Santhosh Thanmal Mutha Vs ITO (ITAT Mumbai)
Cash Sales Cannot Become Unexplained Cash Merely Because They Were Deposited After Demonetisation: Mumbai ITAT Deletes ₹61.44 Lakh Addition
Summary: The deposit of cash during the demonetisation period may invite scrutiny, particularly when the amount is substantial. But can the same receipts be treated as recorded business sales for computing profit and also as unexplained cash credits under section 68? The Mumbai Bench of the Income Tax Appellate Tribunal answered this question in favour of a jewellery trader and deleted an addition of ₹61,44,000.
The cash deposits and the Assessing Officer’s objection
Santhosh Thanmal Mutha carried on the business of trading in gold, gold bars and jewellery as proprietor of Sai Santosh Jewellers. He had taken over the business previously run by his father and filed his return for assessment year 2017–18 declaring income of ₹7,25,850.
During scrutiny, the Assessing Officer questioned cash deposits of ₹61.44 lakh made in November 2016, shortly after the demonetisation announcement. The assessee explained that the deposits came from jewellery sales recorded in his books before 8 November 2016. In particular, he pointed to cash sales of ₹65,21,850 between 25 October and 7 November 2016, which, according to him, had generated sufficient cash for the deposits.
The Assessing Officer was unconvinced. He considered the deposits unusually large when compared with the earlier banking pattern and suspected that the sales had been shown to accommodate the cash. He rejected the books under section 145(3), added ₹61.44 lakh under section 68, and applied the 60% rate under section 115BBE. The Commissioner (Appeals) upheld the addition, citing concerns about the cash flow, record keeping and absence of customer details.
What the assessee placed on record
Before the appellate authorities, the assessee relied on his audited accounts, sales and purchase bills, sales summaries, stock and quantity records, cash book, bank statements and VAT returns. His explanation was that the sales were part of the regular turnover reflected in the profit and loss account, and that the related business profit had already been offered to tax.
He also explained that the retail invoices were for amounts below ₹2 lakh and that jewellery was handed to customers at the shop. The absence of courier or transport records, therefore, did not show that the goods had not been delivered. The assessee argued that the authorities had not identified a specific defect in the recorded purchases, sales or movement of stock that would justify treating the sales as fictitious.
An alternative ground raised a further difficulty with the assessment. If the deposits were to be treated as unexplained credits while the corresponding sales continued to form part of turnover, the same receipts would effectively be counted twice. The assessee sought a corresponding reduction of sales if the section 68 addition was sustained.
Tribunal accepts the link between sales and deposits
The Tribunal examined the business records and found that the assessee had issued sales invoices charging VAT and had reported the transactions in periodic VAT returns. The records before the first appellate authority also included material showing purchases, sales and quantity movement. In the Tribunal’s view, the Assessing Officer and the Commissioner (Appeals) had proceeded on a presumption that the cash sales were fictitious without bringing supporting material to establish that conclusion.
The Bench also addressed the reliance placed on an irregular deposit pattern. This was the assessee’s first year operating the business taken over from his father. The Tribunal considered it inappropriate to treat the banking pattern, by itself, as a reliable basis for rejecting the sales. Nor did it accept the absence of verified customer particulars as sufficient to disbelieve retail invoices below ₹2 lakh when no applicable requirement to collect those particulars had been shown.
Most significantly, the Tribunal held that cash receipts already accepted as trading receipts could not simultaneously be treated as unexplained cash credits without disturbing the corresponding sales. On the facts before it, the available cash balance generated from the recorded sales explained the deposits of ₹61.44 lakh. The addition under section 68 was deleted, and the assessee’s appeal was allowed. With the principal addition gone, the alternative grounds, including the challenge concerning the section 115BBE rate, became academic and were not decided.
Author’s comment
This decision turns on the documented link between cash sales, cash in hand and subsequent bank deposits. The Tribunal did not hold that every deposit made after demonetisation is explained merely because an assessee enters sales in the books. Here, invoices, audited accounts, stock movement and VAT reporting supported the claim, while the authorities had not established why those particular sales should be rejected.
The ruling also highlights a practical inconsistency in additions of this kind. If the recorded sales remain in turnover, treating their very proceeds as a separate unexplained credit requires a sound factual basis; suspicion arising from the timing or size of a deposit cannot supply that basis on its own.
Cases Discussed
- Lalit R. jagawat (HUF) vs. DCIT, ITA No.634/Mum/2025
- DCIT vs. HB Estate Developers Limited, ITA No. 5535/Del/2024, (Delhi ITAT)
- CIT versus S.D. Investment and Trading Company, 306 ITR 31, (Bombay High Court)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal has been filed by the Assessee against the order under section 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017–18, arising out of the assessment order under section 143(3) of the Act.
2. The appellant has raised the following grounds of appeal:
1. On facts and circumstances of the case and in Law, Ld. CIT(A) erred in confirming the rejection of appellant’s books of account u/s.145(3), since the proposal to reject the books of account was not made in the show-cause notice;
2. On facts and circumstances of the case and in Law, Ld. CIT(A), without any justification and without pointing any specific defect in recorded entries, erred in confirming the rejection of appellant’s audited books of account u/s.145(3) of the Act;
3. On facts and circumstances of the case and in Law, Ld. CIT(A) erred in confirming the addition u/s.68 of cash deposits made in bank account during demonetization period of Rs.61,44,000/-, though the source of cash is out of realisation of sales of jewellery made in retail jewellery shop and credited in audited P & L account;
4. The Ld. CIT(A), before confirming the addition u/s.68 of cash deposits made in bank account of Rs.61,44,000/-, ought to have considered the understated vital facts, being:
a) The source of cash deposits is out of realisation of sale proceeds of jewellery made in normal course of business in appellant’s retail jewellery shop;
b) The appellant had furnished exhaustive documents such as sales bills, corresponding purchase bills, monthly summary of sales and purchase, Quantity tally, stock register, cash book, bank statements, party-wise details of purchase, VAT returns, etc. to establish the sales of jewellery/ornaments and realisation of sale proceeds;
c) The addition had been made on the basis of assumption and surmise, without carrying any enquiry or investigation and without bringing any contrary material/evidence on record;
5. Without prejudice to Ground Nos. 3 and 4, Ld. CIT(A) having confirmed the addition u/s.68 of cash deposits corresponding to recorded cash sales of Rs.61,44,000/-, ought to issue directions to the AO to exclude/reduce the sales credited in audited P & L account and to allow the business loss of equivalent amount;
6. Without prejudice, the tax computed by the AO @ 60% is grossly erroneous, since the amendment to Sec.115BBE proposed under Taxation Laws (Second Amendment), Act, 2016 had been granted the assent of the President of India on 15/12/2016 and the amendment to Sec.115BBE shall apply w.e.f. 15/12/2016.
3. The brief relevant facts of the case are that, Assessee is an individual, engaged in the business of trading of gold, gold bars and jewellery, being proprietor of M/s Sai Santosh Jewellers, filed his return of income under section 139(1) on 30th October 2017, declaring the total income of ₹7,25,850/-. The return of income was selected for the complete scrutiny through CASS, vide issue of notice under section 143(2), dated 09-08-2018. Subsequently, the assessing officer has issued query letters under section 142(1), but, the Assessee failed to comply with those notices. Finally, a show cause notice issued on 19-12-2018, asking to submit details and explanation for the cash deposits of ₹61,44,000/- into bank account during the demonetisation period from 08-11-2016 to 30-11-2016, the Assessee furnished response on 10-02-2017 stating that source of cash deposits were cash sales effected by him during the period up to 08–11–2016. Considering that, AO, observed that there was no cash deposits during the year till 10–11–2016, suddenly between 11–11–2016 to 19–11–2016, deposited huge cash of ₹61,44,000/- in bank account. That being not ordinary cash deposit pattern, noticed complete irregularity in cash deposits during the whole year, that do not demonstrate genuine business receipts, rather, the sales shown by the Assessee is manipulated to adjust the corresponding cash deposits into bank account. Accordingly, the books of accounts were also incorrect, and rejected holding that Assessee failed to justify the cash deposits, by proper explanation for cash deposit of Rs. 61,44,000/- thus, treated as unexplained cash credit u/s 68 of the Act, and levied tax u/s 115BBE of the Act @ 60%.
4. The Assessee, being aggrieved by the assessment order preferred an appeal before the Learned Commissioner of Income Tax (Appeals), raising following grounds of appeal:
1. The learned AO has grossly erred both in law as well as on facts in making addition of Rs. 61,44,000/- u/s 68 which is completely unjustified and uncalled for.
2. The learned AO has further failed to appreciate that the cash of Rs. 61,44,000/- were deposited out of sale proceeds of jewellery which were effected before 08/11/2016 and were in high denomination notes, therefore additions made by disbelieving the same and rejecting the books of accounts is completely unjustified and uncalled for.
3. The learned AO has further erred in not appreciating the facts that the appellant has maintained proper books of accounts including purchases, sales, stock register etc. which were audited and VAT returns were also filed. Therefore, additions made by rejecting the Books of Accounts and rejecting the cash sales is completely unjustified and uncalled for.
4. The learned AO has further failed to appreciate that there was opening cash balance of Rs. 63,93,311/- as on 08/11/2016 out of which Rs. 61,44,000/- was deposited therefore additions made for deposit of cash out of opening balance is completely unjustified and uncalled for.
5. The learned AO has further erred in not appreciating the facts that the cash deposited were duly explained by the appellant. Therefore, the additions made for cash deposited of Rs. 61,44,000/- is completely unjustified and uncalled for. Therefore, tax levied u/s 115BBE @ 60% is also unjustified.
5. Before the Learned Commissioner of Income Tax (Appeals), the Assessee has furnished following documents:
- Tax audit report
- Audited balance sheet and profit and loss account for the year and 31st March 2017
- Inventory statement
- Sales summary
- Sales bills
- Purchase bills
- Purchase summary
- Month wise details of cash, sales, and credit sales.
6. Through aforementioned documents, Assessee explained that sales in the month of October, 2016 increased due to marriage season starts during November, 2016, due to demonetisation announcement at 8 PM. People rushed to the jewellery shops for purchase of gold/gold ornaments between 8 PM to 12 midnight within time period of four hours. Further submitted that entire cash deposits represents the cash sales made to retail customers in tune of less than 2 lac, recorded such sales into regular books of accounts, appearing in profit and loss account, reported in the return of income with profit, and offered such profit for taxation in the return of income. In support of cash sales, he has furnished sales bills, cash, Book, stock register, audited books of accounts, bank statements and contended that there was sufficient cash balance available in the cash Book before 8-11-2016, as the cash sales between 25-10-2016 to 07-11-2016 were Rs.65,21,850/- and same has been used for cash deposit of Rs.61.44 lac into the bank account. The Assessee claimed that entire sales affected have been reported in VAT returns, deposited VAT collection to VAT Dept, having VAT registration certificate effective from 08/07/2016. Prior to that date said jewellery shop was operating by Assesse’s father Shri Thanmal Mutha. Later on, during the year, looking to the old age of the father, the shop with all stock in trade available at the year end on 31st March 2016 inherited to Assessee for future operation and at his disposal.
7. The learned Commissioner of Income Tax (Appeals) after examination, upheld the rejection of books of accounts u/s 145(3), and sustained the addition u/s 68 of ₹61,44,000/- with findings that Assessee failed to explain cash flow pattern, lack of consistency in record keeping and absence of customer details.
8. The Assessee being aggrieved by the order of Ld. CIT(A), is in appeal before the Tribunal. Before us, the learned authorised representative of the Assessee reiterated the arguments, furnished documents and contended that sales, purchases, stock summary with quantity movement etc have not been doubted by Commissioner of Income Tax, Appeals.
9. The Ld. AR invited our attention to the accumulation of cash through cash sales of Rs.65,21,850/-(PB-28) effected between 25-10-2016 to 07-11-2016, just prior to date of demonetisation announcement on 08–11–2016 and used that accumulated cash for deposition into Kotak Mahindra bank account number 9412394424 during that period.
10. The Ld. AR further pointed out that learned assessing officer did not pointed out any specific defect or error in the books of accounts, moreover, it is settled that, without pointing out specific defect or error in the books of accounts, the provisions of section 145(3) cannot be invoked.
11. During the hearing, it is also submitted that recorded sales are part of audited profit and loss account with disclosure in the return of income, without disturbing that, simultaneously, it cannot be treated as an unexplained cash credit under section 68 of the Act.
12. Having placed reliance of following judgments, stated that consistently held that addition u/s 68 of the Act for cash deposits against recorded and declared sales cannot be made:
I. Lalit R. jagawat (HUF) vs. DCIT, ITA No.634/Mum/2025
II. DCIT vs. HB Estate Developers Limited, ITA No. 5535/Del/2024, (Delhi ITAT)
III. CIT versus S.D. Investment and Trading Company, 306 ITR 31, (Bombay High Court).
13. Without prejudice to ground numbers 1 to 4, Assessee further urged that in case addition u/s 68 for cash deposits of ₹61,44,000/- is sustained, than Assessee would be allowed to reduce corresponding sales from total sales reported in the profit and loss account, which would result into business loss and same shall be available for set of with the income from other sources, being addition and section 68 of the Act.
14. Per contra, learned DR relied upon the order of lower authorities.
15. We have carefully considered the rival submissions, perused the material on record, gone through the judgements relied upon by the Assessee. We may here in observe that Assessee has continued the inherited gold trading jewellery business and that being his first year of operation, before the assessing office did not furnish comparative cash chart. While, before First Appellate Authority, furnished documents in support of his business operations, VAT returns, cash sales bills containing VAT collection, quantity summary etc., to support the genuineness of business operations, movement of the quantity through purchases, sales, cash sales statement and summary of cash deposits into bank account.
16. We find that Assessee issued sales invoices to the customers by charging VAT at the prescribed rate of state VAT, reported sales, VAT liability, VAT credit on purchase invoices, in his periodic VAT returns filed to VAT department.
17. The delivery of gold bar(s)/ornaments made through on hand basis and not through any courier or transport service, under the circumstances proof of delivery would not possible. The pattern of cash deposit found irregular by Ld. CIT(A), being the first year of business of Assessee, the pattern of cash deposit could not have compared and made the basis for confirming the additions. The cash sales invoices for less than Rs.2,00,000/- are found in parlance with normal business transactions invoices, a trader cannot bound to collect customer’s verified details like PAN, Address etc, unless the law necessitates, at that time there was no such provision compel Assessee to do so. It is an undisputed fact that without reduction of cash sales from the total turnover, corresponding cash receipts cannot be simultaneously treated as unexplained cash credit u/s 68 of the Act.
18. We found force in the contention of the Assessee, that unexplained cash credit under section 68 of the Act and cash sales both cannot get birth from one transaction. The learned Assessing Officer and Learned Commissioner of Income Tax (Appeals) failed to discharge the onus to support their presumption of fictitious cash sells affected by the Assessee. Thus, we are inclined to contentions that cash sales of the Assessee cannot be treated as unexplained cash credit under section 68 of the Act, as that has been already considered as trading receipts for determination of profit from business, otherwise it leads to double taxation, which has not been specifically provided under the income tax act, 1961.
19. Accordingly, we hold that cash deposit of ₹61,44,000/- during the demonetisation period was out of the available cash balance, thus, source of cash deposit is treated as explained being generated from the accepted cash sales. In the result, the ground numbers 1-4 of the Assessee are allowed, remaining grounds of appeal becomes academic and needs no further adjudication.
20. In the result, the appeal filed by the Assessee stands allowed.
Order pronounced in the open court on 21.09.2026.
