Vellaisamy Sekar Vs ITO (ITAT Chennai)
Demonetisation May Trigger Scrutiny, Not Automatic Addition—Recorded Paddy Sales Cannot Be Branded Unexplained Money u/s 69A: Chennai ITAT
The Chennai ITAT has held that cash deposited during the demonetisation period cannot automatically be treated as unexplained money u/s 69A merely because cash sales increased immediately before demonetisation.
Where the assessee was an existing paddy trader, the cash sales were recorded in the regular books, sufficient stock was available, the books were not rejected u/s 145(3) & the Revenue produced no positive evidence that the sales were fictitious, the entire cash deposit could not be taxed u/s 69A.
The Tribunal accordingly deleted an addition of ₹43,55,000.
Delay of 323 Days Condoned
The assessee’s appeal before the Tribunal was delayed by 323 days.
It was explained through an affidavit that the assessee had suffered severe lower-back pain & was admitted to hospital on 15.03.2025. After considering the explanation, the Tribunal found that the delay was neither deliberate nor attributable to mala fide conduct.
Observing that applications for condonation must receive a liberal & justice-oriented approach where sufficient cause is shown, the Tribunal condoned the delay & admitted the appeal.
Facts of the Case
The assessee was an individual regularly engaged in the business of trading in paddy. He filed his return for AY 2017-18 declaring income of ₹3,34,430, along with the tax audit report u/s 44AB.
The case was selected for complete scrutiny because of large agricultural income, substantial cash deposits during demonetisation, abnormal increase in sales & reduction in profitability compared with the preceding year.
During the assessment, the assessee furnished his computation, trading account, profit & loss account, balance sheet, cash book, purchase and sales details, commission income particulars, paddy loading and unloading account & explanation for the cash deposits.
The assessee explained that the deposit of ₹43,55,000 represented cash generated through sales of paddy recorded in the regular books.
The AO rejected the explanation & treated the entire deposit as unexplained money u/s 69A.
CIT(A)’s Reasoning
The CIT(A) confirmed the addition, observing that the assessee had not clarified the extent of his agricultural landholding.
He also noted that it was unclear whether the assessee had sold paddy in the earlier or subsequent years. The names of the parties to whom the paddy was sold had not been furnished & the cash book and sales details were allegedly unsupported by complete evidence and vouchers.
The CIT(A) consequently held that the deposits remained unexplained.
Assessee’s Evidence Before the Tribunal
The assessee produced financial statements for three years, the cash book for FY 2016-17, HDFC Bank statements, the paddy-loan ledger & the CBDT’s SOP concerning demonetisation deposits.
The cash book recorded sales of paddy during October 2016 & demonstrated the corresponding availability and movement of cash.
The assessee had also obtained a specific loan facility from HDFC Bank for his paddy trading business. An amount of ₹40,32,000 had been disbursed in February 2016. The liability was reflected in the balance sheet as on 31.03.2016 & repayment towards the paddy loan was recorded during November 2016.
According to the assessee, these records established a commercially plausible nexus between the paddy trading operations, cash sales & subsequent deposits.
Existing Business- Not an Explanation Invented After Detection
The Tribunal noted that the assessee was admittedly engaged in paddy trading & had filed audited business accounts.
This was not a case where, after detection of substantial cash deposits, the assessee invented a new story of carrying on business. His business activity, purchases, sales, commission income & books formed part of the contemporaneous financial records.
The cash sales of paddy had been recorded in October 2016. The existence of the business loan, its disbursement & subsequent repayment supported the assessee’s explanation and could not be viewed in isolation.
Timing May Create Suspicion, but Suspicion Is Not Evidence
The Revenue placed considerable emphasis upon the concentration of cash sales in October 2016, immediately before demonetisation.
The Tribunal held that unusual timing could justify close scrutiny, but could not by itself establish that the sales were fictitious.
The enquiry had to examine the books, purchases, availability and movement of stock, sales, cash book & surrounding commercial circumstances. However strong the suspicion arising from timing, it could not substitute evidence disproving the recorded transactions.
Books Were Never Rejected u/s 145(3)
Significantly, the AO did not reject the assessee’s books u/s 145(3).
No material was brought on record to show that purchases of paddy were bogus, sufficient stock was unavailable, sales exceeded the quantitative stock position or the cash generated from the recorded transactions was unavailable for deposit.
Once the source of cash was reflected in the regular books, the explanation had to be tested by identifying specific defects in those records. The deposit could not be rejected merely because it occurred during demonetisation.
Landholding Was an Irrelevant Question
The Tribunal found the CIT(A)’s reliance on the absence of landholding details misplaced.
The assessee’s case was that he was a trader in paddy, not that he had cultivated paddy on his own agricultural land. Therefore, the extent of land owned by him had no direct bearing upon the availability of stock acquired through business purchases.
Similarly, absence of complete particulars of cash purchasers might require closer verification, but could not automatically make all cash sales non-genuine. Cash sales, by their nature, may not always contain the full identity particulars of every retail or spot purchaser.
Section 69A Applies to Money Not Recorded in Books
Section 69A applies where an assessee is found to own money not recorded in the books & either offers no explanation or furnishes an unsatisfactory explanation regarding its nature and source.
Here, the deposits were explained as business receipts from cash sales already recorded in the books. Before invoking s.69A, the Revenue was required to dislodge that explanation through cogent evidence.
Further, once cash sales were credited to the trading account & included in the business results, taxing the same receipts again u/s 69A—without first proving the sales fictitious—would amount to taxing the same economic receipt under two different descriptions.
ITAT’s Decision
The Tribunal held that the assessee’s books, cash book, financial statements & HDFC paddy-loan records reasonably established the source of the deposits.
Since the Revenue failed to prove fabrication of books, bogus purchases, inadequate stock or fictitious sales, the addition of ₹43,55,000 u/s 69A was deleted & the appeal was allowed.
Author’s Comments
Demonetisation deposits deserve careful examination, but the date of deposit cannot become a substitute for evidence. Once the cash is linked to disclosed business sales, the Revenue must break that link by showing absence of purchases, stock deficiency, fabricated entries or some other concrete defect.
In short, old currency deposited during demonetisation may look suspicious -but suspicion cannot thresh recorded paddy sales into unexplained money without a single grain of contrary evidence.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHENNAI
The present appeal has been preferred by the Assessee against the order dated 05.02.2025 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the Ld. CIT(A)”], arising from the assessment order dated 12.12.2019 passed by the Income Tax Officer, Ward – 2, Pudukkottai [hereinafter referred to as “the AO”], u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2017-18.
2. At the outset, it is noticed that the present appeal has been instituted by the assessee with a delay of 323 days beyond the period prescribed under the Act. The assessee has filed an affidavit setting forth the reasons and circumstances which occasioned the delay in preferring the appeal within the stipulated time, as the assessee was suffering from severe lower back pain and was admitted to the hospital on 15.03.2025. We have carefully considered the contents of the affidavit and examined the explanation tendered by the assessee. Having regard to the facts and circumstances of the case, and being satisfied that the assessee was prevented by sufficient and reasonable cause from filing the appeal within the prescribed period, we are of the considered opinion that the delay does not appear to be deliberate, intentional or attributable to any mala fide conduct.
3. It is a settled proposition of law that, while considering an application for condonation of delay, a liberal and justice-oriented approach is required to be adopted so as to advance substantial justice, particularly when no prejudice is shown to have been caused to the opposite party. In the present case, we are satisfied that sufficient cause has been demonstrated by the assessee for the delay in filing the appeal. Accordingly, the delay of 323 days in filing the present appeal is condoned, and the appeal is admitted for adjudication on merits in accordance with law.
4. The brief fact of the case emanating from the records are that the assessee is an individual, engaged in the business of trading in paddy. The assessee filed his return of income for the AY 2017-18 on 10.06.2017 by admitting an income of Rs.3,34,430/- along with tax audit report u/s.44AB of the Act. The case was selected for complete scrutiny for the reason that “large agricultural income shown in ITR and large cash deposit during demonetisation period and abnormal increase in sales and decrease in profitability as compared to preceding previous year”. Accordingly statutory notices were issued to the assessee calling for the details from time to time. During the assessment proceedings, the assessee uploaded the details including computation of income, trading account, profit and loss account, balance sheet, ledger account, details of purchase, sales, commission received, paddy loading and unloading account along with details of cash deposits for sale of paddy. On perusal of the submission made by the assessee, the AO was of the view that the assessee has failed to prove the source for the cash deposits made during demonetisation period of Rs.43,55,000/- and hence made an addition u/s.69A of the Act by passing an order u/s.143(3) of the Act dated 12.12.2019.
5. Aggrieved by the order of the AO, the assessee filed an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee submitted that the AO has erred in determining the cash deposits of Rs.43,55,000/- made during the demonetisation period as unexplained money u/s.69A of the Act. The assessee contended that the cash deposits were made out of cash sales of paddy, which is a regular business receipt and recorded in the books of account. The assessee also has received commission income, which has been reflected in the profit and loss account submitted. Further, the assessee also submitted that the cash book purchase and sales details and other records have been furnished to substantiate the explanation for source of cash deposit made. In view of the above, the assessee prayed for deleting the said addition made by the AO. On perusal of the documents and submission made by the assessee, the ld.CIT(A) rejected the claim of the assessee and confirmed the addition made by the AO by passing an order dated 05.02.2025 by holding as under:-
“6. Decision: I have considered the facts of the case, written submission and case laws relied upon by the appellant as against the observations and findings of the AO in the assessment order. The submissions and contentions of the appellant are discussed and decided as under:
6.1 Grounds No.1 to 3: In these grounds the appellant has challenged the addition worth Rs.43,55,000/- as unexplained investment. The AO has made the addition as the cash amounting to Rs. 43,55,000/- was deposited during demonetization period. The appellant stated before the AO that he was a dealer in paddy. The AO pointed out in the last para of the assessment order that there was no cash sales of paddy during previous year. Hence the source of the cash was unexplained and hence AO made the addition.
6.1.1 Now before me in the appellate proceedings, the appellant has filed written submission. The appellant has filed the details of paddy sales before me along with the cash book and profit and loss account before me. I have gone through the entire written submission. It is not clear about the land holding of the appellant. It is not known whether the appellant has sold paddy in earlier years and in later years. The names of the parties to whom paddy has been sold have not been given to me in the appellate proceedings. Entire cash book and the details of sale of the paddy are back by any evidences, vouchers and books of accounts. Hence the cash deposits of Rs. 43,55,000/- remain unexplained before me. Hence the addition of the AO is confirmed and appeal of the appellant is dismissed.”
6. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us. The ld.AR for the assessee submitted a paper book of 30 pages containing the financial statements for the AYs 2017-18, 2018-19, 2019-20 along with copy of cash book for the financial year 2016-17, HDFC Bank statement, ledger account of paddy loan account and SOP issued by the CBDT on demonetisation dated 21.02.2017. The ld.AR submitted that the assessee is carrying on the business of trading in paddy regularly. The assessee has filed his return of income regularly by showing the business income of trade in paddy along with the commission earned. Further, the ld.AR drew our attention to the loan taken from HDFC bank to page Nos. 13 and 14 of the paper book, wherein it clearly shows that loan has been taken for trading in paddy along with the repayment made in November 2016, which was disbursed to the assessee in the month of February 2016 to the tune of Rs.40,32,000/-. The said loan account shown as payable in the balance sheet of the assessee as on 31st March, 2016 (paper book page No.1). The assessee also filed a cash book showing the paddy sales made during the month of October 2016 and subsequently making the payment towards HDFC Bank paddy loan in the month of November 2016 (paper book page Nos.7, 8 and 9). In view of the above arguments, the ld.AR prayed for deleting the same.
7. Per contra, the ld.DR for the Revenue supported the orders of the authorities and submitted that the assessee has failed to prove that the sales is made only in the month of October 2016 and subsequently or earlier to the month of October 2016 no trading activity has been shown. Therefore, the additions made by the AO needs to be upheld as confirmed by the ld.CIT(A).
8. We have heard the rival submissions, perused the material available on record and carefully gone through the orders of the authorities below as well as the paper book filed by the assessee. The solitary issue arising for our consideration is whether the authorities below were justified in treating the cash deposits aggregating to Rs.43,55,000/- made by the assessee during the demonetisation period as unexplained money u/s.69A of the Act, notwithstanding the assessee’s explanation that the said deposits represented cash generated from his regular business of trading in paddy and were duly recorded in the books of account.
9. At the outset, we note that the assessee is admittedly engaged in the business of trading in paddy. The return of income for the year under consideration was filed along with the tax audit report u/s.44AB of the Act. During the course of assessment proceedings, the assessee had furnished, inter alia, the computation of income, trading account, profit and loss account, balance sheet, cash book, purchase and sales details, commission income details, paddy loading and unloading account and particulars relating to the cash deposits. Thus, this is not a case where the assessee, for the first time after detection of the cash deposits, has set up a plea of carrying on paddy trading business. The nature of the business and the maintenance of books of account form part of the regular financial records of the assessee.
10. We have also carefully examined the cash book placed at pages 7 to 9 of the paper book. The assessee has recorded therein the cash sales of paddy during October 2016 and the corresponding availability and movement of cash. The explanation of the assessee, therefore, is that the impugned deposits did not represent money received from an unidentified or extraneous source but constituted business receipts arising from sale of paddy which stood incorporated in the regular books of account. Another important circumstance which lends support to the assessee’s explanation is the banking facility availed for the paddy trading business. The material placed at pages 13 and 14 of the paper book shows that the assessee had availed a loan facility from HDFC Bank for trading in paddy and an amount of Rs.40,32,000/- was disbursed in February 2016. The outstanding liability relating to the said loan is also reflected in the balance sheet as at 31.03.2016. The cash book further records repayment towards the HDFC Bank paddy loan during November 2016. The existence of the paddy loan, its disbursement and subsequent repayment are relevant surrounding circumstances which cannot be viewed in isolation from the assessee’s explanation regarding his paddy trading operations.
11. We further notice that the principal reason for rejecting the assessee’s explanation appears to be the perceived absence or abnormality of cash sales in the preceding period and the concentration of such sales during October 2016, immediately preceding demonetisation. In our considered view, mere concentration of cash sales during a particular period, by itself, cannot be conclusive to hold that the sales are fictitious or that the corresponding cash represents unexplained money. Where the assessee is admittedly carrying on a trading business, the question has to be examined with reference to the books of account, purchases, availability of stock, sales recorded, movement of stock, cash book and other surrounding commercial circumstances. Suspicion arising merely from the timing of the transactions, however strong, cannot substitute evidence establishing that the recorded sales did not actually take place.
12. Significantly, the AO has not rejected the books of account of the assessee u/s.145(3) of the Act. There is also nothing brought on record to demonstrate that the purchases of paddy recorded in the books were bogus, that the assessee did not possess sufficient stock capable of being sold, or that the sales recorded in the books resulted in any discrepancy in the quantitative stock position. Nor has any specific defect been pointed out in the cash book demonstrating that the cash generated from the recorded business transactions was unavailable for making the impugned deposits. Once the business transactions forming the source of cash are reflected in the regular books, the explanation has to be tested on the basis of those records and cannot be rejected merely because the cash was ultimately deposited into the bank during the demonetisation period.
13. We also find that the reasoning adopted by the ld.CIT(A) proceeds partly on an erroneous premise. The ld.CIT(A) observed that the extent of landholding of the assessee was not clear. However, the case of the assessee is that he is a trader in paddy and not that the cash represented sale proceeds of paddy cultivated on his own agricultural lands. Therefore, the extent of agricultural land owned by the assessee, by itself, is not determinative of the source of cash generated from his trading activity. The relevant enquiry ought to have been whether the purchases and stock of paddy recorded in the trading books were available for the corresponding sales and whether the cash so generated was available for deposit. The ld.CIT(A) has further observed that the names of the parties to whom paddy was sold had not been furnished and that the cash book and sale details were not backed by evidence and vouchers. While absence of complete particulars of cash purchasers may call for closer examination, it cannot, without anything further, lead to the conclusion that the entire cash sales recorded in the books are non-genuine. Cash sales, by their very nature, may not always contain complete identification particulars of every retail or spot purchaser. What is material is whether the sales are supported by the overall trading records, availability of stock, books of account and consequential accounting entries. No exercise appears to have been undertaken by the authorities below to establish that the quantity allegedly sold by the assessee was in excess of the stock available with him or that the corresponding sales had not been credited to the trading account.
14. It is equally relevant that section 69A applies where an assessee is found to be the owner of money, bullion, jewellery or other valuable article which is not recorded in the books of account, if any, maintained by him, and the assessee either offers no explanation about its nature and source or the explanation offered is found unsatisfactory. In the present case, the specific case of the assessee is that the impugned amount has its source in the cash sales recorded in the regular books of his paddy trading business. Therefore, before invoking section 69A, it was incumbent upon the Revenue to examine and dislodge the assessee’s claim that the impugned cash formed part of the recorded business receipts.
15. The fact that the deposits were made during the demonetisation period undoubtedly justified scrutiny of the source thereof. However, demonetisation, by itself, does not alter the settled principles governing determination of taxable income. A cash deposit made during the specified period cannot automatically acquire the character of unexplained money merely because it consisted of cash generated immediately prior to demonetisation. The explanation furnished by the assessee must be examined on its own merits with reference to the books of account and contemporaneous evidence. In the present case, the chain of circumstances emerging from the material placed before us shows that (i) the assessee was carrying on the business of trading in paddy; (ii) books of account and financial statements were maintained and furnished; (iii) the assessee had availed a substantial HDFC Bank loan specifically in connection with the paddy trading activity; (iv) the loan of Rs.40,32,000/- had been disbursed in February 2016; (v) the cash book records paddy sales during October 2016; and (vi) repayment towards the paddy loan was made during November 2016. These circumstances, when read cumulatively, provide a commercially plausible and documentary nexus between the assessee’s regular business operations and the cash available during the relevant period.
16. The Revenue has not brought any positive material on record to establish that the entries appearing in the cash book were fabricated or that the paddy sales recorded therein were fictitious. There is no finding that the corresponding purchases were bogus or that sufficient stock was not available for effecting such sales. The books have also not been rejected. In such circumstances, merely because there was an increase in cash sales during October 2016 or because the cash was deposited during the demonetisation period would not, in our considered view, be sufficient to disregard the books of account and treat the entire amount of Rs.43,55,000/- as unexplained money.
17. We also find considerable force in the contention of the ld.AR that once the cash sales have been credited as business receipts and form part of the trading results offered to tax, treating the very same receipts again as unexplained money, without first demonstrating that the sales themselves are fictitious, would result in taxing the same economic receipt under two different characterisations. If the Revenue disputes the genuineness of the sales, it must establish the same on the basis of cogent material such as absence of stock, discrepancies in purchases, falsification of books or other evidence showing introduction of unaccounted money in the guise of sales. No such material has been brought to our notice in the present case.
18. In view of the foregoing discussion and having regard to the totality of the facts and circumstances, we are unable to sustain the conclusion reached by the AO and affirmed by the ld.CIT(A). The assessee has furnished a reasonable explanation regarding the source of the impugned cash deposits and has supported the same by the regular books of account, financial statements, cash book and the records pertaining to the HDFC Bank paddy loan. On the other hand, the Revenue has not brought sufficient material on record to demonstrate that the recorded cash sales were fictitious or that the cash deposited in the bank emanated from any source outside the books. Accordingly, we hold that the cash deposits of Rs.43,55,000/- cannot, on the facts of the present case, be treated as unexplained money u/s.69A of the Act.
We, therefore, set aside the finding of the ld.CIT(A) on this issue and direct the AO to delete the addition of Rs.43,55,000/-. The grounds raised by the assessee on this issue are accordingly allowed.
19. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the court on 10th September, 2026 at Chennai.
