Jayantilal Amulakhbhai Shah Vs ITO (ITAT Ahmedabad)
Demonetisation Cash Deposit Addition Cannot Rest on Suspicion Alone: ITAT
The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld deletion of a Rs. 1,10,08,143 addition under section 68, holding that a surge in cash deposits during demonetisation could not justify an addition without evidence disproving the assessee’s explanation.
In the same consolidated order, the Tribunal sustained a separate Rs. 35 lakh addition under section 41(1) concerning an unsubstantiated creditor liability. It found that the assessee had not produced confirmation or supporting evidence and that the creditor was neither furnishing details nor pursuing recovery.
Accordingly, both the assessee’s appeal and the Revenue’s appeal were dismissed, leaving the CIT(A)’s conclusions on both issues undisturbed.
Background of the Cross-Appeals
The assessee, an individual, filed his return for assessment year 2017-18 on October 31, 2017, declaring total income of Rs. 7,76,520.
The assessment included additions of Rs. 1,10,08,143 under section 68 and Rs. 35,00,000 under section 41(1).
The CIT(A), National Faceless Appeal Centre, deleted the section 68 addition but confirmed the addition concerning cessation of liability.
The assessee challenged the sustained Rs. 35 lakh addition, while the Revenue sought restoration of the cash-credit addition. Both appeals arose from the CIT(A)’s order dated August 19, 2025, and were decided together.
Cash Deposits Were Recorded in Books
During assessment, the Assessing Officer noticed cash deposits of Rs. 2,43,01,513 in the assessee’s ICICI Bank account.
The deposits were reflected in the books, and the assessee explained their source as sale proceeds and collections from debtors.
The officer nevertheless questioned the pattern of cash movements. He considered regular withdrawals, despite substantial cash balances, suspicious and concluded that the books had been arranged to inflate cash availability and present unexplained money as sales receipts.
The officer accepted Rs. 1,32,93,370 as cash sales and treated the balance Rs. 1,10,08,143 as income from undisclosed sources.
Change from Operator to Dealer Explained Higher Receipts
Before the Tribunal, the assessee explained that his business arrangement with Adani Gas Limited changed during the year.
Until October 14, 2016, he functioned as an operator. Outlet sale proceeds were deposited with Adani Gas, and he earned commission.
From October 15, 2016, his status changed to that of a dealer. Thereafter, sales were recognised in his own books, with corresponding deposits in his bank accounts.
The assessee relied on the dealership agreement, VAT details and bank statements supporting this change. He submitted that the officer had not disputed the dealership arrangement but had questioned the link between sales and deposits.
The Revenue defended the assessment, relying on the abnormal growth in deposits and the changed monthly cash trend during demonetisation.
Suspicion Did Not Establish Unexplained Income
The Tribunal found that the officer had essentially relied on the increase in cash deposits during the demonetisation period.
He had not brought material on record establishing that the explanation linking deposits to sales proceeds was incorrect.
The Tribunal reiterated that suspicion, however strong, cannot replace evidence. A section 68 addition could not survive merely because the officer doubted the explanation without substantiating that doubt.
It therefore upheld the CIT(A)’s deletion of Rs. 1,10,08,143 and dismissed the Revenue’s appeal.
Separate Dispute over Rs. 35 Lakh Creditor
The assessee’s appeal concerned a liability of Rs. 35 lakh towards Rao Tourist Service Private Limited.
The Assessing Officer issued a notice under section 133(6) seeking transaction details. The creditor did not respond or furnish documents.
The assessee argued that mere non-response by a creditor could not justify an addition. However, the liability remained unsupported by confirmation or other evidence.
The officer treated it as a cessation of liability under section 41(1). The CIT(A) confirmed the addition, holding that the assessee had failed to substantiate the entry at both assessment and appellate stages.
Tribunal Sustains Cessation-of-Liability Addition
Before the Tribunal, the assessee maintained that the transactions arose in the ordinary course of business but did not support that assertion with concrete evidence.
The Tribunal found that the liability remained unexplained and unsubstantiated. It also observed that the creditor was not providing details or pursuing recovery.
In those circumstances, it considered the material sufficient to uphold the finding of cessation of liability.
The Tribunal consequently sustained the Rs. 35 lakh addition and dismissed the assessee’s appeal.
Final Decision
Both appeals were dismissed.
The assessee retained relief against the Rs. 1.10 crore section 68 addition, because the officer had not disproved the sales-based explanation through evidence. However, the Rs. 35 lakh section 41(1) addition survived, based on the unsupported liability and the creditor’s conduct recorded in the order.
The two outcomes rested on the distinct evidence and findings concerning each addition.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These are two appeals, one preferred by the Assessee and the other preferred by the Revenue in respect of the same Assessee are directed against the same impugned order dated 19.08.2025 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as ‘Ld. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short).
1.1 Since the issues relate to the same Assessee and pertain to the same Assessment Year 2017-18, both are being taken together for adjudication.
2.1 The grounds taken by the Assessee in ITA No. 1702/Ahd/2025 are as under:
“1. The Commisioner of Income Tax (Appeals), NFAC, Delhi has erred in law and on facts by disallowing a sum of Rs. 35,00,000/- and making addition u/s. 41(1) of I, T. Act, 1961.
2. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.”
2.2 The grounds taken by the Revenue in ITA No. 1897/Ahd/2025 are as under:
“1. Whether on facts and circumstances of the case and in law, the Id.CIT(A) has erred in law and on facts in deleting the addition of Rs.1,10,08,143/-made on account of unexplained cash credit u/s.68 of the Act without appreciating the facts of the case?
2. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
3. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored?”
3. Brief facts of the case are that the Assessee is an individual and filed his return of income for Assessment Year 2017-18 on 31.10.2017, declaring a total income of Rs.7,76,520/-. The assessment was completed, wherein several additions were made, including an addition of Rs.1,10,08,143/- u/s 68 and Rs. 35,00,000/- u/s 41(1) of the Act, for the relevant purposes of the present appeals.
ITA No. 1702/Ahd/2025:-
4. First, we will take up ITA No. 1702/Ahd/2025, the Assessee’s appeal.
5. The Assessee in this appeal has impugned the addition of Rs. 35,00,000/- u/s 41(1) of the Act. The facts relating to this addition are that the AO, during the assessment proceedings, had issued notice u/s 133(6) of the Act to M/s. Rao Tourist Service Private Limited (creditor), asking for details of transactions. No reply was received from the said creditor, nor were any documents furnished.
5.1 The Assessee submitted before the AO that no addition can be made on the mere non-response of the creditor. Since no reply was received either from the creditor or from the Assessee itself, the AO treated the liabilities in respect of the said creditor as a cessation of liability and, accordingly, made an addition of Rs. 35,00,000/- u/s 41(1) of the Act.
5.2 The Ld. CIT(A) upheld the findings of the AO, holding that the Assessee had not furnished any confirmation or supporting evidence of the concerned party to substantiate this claim and, in the absence of such, the entry remains unproved; holding that the burden of proving the correctness of entries in the books of account lies on the Assessee, and the Assessee in this case failed to discharge the onus both at the assessment as well as the appellate stage. Therefore, the Ld. CIT(A) upheld the addition made by the AO in this regard.
6. Before us also, the Ld. AR has made the same submissions that transactions between the parties were conducted in the regular course of business. He failed to explain or substantiate his submission with concrete evidence.
7. As rightly held by the Ld. CIT(A), in the absence of any confirmation from the creditor, the entry remains unexplained and unsubstantiated. Be that as it may, the fact remains that the creditor is not interested in providing any details or pursuing recovery of the said amount in question, and this is sufficient to hold that there is a cessation of liability in respect of the said creditor. That being the case, we find no infirmity in the findings of the Ld. CIT(A) and, accordingly, uphold the addition.
8. In the result, the appeal of the Assessee is dismissed.
ITA No. 1897/Ahd/2025:-
9. Now, we take up the Revenue’s appeal, i.e., ITA No. 1897/Ahd/2025:
10. The facts of this addition are that during assessment proceedings, the AO noticed that the Assessee had deposited an amount of Rs. 02,43,01,513/- in his ICICI Bank account. On verification, the AO found that the cash deposits were duly reflected in the books of account of the Assessee, and the source of the cash deposits was claimed to be sale of goods and payments received from debtors.
10.1 The AO, observing that there were regular cash withdrawals after having sufficient cash balance in hand, creates a suspicion, as the Assessee on the one hand had shown a huge cash balance and on the other hand had regularly withdrawn huge cash. The AO, thus, concluded that the books of account were fabricated in such a way that cash on hand could be increased to a certain level, which the Assessee camouflaged as sales receipts. The AO thereafter bifurcated the sum, holding Rs.1,32,93,370/- to be cash sales and treated the remaining amount of Rs.1,10,08,143/- as income from undisclosed sources.
10.2 The Ld. CIT(A) held that though the AO had raised doubts on the cash sales, no material was brought on record by the AO to establish that the deposits were from unexplained sources other than sales. He, accordingly, deleted the additions.
11. Before us, the Ld. Senior DR has relied upon the Assessment Order and submitted that the AO had examined the pattern of sales and there was abnormal growth in cash deposits made by the Assessee during the demonetization period, modifying the monthly cash trend of the Assessee.
12. Per contra, Mr. A.S. Soparkar, Ld. Senior Advocate for the Assessee, has submitted that up to 14.10.2016, the Assessee was only an operator for Adani Gas Limited, whereby the outlet sale proceeds were deposited to Adani Gas and the Assessee was entitled only to commission. From 15.10.2016, however, the Assessee’s status changed to that of a dealership, and thereafter the sales were recognized in his books and the corresponding deposits were made in his bank accounts. He has submitted that the change of status is supported by the dealership agreement, VAT details, and the bank statements available on record. He further submitted that the Assessing Officer has not disputed the fact of the dealership, but has doubted the nexus between the cash deposits and sales.
13. We have heard the parties and perused the materials on record.
14. It is evident that the AO in this case has merely noticed a surge in cash deposits made by the Assessee during the demonetization period. He has not brought anything on record to establish that the claim of the Assessee that cash deposits were made out of its sales proceeds was wrong. In other words, the AO had a suspicion regarding the cash deposits being unexplained income; he, however, did nothing to substantiate his suspicion, and it is a settled principle of law that suspicion, howsoever strong, cannot take the place of evidence. Addition u/s 68 cannot be sustained on the basis of mere suspicion of the AO. In view thereof, we find no infirmity in the findings of the Ld. CIT(A) in deleting the addition made u/s 68 of the Act.
15. In the result, the appeal filed by the Revenue is dismissed.
16. In conclusion, both the captioned appeals are dismissed.
The order pronounced on 23.10.2026.
