CIT v. P.K. Noorjahan has held that even where the conditions of section 69A are satisfied, the provision is discretionary and addition is not automatic. The authority must exercise judicial discretion considering the facts and circumstances of the case.
In the present case, the assessee’s turnover for the year, as reflected in the audited financial statements, exceeds Rs. 6 crore. In the context of such substantial business volume, cash deposits of Rs. 1.05 crore during peak business season cannot be regarded as abnormal or disproportionate. The denomination-wise details of deposits correlate with the demonetization timeline. The ledger entries of cash sales during the relevant period show systematic recording of daily transactions. The VAT output ledger further corroborates that such sales were accounted for.
It is also noteworthy that the Assessing Officer has not carried out any comparative analysis with earlier years to show that the cash sales during the demonetization period were abnormally high. Nor has he computed peak credit or attempted to determine profit element embedded in such deposits. Instead, the entire gross deposits were added as income, which amounts to taxing turnover rather than profit.
The settled legal position is that in the case of business receipts, even if certain defects are found in books, addition can at best be made by estimating profit element and not by treating the entire receipts as income. This principle has been consistently upheld by the Rajasthan High Court in several decisions including CIT v. Gotan Lime Khanij Udyog and CIT v. Kanhaiyalal Jangid, wherein it has been held that when books are not rejected and business receipts are recorded, addition of entire receipts is not justified.
In the present case, there is no rejection of books and no finding that the recorded sales are non-genuine. The assessee has discharged the primary burden by furnishing audit report, bank statements, purchase bills, sales ledgers, VAT details and denomination reconciliation. The burden thereafter shifts to the Revenue to establish that the explanation is false or unsatisfactory. No such material has been brought on record.
The mere observation that GST/VAT returns and vouchers were not produced to the satisfaction of the Assessing Officer cannot override the substantive evidences on record. The addition appears to be based on conjecture and suspicion rather than concrete material.
The Hon’ble Rajasthan High Court has repeatedly held that suspicion, however strong, cannot substitute evidence. In the absence of any material to disprove the books of account, the addition under section 69A cannot be sustained.”
8. When the assessee has duly proved on record ledger account showing cash sales during the period under question, which tallies VAT output ledger, even denomination of the currency deposited in cash is also specified, and that old currency and other notes were the subject matter of the ledgers. When the Assessing Officer has not recorded any findings that purchases and sales by the assessee are bogus, which are otherwise duly reflected in the books of accounts, which are duly audited and which have not been rejected by the AO, addition made by the AO is not sustainable, hence rightly deleted by the ld. CIT(A).
9. So in these circumstances, we find no illegality or perversity in the impugned order passed by the Ld. CIT(E).
10. Resultantly, the appeal filed by the Revenue is hereby dismissed.
Order pronounced in the open court on 26-10-2026.
