ITAT Deletes Demonetization Cash Deposit Addition as Sales Were Recorded in Books

ITO Vs Greyline Knitwear (ITAT Chandigarh)

In the case of Income Tax Appellate Tribunal involving Assessment Year 2017-18, the Revenue challenged the order of the Commissioner of Income Tax (Appeals), NFAC, deleting an addition of Rs.82.40 lakh made by the Assessing Officer on account of cash deposits during the demonetization period.

The assessee, a resident firm engaged in manufacturing and trading of garments and hosiery goods, had deposited Rs.82.40 lakh in cash during demonetization. During scrutiny assessment, the assessee explained that the deposits were sourced from cash sales and furnished the cash book in support. The total sales during the relevant year were Rs.23.01 crore, including cash sales of Rs.1.53 crore, as compared to total sales of Rs.11.86 crore and cash sales of Rs.90.47 lakh in the preceding year.

The Assessing Officer observed that the assessee had made regular cash deposits during October 2016 and had also withdrawn cash shortly thereafter. It was further noted that the closing cash-in-hand during October 2016 increased substantially to Rs.107.54 lakh compared to Rs.6.84 lakh in the corresponding period of the earlier year. The Assessing Officer alleged manipulation of cash-in-hand and noted that the cash sale bills did not contain names or addresses of customers. Treating the deposits as unexplained cash credit under Section 68, the Assessing Officer added Rs.82.40 lakh to the assessee’s income.

On appeal, the CIT(A) deleted the addition. It was noted that cash sales constituted 6.67% of total sales during the relevant year as against 7.26% in the preceding year. The CIT(A) also observed that the Assessing Officer had neither doubted the purchases nor rejected the books of account. VAT returns reflecting the sales turnover had also been accepted by the state revenue authorities. Considering the nature of the assessee’s business, higher sales during the winter season in September and October were found to be reasonable. The CIT(A) held that the cash deposits represented sales proceeds and could not be taxed again.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

1. Aforesaid appeal by revenue for Assessment Year (AY) 2017-18 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 12-09-2025 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) of the Act on 22-12-2019. The sole grievance of the revenue is deletion of addition of Rs.82.40 Lacs as made by Ld. AO on account of cash deposit during demonetization period. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident firm is stated to be engaged in manufacturing and trading of garments and hosiery goods.

2. To verify the sources of cash deposits of Rs.82.40 Lacs during demonetization period, the return of income of the assessee was scrutinized. The assessee, inter-alia, stated that the deposits were sourced out of cash sales. In support, cash book was furnished. The total sales during this year was Rs.23.01 Crores out of which cash sales was for Rs.1.53 Crores. In immediately preceding year, total sales were for Rs.11.86 Crores out of which cash sales were for Rs.90.47 Lacs. The sales increased substantially and the deposits were sourced out of cash sales. However, Ld. AO noted that the assessee had regular cash deposits from 01-10-2016 to 28-10-2016. The cash was deposited on 02-11-2016 and again withdrawals were made on 03-11-2016 to 05-11-2016 which would reflect that the assessee was not having sufficient cash-in-hand as stated by him. The closing cash-in-hand during October, 2016 increased substantially to Rs.107.54 Lacs whereas the same in the corresponding period of last year was Rs.6.84 Lacs. Therefore, it was alleged that the assessee manipulated its cash-in-hand. The cash sales bills as furnished by the assessee did not bear the name of the party or their addresses. Finally, the impugned deposits were alleged to be unexplained cash credit u/s 68 and added to the income of the assessee. Aggrieved, the assessee preferred further appeal.

3. The Ld. CIT(A) accepted the claim of the assessee on the ground the percentage of cash sales in this year was 6.67% of total sales as against 7.26% in earlier year. The Ld. AO did not doubt the purchases and the books of accounts were not rejected. There could be no sales without corresponding purchases. The assessee filed VAT returns which reflected sales turnover which was accepted by state revenue authorities. During winter season, the sales would be high in September & October considering the nature of assessee’s business. The Ld. AO tried to put himself into the shoes of the assessee by questioning the deposits and withdrawals. The impugned deposits represent sales proceeds which could not be taxed again. Finally, the impugned addition was deleted. Aggrieved, the revenue is in further appeal before us.

4. We are of the considered opinion that the impugned issue has been clinched in correct perspective by Ld. CIT(A). The findings of Ld. CIT(A) remained to be controverted before us. The percentage of cash sales in this year is significantly lesser than percentage of cash sales in earlier year. The Ld. AO has not doubted the purchases and the books have not been not rejected. There could be no sales without corresponding purchases. The assessee had filed VAT returns which reflected sales turnover which was accepted by state revenue authorities. The cash sales have been reflected as sales turnover and adding the same again would amount to double taxation which is impermissible. Therefore, we find no reason to interfere in the impugned order.

5. The appeal stands dismissed.

Order pronounced on 6t^h April, 2026.