Gurdas Mal Arora Vs Assessing Officer (ITAT Lucknow)
Demonetisation Cash Deposits Upheld as Unexplained — ITAT Lucknow Confirms Addition u/s 69A & Salary Disallowance u/s 40A(2)(b)
The Lucknow Bench of the ITAT dismissed the assessee’s appeal for AY 2017-18 and upheld the addition of ₹1.93 crore as unexplained money on account of cash deposits made during the demonetisation period, along with disallowance of ₹23.06 lakh under section 40A(2)(b).
Key findings of the Tribunal were as follows:
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Cash deposits during demonetisation not explained: The assessee, a jeweller, claimed that large cash deposits (₹1.93 crore) represented cash sales made just before demonetisation. However, the AO found abnormal patterns—sales and purchases deliberately kept below statutory thresholds (₹20,000, ₹2 lakh etc.) to avoid penal provisions, lack of contemporaneous books, and failure to substantiate opening stock, purchases, and sales with credible evidence.
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Rejection of books justified: The AO validly rejected the books under section 145(3). Once books were rejected, the Tribunal held that book entries showing cash sales could not be relied upon to explain deposits of specified bank notes.
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Human probability test applied: Relying on Durga Prasad More and Sumati Dayal, the Tribunal held that the assessee’s explanation of sudden heavy cash sales immediately before demonetisation was beyond human probabilities and appeared to be a device to launder unaccounted cash.
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Addition under section 69A sustained: The cash deposits were rightly treated as unexplained money taxable under section 69A read with section 115BBE. Arguments of double taxation and reliance on other demonetisation-related precedents were rejected as distinguishable on facts.
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Salary disallowance u/s 40A(2)(b) confirmed: Partial disallowance of salary paid to related persons was upheld. The Tribunal clarified that taxability of salary in recipients’ hands or genuineness of payment is not decisive; what matters is whether the expenditure is excessive or unreasonable vis-à-vis fair market value and business needs.
Accordingly, the ITAT found no infirmity in the orders of the AO and CIT(A) and dismissed the assessee’s appeal
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Gurdas Mal Arora Vs Assessing Officer (ITAT Lucknow)
(A). The present appeal has been filed by the assessee against the order dated 31.10.2023 passed by the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2017-18. The grounds of appeal of the assessee are as under: –
“1. That the Id.AO has erred in making addition u/s 69A read with section 115BBE of the Income Tax Act, 1961 as well as Id.CIT(A) has also erred in confirming the addition u/s 68 of the Act when the books of accounts have already been rejected u/s 145(3) of the IT Act, 1961.
2. That the Id.AO has erred in rejecting the books of account without issuance of show-cause notice to the appellant before rejection of books of account u/s 145(3) of the Income Tax Act, 1961 making the order itself void-ab-initio by violating the principle of natural justice.
3. That the Id.CIT(A) has erred in confirming addition of Rs.1,93,48,000/- u/s 68 of the IT Act, 1961 rws 115BBE of the IT Act, 1961.
4. That the Id.AO as well as Id.CIT(A) has erred in confirming addition of Rs.1,93,48,000/- u/s 68 of the IT Act, 1961 rws 115BBE of the IT Act, 1961 leading to double taxation as the cash deposit has already been considered in the return of income.
5. That the Id. CIT(A) has erred in not appreciating the fact that the sale has been made out of the stock available with the appellant out of which the major stock is out of opening stock and during the year of purchase made from registered dealer and only minor part of purchase in stock amounting to Rs.15,88,468/- has been made in cash.
6. That the Id.AO has erred in making addition of Rs.23,06,000/- u/s 40A(2)(b) of the Income Tax Act, 1961.
7. The the Id.CIT(A) has erred in not providing the proper and adequate opportunity of hearing to the appellant in the form of virtual hearing as requested by the appellant.
8. That the order passed by the Id.AO as well as Id.CIT(A) is arbitrary, prejudicial and unlawful without proper appreciation of facts and position of law.
9. That the appellant craves leave to introduce, modify or withdraw any ground of appeal with kind permission of your honour.”
(B) In this case, assessment order dated 31.12.2019 was passed u/s 143(3) of the Income Tax Act, 1961 (“Act” for short) wherein the assessee’s total income was assessed at Rs.2,90,18,740/- as against the returned income of Rs.73,64,740/-. In the aforesaid assessment order, an addition of Rs.1,93,48,000/- was made on account of cash deposit made by the assessee in the bank. Further, an addition of Rs.23,06,000/-by way of disallowance u/s 40A(2)(b) of the Act was also made, disallowing part of the salary paid by the assessee to persons specified u/s 40A(2)(b) of the Act. The relevant portion of the assessment order is reproduced as under: –
