Demonetization cash deposits: ITAT Orders Re-Verification for Diamond Dealer

V N Exports Vs ACIT (ITAT Ahmedabad)

Income Tax Appellate Tribunal (ITAT) Ahmedabad Bench, in a recent ruling, has provided a significant directive concerning the assessment of unexplained cash deposits made during the demonetization period. The Tribunal has instructed the Assessing Officer (AO) to re-verify the books of accounts and cash sales records of V N Exports, a dealer in diamonds, gold jewelry, and bullion, effectively setting aside an earlier order that had confirmed substantial additions to the assessee’s income.

The case pertains to the Assessment Year 2017-18, a period marked by the nationwide demonetization announcement on November 8, 2016. V N Exports had filed its Return of Income on September 8, 2017, declaring a total income of INR 38.61 lakh. However, the case was selected for scrutiny due to a notable cash deposit of INR 1.24 crore made during November 2016, a period coinciding with the demonetization drive. The Assessing Officer observed that apart from this singular large deposit, there were no other major cash deposits recorded throughout the financial year.

The assessee, in its defense, contended that a significant portion of this cash, specifically INR 1 crore, originated from cash sales conducted between 8:30 PM and midnight on November 8, 2016, immediately following the Prime Minister’s announcement. V N Exports claimed to have sold gold jewelry valued between INR 1.5 lakh and INR 1.99 lakh to more than 68 different customers during this brief window. The assessee asserted that these were genuine cash sales duly reflected in its books of accounts. To highlight the extraordinary nature of the demonetization period, the assessee contrasted these sales with previous months, noting that cash sales in May 2016 were merely INR 93,000, and in June 2016, only INR 50,000.

The Assessing Officer, however, rejected the assessee’s explanation. The AO viewed the claim of selling to over 68 customers within a mere three to four hours as highly improbable, especially for jewelry items that typically involve careful selection. The AO further suspected that the sales were deliberately kept below INR 2 lakh per customer to avoid the requirement of furnishing PAN details from purchasers. Consequently, the AO treated the entire cash deposit in the bank account as unexplained income under Section 69A of the Income Tax Act, 1961, and levied tax accordingly.

Upon appeal, the Commissioner of Income Tax (Appeals) (CIT(A)), National Faceless Appeal Centre, Delhi, upheld the additions made by the AO. The CIT(A) concurred with the AO’s assessment of improbability, stating that it was “highly improbable that within 15 minutes of the Hon’ble Prime Minister’s speech, 68 persons rush to buy jewellery from the appellant.” The appellate authority reiterated the AO’s human probability argument regarding the difficulty of serving so many customers for jewelry selection within such a short timeframe, particularly when the transactions were structured to avoid PAN requirements. The CIT(A) not only confirmed the addition as unexplained income but also ruled that it would be taxable under Section 115BBE of the Act at a higher rate of 60%, dismissing the assessee’s appeal.

Aggrieved by this confirmation, V N Exports approached the ITAT Ahmedabad. The core grounds of appeal centered on the argument that the addition was wrongly made despite the cash deposits being from genuine sales duly recorded in the books. The assessee contended that rejecting cash sales merely on “conjectures and surmises” without rejecting the books of accounts led to double taxation. Furthermore, the assessee challenged the applicability of Section 115BBE, arguing that its provisions should not apply to transactions that occurred prior to December 15, 2016, when the specific amendment came into force.

During the ITAT hearing, the senior counsel for the assessee emphasized that the issue of cash deposits during the demonetization period was “no more res integra,” implying that various Tribunal Benches had already pronounced on similar matters. The counsel presented a list of judicial precedents from different Benches of the Tribunal, including Visakhapatnam, Bangalore, Kolkata, Chennai, Mumbai, Chandigarh, Delhi, and Ahmedabad itself, all reportedly ruling in favor of taxpayers in comparable situations.

Of particular significance, the assessee’s counsel heavily relied on the decision of the very same Ahmedabad ITAT Bench in the case of M/s. Zinzuwadia & Sons (IT(SS)A No. 45/Ahd/2021). In that case, which also involved a jeweler making substantial cash sales during demonetization, the Tribunal had found the assessee’s explanation plausible. The Zinzuwadia & Sons order highlighted that the “huge rush of public to jewellers on account of demonetization announced by the Government was acknowledged by reports in the public domain.” It further noted that no infirmity was pointed out regarding the assessee’s ability to cater to a large number of customers. Crucially, the Tribunal in Zinzuwadia & Sons dismissed the AO’s comparison of sales data, reasoning that the full-fledged retail business had only started in July 2016, making comparisons with preceding periods or years invalid. Moreover, the extraordinary circumstances of demonetization, where people rushed to convert Old High Denomination (OHD) notes into gold to maintain value, made the increase in cash sales during that period entirely plausible. The Tribunal in Zinzuwadia & Sons also pointed out the AO’s “selective approach” in not questioning similar significant hikes in cash sales in other months (e.g., March 2017) while focusing solely on demonetization period sales. Since the purchases and stock available with the assessee in that case were undisputed, the question of bogus sales was deemed not to arise, and no actual excess stock was found during post-demonetization surveys.

The assessee’s counsel also cited another Co-ordinate Bench decision from Ahmedabad in Kaneiyalal Ramjibhai & Sons (ITA No. 293/Ahd/2022), along with Samir Shantilal Mehta vs. ACIT (ITA No. 42/SRT/2022), to argue against the retrospective application of Section 115BBE. These precedents asserted that the amendment to Section 115BBE came into force only on December 15, 2016, and therefore, transactions or events occurring prior to this date should not be subjected to the enhanced tax rate stipulated by the amended provision.

In response, the learned Senior Departmental Representative (DR) supported the orders of the lower authorities, urging the Tribunal to confirm them.

After hearing both sides and examining the evidence, the ITAT Ahmedabad Bench acknowledged the consistent stance of various Tribunals on the issue of demonetization-era cash deposits. The Tribunal specifically referenced its own previous decision in Zinzuwadia & Sons, which directly addressed the challenges faced by jewelers during demonetization.

The ITAT concluded that the lower authorities had failed to adequately consider the detailed submissions made by the assessee and overlooked the established judicial precedents from Co-ordinate Benches. Given this lapse, the Tribunal deemed it appropriate to remit the matter back to the Jurisdictional Assessing Officer. The AO has been directed to conduct a fresh verification of the assessee’s cash sales, books of accounts, stock details, and purchase and sales bills. Crucially, the ITAT emphasized that the assessee must be provided with a proper opportunity of hearing during this re-adjudication process.

As a result of this directive, the appeal filed by V N Exports was allowed for statistical purposes, meaning the addition is not outright deleted but the case is sent back to the AO for a fresh and thorough examination in light of the Tribunal’s observations and judicial precedents. This ruling underscores the necessity for tax authorities to conduct comprehensive investigations and consider relevant facts and legal interpretations, even in situations arising from extraordinary events like demonetization.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee as against appellate order dated 31.03.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2017-18.

2. Brief facts of the case is that the assessee is a dealer in diamond, gold jewellery and bullion. For the Asst. Year 2017-18, assessee filed its Return of Income on 08-09-2017 declaring total income of Rs.38,61,982/-. The case was selected for scrutiny assessment since huge cash of Rs.1.24 crores deposited during demonetization period. The Assessing Officer further noted that there were no major cash deposit during the year except in the month of November 2016. Further the assessee claim that the cash sales between 8.30 pm to 12 midnight on 08-11-2016 which were responsible for cash deposit of Rs.1 crore in the month of November 2016. Whereas the cash sales in the month of May 2016 was just Rs.93,000/- and in the month of June 2016, it was Rs. 50,000/-only. Thus the assessee’s claim to have sold gold jewellery of value ranging around 1.5 to 1.99 lakhs to more than 68 different customers were not accepted by the Assessing Officer, hence treated the cash deposit in bank account as unexplained income u/s. 69A of the Act and demanded tax thereon.

3. Aggrieved against the same, assessee filed an appeal before Ld. CIT(A) who has confirmed the above additions by observing as follows:

“6.3 Before me also, the appellant submitted vide submission dated 19.03.2024 that the source of cash deposit was cash sales. The appellant further contended that the sales was increased during demonetisation period and the cash deposit was fully a part of collection. Further, it was submitted that there was no concealment as the appellant fully disclosed the money deposited in old currency in return of income. It has tried to rebutted the stand taken by the AO before me. Before the AO as well as before me, the appellant made highly improbable claims regarding cash sales of Rs. 1 crore in a span of just 3 Hrs 30 minutes to 68 persons, each typically less than Rs. 2 lacs. Hon’ble Prime Minister announced the demonetisation in an unscheduled live national televised address at 8:15 PM on that very particular day (08/11/2016). I am of considered opinion that it is highly improbable that within 15 minutes of the Hon’ble Prime Minister’s speech, 68 persons rush to buy jewellery from the appellant. The AO has clearly held in para 3.4 of assessment order that the appellant sold gold jewellery of value ranging around Rs. 1.5 to 1.99 lakhs to more than 68 different persons only to avoid furnishing PAN No. of the purchasers. The AO further held that within 3 to 4 hours, no business man can sell goods to 68 different persons. This is more so, when the goods being sold were jewellery items which involves careful selection mostly by the ladies. I am of the view that the stand taken by the AO is correct and no interference is called for. In the conspectus of these material facts and considering the human probabilities, I reject the appellant’s explanation regarding cash sales on one day just in 3-4 hours running up to midnight.”

3.1. Ld. CIT(A) further confirmed the above unexplained income is taxable u/s. 115BBE of the Act and the rate of Income Tax shall be charged at 60%. Thus Ld. CIT(A) dismissed the assessee appeal.

4. Aggrieved against the same, assessee is in appeal before us raising the following Grounds of Appeal:

1. Ld. CIT (A) (NFAC) erred in law and on facts in confirming action of AG making addition of Rs. 1, 24, 00, 000 as unexplained cash deposit in the bank during demonetization period u’s 69A of the Act.

2. Ld. CIT (A) (NFAC) erred in law and on facts in confirming huge addition without appreciating the contention that amount of Rs. 1, 24, 00, 000/- deposited in cash during demonetization period was earned from cash sales

3. Ld. CIT (A) (NFAC) ought to have deleted addition especially when the transaction of genuine cash sales are deposited in the bank account and further recorded in the books of accounts which fact is neither disputed by AO nor any adverse remark regarding cash deposits is made by the Auditors

4. Ld. CIT (A) (NFAC) erred in law and on facts in confirming addition made by AO rejecting cash sales made by a retail jeweller just on conjectures & surmises without rejecting books of accounts resulting in double taxation of the same receipt once as sales & other as income from undisclosed sources.

5 Ld. CIT (A) (NFAC) erred in law and on facts in confirming action of AO in invoking provisions of Sec. 115BBE of the Act without appreciating that the same cannot apply to transactions that took place prior to 15.12.2016.

6. Levy of interest u/s 234A/234B/234C & 234D of the Act is unjustified.

7. Initiation of penalty proceedings u/s 271AAC of the Act is unjustified.

5. Ld. Senior Counsel appearing for the assessee submitted that the issue of cash deposits on demonetization period is no more res integra by the following decisions of various Benches of the Tribunal:

5.1. Thus the Lower Authorities are not correct in making the addition on account of cash deposits when the deposits is based on cash sales which is duly reflected in the books of accounts and the Ld. CIT(A) is not correct in taxing the cash deposits u/s. 115BBE of the Act without appreciating the same cannot apply to transaction that took place prior to 15-12-2016.

6. Per contra Ld. Sr. D.R. appearing for the Revenue supported the orders passed by the Lower Authorities and requested to confirm the same.

7. We have given our thoughtful consideration and perused the materials available on record. The very same Bench of this Tribunal in the case of M/s. Zinzuwadia & Sons in IT(SS)A No. 45/Ahd/2021 held that a jellwer who made cash sales on demonetization day was considered and held as follows:

“21. As is evident from a bare perusal of the above he found the assessee’s explanation plausible of having managed its affairs in such a manner so as to grab the opportunity of huge rush of public to jewellers on account of demonetization announced by the Government which was acknowledged by reports in the public domain. No infirmity in the explanation of the assessee has been pointed out to us during the course of hearing, neither do we find any in the same. Therefore we find no infirmity in the order of the Ld. CIT(A) accepting the assesses explanation with regard to allegedly unusually large number of customers catered to by the assessee on one single day.

22. As for the anomaly noted by the AO finding the sales made in the months of demonetization being abnormally/unusually high as compared to that in the corresponding months of the preceding year or preceding months of the same year, the ld. CIT(A) has dealt with the same at para 6.18 of his order as under:

6.18 So far as comparison of sales made by AO in current year as well as preceding year including month to month comparison, The contention of the AO is not found tenable for the fact that comparability of previous year’s data of appellant’s business with the current year’s data is not possible as the fullfledged retail business of the appellant was started from July, 2016 only. The said fact has not been denied by AO as well. Such retail sale business usually takes a period of 2 to 3 months for the sales to pick up. Further, as has already been held earlier, because of such unprecedented and unpredicted move of the government declaring demonetization of OHD (Old High Denomination) notes of Rs.500 and Rs. 1,000, the lack of immediate clarity with regard to the said scheme and the rife of rumors all over social and other medias, a large section of people all around the nation, in the fear of losing the value of money held by them in form of cash, rushed to the ornament showrooms for purchasing the gold ornaments / bullion so as to maintain the value of their cash in form of investment in gold. This peculiar aspect of the F.Y. 201617 makes the cash sales data of the demonetization period i.e. 08- 11-2016 to 31.12.2016 incomparable to the said data of corresponding period of F.Y.2015-16 along with the fact that the retail sales was started by the appellant only from July 2016. The said historic and peculiar aspects of F.Y.2016-17 do not make the increase in cash sales during the demonization period, in any manner, implausible and beyond belief. Furthermore, on perusal of the comparative data of Month of March for F.Y. 2016-17 and F.Y. 2015-16 as provided in the show cause notice dated 11.10.2018 as well as the Assessment Order, it is deduced that during the Month of March 2016 there was not a single amount of cash sales made by the appellant whereas in the Month of March 2017, the cash sales was Rs.1,43,50,263/-. Further, the hike in cash sales for the March’17 when compared to the preceding Month of February’17 was 1074.88%. However, no explanation was required by the AO with regard to the hike in the Month of March’17 in the show cause notice whereas the highest hike is witnessed in the said month of March’17 only based on both yearly and monthly comparison. This, calling a spade a spade, shows the selective approach that has been adopted in course of the assessment. Addition made based on such selective approach, if sustained, would be unjust, unfair and infirm in the eyes of law and therefore, such ground of addition is not found lawful and hence is not tenable.

23. The above anomaly was noted by the Ld.CIT(A) to be adequately explained by the unusual rush of public to buy jewellery during demonetization, which was acknowledged by reports in public domain. We see no infirmity in the same nor was the Ld.DR was able to point out why the explanation of the assessee was unacceptable.

Therefore the order of the Ld.DR accepting the explanation of the assessee for abnormally high sales made by the assessee during demonetization period is found to be in order.”

…………………………

26. In view of the above we do not find any infirmity in the order of the ld. CIT(A) finding merit in the explanation given by the assessee of the anomalies and discrepancies noted vis-à-vis sales made of Rs.7,88,85,082/- prior and during de-monetization, and we completely agree with the ld. CIT(A) that the purchases and stock available with the assessee having not been disputed by the AO, the question of bogus sales being made therefore, does not arise. As also the fact that no actual excess stock was found by the Department during survey conducted on the assessee post-demonetization commensurate to the bogus sales alleged to have been made by the assessee. We have no hesitation therefore in confirming the order of the Ld.CIT(A) deleting the entire sales of Rs.7,88,85,082/- on account of bogus sales.

7.2 Further the decision of Co-ordinate Bench of Ahmedabad in the case of Kaneiyalal Ramjibhai & Sons in ITA No. 293/Ahd/2022 reads as under:

14. In the instant case, admittedly assessee has only one source of income and therefore, looking into the instant facts, in our considered view the Assessing Officer has not erred in facts and law in not invoking the provisions of Section 115BBE of the Act. Further, we also observe that in the instant case, the survey was conducted on the assessee on 23.09.2016, whereas the amendment in Section 115BBE of the Act came into force on 15.12.2016 and therefore, on this count as well, the Assessing Officer has not erred in facts and in law invoking provisions of Section 115BBe of the Act which came into force only from 01.04.2017. It would be useful to club the relevant extracts of the case of Samir Shantilal Mehta vs. ACIT in ITA No. 42/SRT/2022 for A.Y. 2017-18 vide order dated 08.05.2023, wherein on identical set of facts, the ITAT made the following observations:

“8. We note that case of the assessee, under consideration is that the amendment in section 115BBF, came into force only on 15.12.2016  whereas the search was conducted on 16.08.2016 and the assessee has paid tax @ 30%. Since the search in the case of the assessee was carried out before the amendment the addition ought to have been made in terms  of the prevailing provision and therefore, the addition made by the assessing officer invoking section 115BBE, provision of which came into  force only on 01.04.2017 is not sustainable. Therefore, we note that assessee’s issue is squarely covered by the aforesaid precedents, hence we allow the appeal of the assessee.”

8. Since the Lower Authorities have not considered the submission of the assessee, we deem it fit to set aside the issue back to the file of Jurisdictional Assessing Officer and verify the cash sales made by the assessee corresponding verification of books of accounts, stock details, purchase bills and sales bills by giving proper opportunity of hearing to the assessee.

9. In the result, the appeal filed by the Assessee is allowed for statistical purpose.

Order pronounced in the open court on 23 -01-2025