Case Law Details
SDM Lifescienes Pvt. Ltd. Vs ITO (ITAT Delhi)
The appeal before the Income Tax Appellate Tribunal, Delhi Bench, arose from the order of the National Faceless Appeal Centre dated 16.10.2025 for Assessment Year 2017-18 against the assessment order passed under Section 143(3) of the Income-tax Act, 1961 dated 30.12.2019. Ground Nos. 1, 2, 5 and 6 were dismissed as not pressed. The only issue considered was whether the NFAC was justified in upholding the addition made on account of cash deposits during the demonetisation period.
The assessee had filed its return of income on 30.03.2018 declaring taxable income of ₹1,39,784. It was engaged in the business of agarbatti and LED bulbs and had deposited cash of ₹1,11,41,000 in its bank account during the demonetisation period. The assessee explained that it had reported total turnover of ₹1,85,45,595, regularly made cash sales in the ordinary course of business, maintained substantial cash balances for business requirements, and that the cash deposited represented cash generated from business sales and available cash balance recorded in its books following the announcement of demonetisation.
The Assessing Officer accepted that the assessee regularly had cash sales both during the relevant year and the immediately preceding year. To verify the purchases, notices under Section 133(6) were issued to five parties. Two parties responded and confirmed the sales made to the assessee, while three parties did not respond. The Tribunal noted that the non-response of those three parties was never confronted to the assessee.
It was undisputed that the assessee deposited ₹25,55,500 during the period from 01.04.2016 to 08.11.2016 and ₹1,11,41,000 during the period from 09.11.2016 to 31.12.2016. The Assessing Officer questioned only the deposits made during the demonetisation period while accepting the earlier deposits. The opening cash balance as on 01.04.2016 was ₹55,67,428. Cash sales between 01.04.2016 and 31.10.2016 amounted to ₹85,83,979, while cash sales during the remaining five months were ₹7,98,115. The assessee explained that the reduction in cash sales resulted from reduced cash liquidity following demonetisation. The Assessing Officer, however, computed the average monthly cash deposits during the earlier period at ₹3,64,858, held that the deposits during the demonetisation period did not correspond with this average, allowed credit only to the extent of ₹3,64,857 and treated the balance amount of ₹1,07,76,143 as unexplained cash credit under Section 68. The NFAC upheld this addition.
The Tribunal recorded several undisputed facts. Cash sales of ₹85,83,979 formed part of the total sales of ₹1,85,45,595 disclosed in the audited profit and loss account. The Revenue had not doubted the purchases, and the observation regarding payment for April 2016 purchases on 16.11.2016 did not render the purchases non-genuine. The total sales, including both cash and credit sales, had not been disputed. The assessee possessed sufficient stock to make the cash sales, corresponding reductions in stock had been recorded, and complete details of purchases, sales, stock statements and the cash book showing month-wise movements for the relevant year and preceding year had been furnished. The Assessing Officer had not alleged any negative cash balance. The two major suppliers who responded to notices under Section 133(6) confirmed their transactions with the assessee, while the non-response of the remaining three parties had not been put to the assessee.
The Tribunal further observed that the Assessing Officer had accepted the return of income, which already included the cash sales. Therefore, making a separate addition of ₹1,07,76,143 on account of cash deposits would result in double addition. It also held that the assessee had established the source of the cash deposits by showing that they emanated from the regularly maintained books of account and cash book. Since the books of account had not been rejected by the Assessing Officer, the Tribunal found no basis for making a separate addition for the cash deposits and directed deletion of the addition.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No.7/Del/2026 for AY 2017-18, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Id. CIT(A) , in short] dated 16.10.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 30.12.2019 by the Assessing Officer, ITO, Ward-22(4), Delhi (hereinafter referred to as ‘Id. AO’).
2. No arguments were advanced by the Learned AR before us in support of Ground Nos. 1,5 & 6. Accordingly, the same are hereby dismissed as not pressed.
3. The Ground No.2 raised by the assessee was specifically stated to be not pressed on behalf of the assessee, for which necessary endorsement was made by the arguing counsel in our records. Accordingly, the same is hereby dismissed as not pressed.
4. The only issue to be decided in this appeal is as to whether the Learned NFAC was justified in upholding the addition made on account of cash deposits during the demonetization period.
5. We have heard the rival submissions and perused the materials available on record. The return of income for assessment year 2017-18 was filed by the assessee on 30.3.2018 declaring taxable income of Rs 1,39,784. The assessee company was engaged in the business of Agarbatti and LED bulbs during the year under consideration and had deposited cash amounting to 71,11,41,000/- in its bank account during the demonetization period. The assessee was asked to explain the source of the same. The assessee explained that it had reported a turnover of Rs 1,85,45,595 and had made huge cash sales during the year in a routine manner in consonance with the nature of business carried on by it and that always substantial cash balance was held by the assessee company at any point of time for meeting its business requirements. The Id AO agreed to the contentions of the assessee that it was regularly having cash sales both in the year under consideration and also in the immediately preceding year. The assessee primarily submitted that the cash source had been generated out of cash sales made by it in its business and the available cash balance as per books stood deposited in the bank account pursuant to announcement of Demonetization by the Government of India. Hence the entire source of cash deposit is explainable from the cash balance available as per books. The Id AO resorted to examine the veracity of the purchases made by the assessee from 5 parties by issuing notices u/s 133(6) of the Act. Out of 5 parties, only two parties responded to the notice. Those two parties duly confirmed the factum of sales made to the assessee company. The remaining 3 parties however did not respond to the notice issued u/s 133(6) of the Act. But this fact was not even confronted to the assessee by the Id AO. It is not in dispute that the assessee had deposited cash of Rs 25,55,500/- in its bank account during the period 1-4-2016 to 8-11-2016 and Rs 1,11,41,000/- from 9-11-2016 to 31-12-2016. The Id AO had doubted only the cash deposit made during the demonetization period and had accepted the deposit made prior to that period. The opening cash balance as on 1-4-2016 was Rs 55,67,428/- and cash sales made during the period 1-4-2016 to 31-10-2016 was Rs 85,83,979/- and total cash sales in the remaining 5 months was Rs 7,98,115/-. The reduction in cash sales was explained to be on account of reduction in cash liquidity in the market pursuant to demonetization. The Id AO however, did not agree with this contention and proceeded to arrive at the average of cash deposited by the assessee at Rs 3,64,858/- during the period 1-4-2016 to 31-10-2016 and concluded that the average monthly cash deposit does not commensurate with the total cash deposits made during the demonetization period. Accordingly, the Id AO proceeded to give credit only to the extent of average of monthly cash deposit of Rs 3,64,857/- and added the remaining sum of Rs 1,07,76,143/- (1,11,41,000 — 3,64,857) as unexplained credit u/s 68 of the Act This action of the Id AO was upheld by the Id CIT(A).
6. It is not in dispute that the assessee had indeed shown cash sales and is part of the total turnover disclosed by it in the return of income and in the audited profit and loss account. The following points are undisputed and indisputable: —
a. The assessee had shown cash sales for the period 1-4-2016 to 31-10-2016 to the tune of Rs 85,83,979/- and the same is part of total sales disclosed by the assessee in the sum of 71,85,45,595/- in the profit and loss account.
b. The purchase made by the assessee has not been doubted by the revenue. The Id AO had merely doubted on the fact that for the purchases made in April 2016, the assessee had made payments on 16-11-2016. This does not in any way make the purchases of the assessee ingenuine.
c. The total sales made by the assessee (both cash as well as credit sales) has not been doubted by the revenue.
d. The assessee had sufficient stocks to effect the said cash sales and generate cash as an independent source to prove the cash deposits.
e. To the extent of sales made by the assessee, corresponding reduction in stock had been duly made.
f. The assessee has furnished details of purchases and sales, stock statements complete cashbook, showing the month wise movement before the Id AO for the year and in the immediately preceding year.
i. There is no negative cash balance on any day that has been alleged by the Id AO.
j. The major purchase parties (2 persons) had been duly subjected to examination u/s 133(6) of the Act and he had even confirmed the transactions with the assessee. The three parties who had not responded to notice u/s 133(6) of the Act had not even been confronted to the assessee by the Id AO.
7. Further, we find that the Id AO had accepted the return of income by the assessee, which included this cash sales also. Hence, separately, making an addition on account of cash deposits in the sum of 71,07,76,143/- would only result in double addition. Hence, the addition made on account of cash deposits deserves to be deleted on that count itself. Further, we hold that the assessee had indeed proved the source of cash deposits by clearly establishing that the source emanated from the books of account and the cashbook regularly maintained. None of the books of account have been rejected by the Id AO. In these facts and circumstances, there is no case made out by the revenue for making an addition on account of cash deposit separately. Accordingly, the addition made is hereby directed to be deleted. Further, we also find that Honble Madras High Court in the case of of SMILE Microfinance Limited vs ACIT in WP (MD) No. 2078 of 2020 and WMP (MD) No. 1742 of 2020 dated 19-11-2024 had held that the provisions of section 11566E of the Act which enhanced the rate of tax could be made applicable only from 01.04.2017, relevant to assessment year 2018-19 onwards and not earlier. Accordingly Ground Nos. 3 to 5 raised by the assessee are allowed.
8. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 05/06/2026.
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