Cash Deposits During Demonetization Not Unexplained When Supported by Books: ITAT Delhi

ACIT Vs Priti Brijal Bhatia (ITAT Delhi)

The appeal before the Income Tax Appellate Tribunal (ITAT), Delhi was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)/NFAC for Assessment Year 2017–18. At the outset, the appeal was delayed by 68 days. Upon hearing both sides, the Tribunal found reasonable cause for the delay and condoned it, allowing the appeal to be heard on merits.

The assessee had filed a return declaring income of Rs.12,31,610 and was engaged in the business of trading gold, jewellery, and diamond items. During scrutiny proceedings, the Assessing Officer (AO) observed cash deposits of Rs.1.30 crore made during the demonetization period and sought an explanation. The assessee submitted comparative data showing that cash deposits before and during demonetization were lower than the previous year and explained that such deposits were part of regular business activity arising from cash sales.

The AO, however, rejected the explanation, noting a sharp rise in cash balances in September and October 2016 compared to earlier months, lack of detailed supporting documents such as invoice-wise sales and purchase data, and absence of VAT returns. Based on these observations, the AO treated the deposits as unexplained cash credits under Section 68 and made an addition of Rs.1.30 crore.

On appeal, the CIT(A) deleted the addition after considering detailed submissions of the assessee. The Revenue challenged this deletion before the Tribunal, arguing that abnormal cash sales trends and insufficient documentation justified the addition.

The Tribunal examined the material and found that although monthly cash balances increased prior to demonetization, the assessee maintained proper books of account and recorded all sales. It held that closing cash balance alone cannot determine undisclosed income, as cash not deposited remains reflected in the books. The Tribunal also noted that cash deposits during demonetization were actually lower by 43.58% compared to the corresponding period in the previous year and lower by 13.95% in the pre-demonetization period, supporting the assessee’s explanation that deposits were from regular business sales.

The Tribunal concluded that the AO’s reliance on cash balance patterns without disproving recorded sales or books was not justified. Since the assessee demonstrated the source of cash deposits through business records, the addition under Section 68 was unwarranted. Accordingly, the Tribunal upheld the CIT(A)’s order deleting the addition and dismissed the Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the Revenue against the order of Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)”, for short] dated 26.09.2025 for the Assessment Year 2017-18.

2. At the time of filing of appeal, the Registry has pointed out a defect that appeal is time barred by 68 days. In response thereof, the ld. counsel for the assessee submitted that there was a reasonable cause for the delay in filing the appeal. Accordingly, he prayed that the delay in filing the appeal be condoned.

3. We have heard both the counsels on the issue of condonation of delay. In our considered opinion, there was a reasonable cause for the delay in filing the appeal. Therefore, we condone the delay in filing the appeal before the Tribunal.

4. Brief facts of the case are, assessee filed her return of income on 17.10.2017 declaring income of Rs.12,31,610/-. The case was selected for scrutiny through CASS. Accordingly, notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. In response, assessee submitted information from time to time through ITBA Portal.

5. Assessee is engaged in the business of trading of gold, gold jewellery and diamond items. The assessee earned income from business in the name of M/s. Awesome Sparkles. During assessment proceedings, the AO observed that the assessee has made huge cash deposit of Rs.1.30 crores during demonetization period. When assessee was asked to substantiate the above cash deposit, in response assessee has submitted following chart :-

6. In reference to above chart, assessee submitted that the cash deposited by her in the current year is less compared to previous assessment year and also during demonetization period, assessee has deposited only Rs.1.3 crores compared to Rs.2.30 crores during the same period in the previous assessment year. It was submitted that cash sales and cash deposits in the bank account are regular feature of her business activities. After considering the same, the AO rejected the same and observed that the assessee has not furnished the details of cash sales and credit sales and cash purchase and credit purchases and further observed that opening balance of cash as on 01.04.2016 was just Rs.12,89,867/- and he tabulated month-wise closing cash balance paid during the period of demonetization from April to December as under :-

7. He observed that an average cash in hand in each month upto August was around Rs.10 lakhs but all of a sudden closing cash balance came to more than 20 times in September and 13 times in October just preceding month of demonetization.

8. Further assessee was asked to submit the details of invoice-wise and he observed that the transactions valued more than Rs.1 lakh was few compared to during October and November and also asked to submit details of sales month-wise, item-wise, value-wise and party-wise. Since assessee failed to submit relevant information and also not furnished copies of VAT return, based on the above observation, he proceeded to make the addition u/s 68 of the Act to the extent of Rs.1.30 crores.

9. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions which are reproduced at pages 7 to 42 of the appellate order. After considering the same, ld. CIT (A) deleted the addition made by the AO by observing as under :-

7.1 Since ground no. 2 on the addition of Rs.1,30,00,000- made by the AO u/s 68 of the Act has been decided in favour of the appellant, ground nos. 3 to 5 remains only of academic interest and hence dismissed.”

10. Aggrieved with the above order, Revenue is in appeal before us raising following grounds of appeal :-

“1. The Ld. CIT(A) has erred in facts as well as in law by deleting the addition of Rs.1,30,00,000/- made on account of unexplained cash deposited in its bank accounts during the demonization period.

2. The Ld. CIT(A) has failed to appreciate the fact that the abnormal trend of cash sales in the month of September & October of 2016, just before the date of demonization, in comparison to Sales reported in previous months as well as previous years which was pointed by the AO in its assessment order while coming to conclusion that the cash sales made by the assessee was fictitious and only to park its unaccounted money in the guise of cash sales.

3. The Ld. CIT(A) has also failed to appreciate the fact that the assessee failed to produce the details of cash sales and credit sales as well as cash purchase and credit purchase though specifically asked in questionnaire sent alongwith notice 142(1) of the Income Tax Act, 1961.”

11. At the time of hearing, ld. DR of the Revenue brought to our notice detailed findings of the AO and brought to our notice details of cash deposits made by the assessee and also closing balance of each month. Ld. DR heavily relied on the findings of the AO that assessee has maintained closing cash balance of about Rs.10 lakhs before the demonetization period and suddenly closing balance is increased manifold as observed by the Assessing Officer. He submitted that assessee has not submitted proper documents before the AO and finally objected to the relief granted by the ld. CIT (A) who has not appreciated peculiar facts on record. He heavily relied on the detailed findings of the AO.

12. On the other hand, ld. AR of the assessee brought to our notice page 34 of the first appellate order wherein assessee has explained the details of cash deposit compared to previous assessment year and the cash deposit made by the assessee is lower by 13.95% before demonetization period and during demonetization period, the cash deposit was lower by 43.58% compared to previous year and subsequent to demonetization period, cash deposits were much higher compared to previous assessment year. He further submitted that cash deposit is made only out of cash sales made during the year. Therefore, assessee has demonstrated the source of cash and he heavily relied on the findings of the ld. CIT (A).

13. Considered the rival submissions and material placed on record. We observed that no doubt, assessee has maintained closing cash balance at the end of each month prior to demonetization period of about Rs.10 lakhs and habitually assessee deposited the cash sales in the bank account. During demonetization, assessee has cash sales and the same was deposited in the bank account during demonetization period. In our view, the closing cash balance cannot be the criteria to come to the conclusion that it is undisclosed source of income considering the fact that the assessee maintained proper books and whatever cash which was not deposited in the bank will be disclosed as closing cash balance. As per the books, assessee has recorded the sales and maintained proper cash book which shows that there is closing cash balance which was not deposited in the bank. Therefore, we noticed that the cash deposited by the assessee prior to demonetization period is lower by 13.95% and during the demonetization period i.e. 09.11.2016 to 31.12.2016, the cash deposited by the assessee is -43.58% compared to same period in previous assessment year. Since assessee has maintained proper books of account and demonstrated that cash deposits are out of its own business, the analysis and pattern of the AO in making the addition is not proper. Accordingly, we are inclined to uphold the findings of the ld. CIT (A).

14. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on this 9TH day of April, 2026.