Demonetization Addition Reduced for Cash Deposits Supported by Recorded Sales

Satish Chandra Vs ITO (ITAT Delhi)

Summary: The ITAT Delhi granted substantial relief to an assessee whose demonetization-period cash deposits of ₹80.92 lakh had been treated as unexplained money under Section 69A and taxed at the enhanced rate under Section 115BBE. The Tribunal observed that the assessee had produced material showing that the cash deposits originated from sales recorded in the books, although he failed to satisfactorily explain the sharp rise in cash sales immediately before demonetization. Balancing both sides, the Tribunal held that complete rejection of the assessee’s explanation was unjustified, but some unexplained element could not be ruled out. Accordingly, it restricted the addition to a lump-sum amount of ₹10 lakh on an estimated basis. The Tribunal further held that the enhanced tax rate under Section 115BBE was not applicable and directed taxation under normal provisions. Since the addition ultimately survived only on an estimated basis, penalties under Sections 270A and 271AAC were deleted. The penalty under Section 272A(1)(d) was also deleted because the CIT(A) had dismissed the appeal without adequately following principles of natural justice.

Core Issue: Whether cash deposits made during the demonetisation period could be treated as unexplained money under section 69A despite the assessee’s claim that the deposits represented recorded cash sales, whether such addition was liable to be taxed under section 115BBE, and whether penalties under sections 270A, 271AAC(1) and 272A(1)(d) could survive when the addition was ultimately sustained only on an estimated basis.

Facts: The assessee filed his return of income for AY 2017-18 on 15.07.2017 declaring total income of ₹3,04,250. The case was selected for scrutiny under CASS on account of abnormal cash deposits during the demonetisation period compared to the pre-demonetisation period. During the assessment proceedings, the AO examined cash deposits made in various bank accounts during the demonetisation period and other credits appearing in the bank accounts. According to the assessee, the cash deposits were generated from business sales duly recorded in the books of account and supported by stock records and purchase records. However, due to alleged non-compliance with notices, the assessment was completed ex parte under section 144. The total amount questioned by the AO comprised cash deposits of ₹49,67,500 during demonetisation and other cash and credit entries of ₹31,24,608, aggregating to ₹80,92,108.

AO’s Findings: The AO observed that the assessee failed to satisfactorily explain the source of cash deposits and various credits appearing in the bank accounts. According to the AO, the assessee had not furnished sufficient evidence to establish the genuineness of the cash deposits and other credits. Since the assessment was framed under section 144, the AO treated the entire amount of ₹80,92,108 as unexplained money under section 69A. The AO held that the cash deposits and other credits represented income from undisclosed sources and accordingly added the entire amount to the assessee’s income. The assessed income was determined at ₹83,96,360 as against the returned income of ₹3,04,250. The AO further subjected the addition to tax under section 115BBE and simultaneously initiated penalty proceedings under sections 270A and 271AAC(1). Separate penalty proceedings under section 272A(1)(d) were also initiated for non-compliance with statutory notices.

CIT(A) Findings: The CIT(A) did not examine the merits of the addition or penalties. All four appeals were dismissed primarily on the ground that they were filed beyond the prescribed limitation period. The CIT(A) declined to condone the delay and consequently refrained from adjudicating the substantive grounds relating to the addition, applicability of section 115BBE and levy of penalties.

ITAT Findings on Quantum Addition: The Tribunal undertook an independent examination of the material on record. It found that the assessee had made a genuine effort to explain the cash deposits as arising from sales recorded in the regular books of account. The assessee had also produced supporting material such as stock registers and purchase records. Therefore, the Tribunal held that the assessee had prima facie discharged the initial burden of explaining the source of the deposits. However, the Tribunal simultaneously observed that the assessee failed to provide a convincing explanation for the substantial and disproportionate increase in cash sales immediately preceding demonetisation. This unusual spike in cash sales created doubts about the complete genuineness of the explanation offered. On the other hand, the Revenue was also unable to completely demolish the assessee’s explanation because the stock records and purchase records broadly supported the existence of business activity and sales. Thus, neither side could establish its case completely. Considering the peculiar facts, the Tribunal held that some unexplained element could not be ruled out, but sustaining the entire addition of ₹80.92 lakh would be excessive and unjustified. Accordingly, to balance the equities and cover possible leakages, the Tribunal restricted the addition to a lump-sum amount of ₹10 lakh, specifically observing that such estimation was made on the facts of the case and should not be treated as a precedent.

ITAT Findings on Section 115BBE: The Tribunal held that even the sustained addition of ₹10 lakh could not be subjected to tax under section 115BBE. Relying upon the judgment of the Madras High Court in S.M.I.L.E. Microfinance Ltd. vs. ACIT, it was held that the enhanced taxation mechanism introduced through the amended provisions of section 115BBE would apply only to transactions undertaken on or after 01.04.2017. Since the dispute related to cash deposits during the demonetisation period in FY 2016-17, the higher tax rate under section 115BBE was held to be inapplicable. The AO was directed to tax the sustained addition under the normal provisions of the Act.

ITAT Findings on Penalty under Section 270A: The Tribunal observed that the addition ultimately sustained was based purely on estimation and not on any conclusive finding of concealment or misreporting. Penalty under section 270A requires clear evidence of under-reporting or misreporting of income. Since the quantum addition itself survived only on an estimated basis, there was no foundation for imposing penalty. Accordingly, the penalty under section 270A was deleted.

ITAT Findings on Penalty under Section 271AAC(1): The Tribunal noted that penalty under section 271AAC is computed as a percentage of tax payable under section 115BBE. Since the Tribunal had already held that section 115BBE was not applicable, the very statutory basis for the penalty disappeared. Therefore, the penalty levied under section 271AAC(1) was deleted.

ITAT Findings on Penalty under Section 272A(1)(d): The Tribunal found that the CIT(A) had dismissed the appeal merely on technical grounds of delay without granting an adequate opportunity to explain the delay. Such action was held to be contrary to the principles of natural justice. Taking into account the overall facts and circumstances, the Tribunal held that the penalty imposed for non-compliance with notices under section 272A(1)(d) was also liable to be deleted.

Case Law Relied Upon: S.M.I.L.E. Microfinance Ltd. vs. ACIT.

Relevant Paras: Paras 8 to 14.

Held: The Tribunal restricted the addition under section 69A from ₹80,92,108 to ₹10 lakh on an estimated basis, directed that the addition be taxed under the normal provisions and not under section 115BBE, and deleted penalties levied under sections 270A, 271AAC(1) and 272A(1)(d). Consequently, the quantum appeal was partly allowed and all three penalty appeals were allowed

FULL TEXT OF THE ORDER OF ITAT DELHI

The above captioned four appeals are preferred by the assessee against the order dated 09.01.2026, passed by Learned Commissioner of Income Tax (Appeals)/NFAC, Delhi [hereinafter referred to as ‘ld. CIT(A)/NFAC], under section 250 of the Income Tax Act, 1961 [hereinafter referred to as, ‘the Act’] against the assessment order dated 13.12.2019 passed u/s 144 of the Act by the ITO, Ward-54(4), Delhi (ITA No.1231/Del/2026), penalty order dated 15.03.2022 passed u/s 270A of the Act by the NFAC, Delhi (ITA No.1232/Del/2026), order dated 25.11.2021 passed u/s 272A(1)(d) of the Act by the NFAC, Delhi (ITA No.1233/Del/2026) and penalty order dated 02.03.2022 passed u/s 271AAC(1) of the Act by the NFAC, Delhi (ITA No.1234/Del/2026) for A.Y. 2017.18.

2. Since the above captioned appeals were heard together and the facts in issues are identical, all the four appeals are being disposed of by this common order for the sake of convenience and brevity.

3. Brief facts of the case are that the return of income for the A.Y. 2017-18 was filed by the assessee electronically on 15.07.2017 declaring total income of Rs. 3,04,250/-. It was electronically processed under section 143(1) of the Act at returned income and the case was selected for Scrutiny through CASS on account of Abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period.

4. In absence of any responses to the notices the learned AO passed the assessment order u/s 144 of the Act, on the basis of material available on record and on the basis of reply filed by the assessee during the course of assessment proceedings. In view of the same, the amount of cash deposited in various bank accounts during demonetization period and other cash and credit entries during F.Y. 2016-17 collectively to tune of Rs. 80,92,108/- was considered to be unexplained money from undisclosed sources and accordingly added to his income u/s 69A of the Act, 1961 for the year under consideration. The learned AO in his assessment order assessed an income of Rs. 83,96,360/- and charge interest as per provisions of the Act. Penalty proceedings u/s 271AAC of the I.T. Act and penalty proceedings u/s 270A(2) of the I.T. Act are separately initiated.

5. When the aggrieved assessee went in appeal before the ld. CIT(A), the ld. CIT(A) dismissed the four appeals with the observation that “on account of being filed beyond the period prescribed under the Act, therefore, I am not expressing any opinion on merit of the case”. The aggrieved Assessee is before us in ITA 1231/Del/2026 with the following grounds:

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in passing the impugned assessment order without assuming jurisdiction as per law and without complying with the requisite procedure in accordance with law.

2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not condoning the delay in filing of first appeal and that too without providing any reasonable opportunity of being herd to the assessee and in gross violations of principles of natural justice.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making aggregate addition of Rs.80,92,108/- (Rs. 49,67,500/-on account of cash deposits in bank account and Rs.31,24,608/- on account of other credits in the bank account) by treating it as income of assessee u/s 69A and charging the same to tax u/s 115BBE and that too by recording incorrect facts and findings and without considering the submissions of the assessee and without observing the principles of natural justice.

4. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in passing the impugned assessment order dated 13-12-2019 is illegal, bad in law, void ab-initio and against the facts and circumstances of the case and without following the principles laid down u/s 144 of the Act and in gross violation of principles of natural justice and barred by limitation also and with providing adequate opportunity of being heard.

5. That having regard to facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in taxing the addition of Rs. 80,92,108/- made u/s 69A as per the amended provisions of section 115BBE i.e., at the high rate of tax of 60% which is bad-in-law in view of the decision of Hon’ble Madras High Court in the case of S.M.I.L.E MicroFinance Ltd. vs. ACIT, WP(MD) 2078 of 2020 dated 19.11.2024.

6. That having regard to the facts and circumstances of the case, Ld. AO has erred in law and on facts in charging interest u/s 234B of the Income Tax Act, 1961.

7. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

6. Before us, the learned counsel for the assessee vehemently submitted that the cash deposits in the bank account during the period of demonetization were out of sales and duly recorded in the books of account.

7. Per contra, the ld. DR relied on the orders of the authorities below.

8. We have heard the rival submissions and have perused the relevant material on record. In the instant case, we find that the assessee has attempted to prove the entire cash deposit during demonetization period as being out of sales and recorded in the books of account. Although the assessee, prima facie, appears to have discharged its onus of explaining the cash deposits, it’s contentions to prove the cash deposits during the demonetization period, hardly deserves to be accepted in entirety especially when the assessee could not give satisfactory explanation for the disproportionate increase in cash sales just before demonetization period. On the other hand, the Revenue’s endeavour to disbelieve the assessee’s contention that cash deposits are supported by stock register, purchase records, cannot be fully justified. In this factual matrix, there is some element of failure to explain some of the cash sales, cannot be ruled out. Be that as it may, it is deemed appropriate, in larger interest of justice, that a lump-sum addition of Rs. 10 lakhs only would be just and proper with a rider that the same shall not be treated as a precedent, so as to cover all loopholes. The assessee’s ground on this count is partly allowed.

9. In so far as levy of tax at a higher rate under section 115BBE of the Act is concerned, we find that the Madras High Court in the Writ petition in the case of S.M.I.L.E. Microfinance Ltd. Vs. ACIT, W.P. (MD) No.2078 of 2020 & 1742 of 2020, dated 19.11.2024 (Madras) has held that the impugned statutory provision would come into effect on the transaction done on or after 01.04.2017 only. Accordingly, we direct the AO to tax the addition under normal provisions of tax and not under the provisions of 115BBE.

10. In the result, appeal of the assessee in ITA No. 1231/DEL/2026 is partly allowed.

ITA No.1232/Del/2026 ; ITA 1233/Del/2026 and 1234/Del/2026:

11. The ITA No.1232/Del/2026 relates to penalty u/s 270A; ITA 1233/Del/2026 relates to penalty u/s 272A(1)(d) and ITA 1234/Del/2026 relates to penalty u/s 271AAC(1).

12. We have herein above estimated an income of Rs 10 lakh as income of the assessee for the instant year and have deleted the application of the provisions of section 115BBE. In such facts and circumstances the penalty levied under section 270A for misreporting or underreporting of income cannot be imposed when income is added solely on an estimate basis. Penalties require concrete evidence of misreporting, not merely an ad-hoc or estimated addition to profits. Under such situation, the above penalty levied for misreporting u/s 270A(9) are not sustainable in the eyes of law. The same is deleted.

13. The penalty is leviable u/s 271AAC at 10% of the tax payable under 115BBE(1)(i). We have herein above deleted the invocation of the provision of section 115BBE. In such factual matrix, the penalty levied u/s 271AAC(1) is not sustainable in the eyes of the law and is accordingly deleted.

14. The penalty levied u/s 272A(1)(d) for non-compliance of notices. We find that the CIT(A) has dismissed the appeal on account of delay in filing of appeal before him. We are of the considered view that the dismissal of appeal on account of delay appears to be unwarranted on account of the fact that the CIT(A) did not adhere to the principal pf natural justice, of providing adequate opportunities to explain the delay in filing appeal. Taking into consideration the entire facts of the case, we are of considered view that penalty levied u/s. 272A(1)(d) of the Act is liable to be deleted. Ground is allowed.

15. In the result, all the four appeals are decided as under:

In ITA Nos.1231/Del/2026 is partly allowed while appeal in ITA 1232, 1233 & 1234/Del/2026 are allowed.

Order was pronounced in the open court on 04.06.2026.