Rameshbhai Harvara Vs ITO (ITAT Rajkot)
Annual Cash Deposits Mistaken for Demonetisation Deposits: ITAT Quashes Reopening
The Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) set aside reassessment proceedings founded on the incorrect premise that the assessee had deposited ₹1,72,90,000 during demonetisation. The Tribunal found that this amount represented deposits throughout the financial year, while deposits during the demonetisation period were only ₹10,10,000. Holding that the factual error went to the foundation of the recorded reasons, it directed deletion of the Section 68 addition.
The assessee, proprietor of M/s Raviraj Enterprise, traded in cement and iron/steel products. He filed his return for Assessment Year 2017-18 on 2 November 2017, declaring total income of ₹3,41,630.
The Assessing Officer reopened the assessment through a notice under Section 148 dated 30 March 2021, relying on information concerning cash deposits in the assessee’s account with Navanagar Co-operative Bank Limited.
Assessee explained deposits as business receipts and redeposited withdrawals
During reassessment, the assessee submitted that the deposits represented receipts from sales and redeposits of cash previously withdrawn from bank accounts.
He furnished his return, computation of income, tax audit report, Form 26AS, bank statements and ledger account. He also explained that approximately 15% to 20% of sales were made in cash and referred to substantial withdrawals from HDFC Bank and Navanagar Co-operative Bank.
The Assessing Officer considered the explanation insufficient, citing the absence of supporting sales and purchase bills, a cash book and a reconciliation of withdrawals with redeposits. He added the entire ₹1,72,90,000 under Section 68 and taxed it under Section 115BBE.
CIT(A) granted partial relief
The CIT(A) accepted the explanation concerning ₹1 crore of bank withdrawals and the ₹10,10,000 deposited during demonetisation. It consequently sustained an addition of ₹62,70,000.
Both parties appealed. The assessee sought further relief, while the Revenue challenged the partial deletion.
Recorded reasons contained fundamental factual error
Before the Tribunal, the assessee challenged the reopening itself. He produced the recorded reasons, which stated that ₹1,72,90,000 had been deposited during the demonetisation period from 8 November to 30 December 2016.
The assessee pointed out that only ₹10,10,000 had been deposited during that period. The larger amount represented aggregate deposits for the entire financial year.
The Tribunal accepted this distinction. It held that the recorded reasons had to be examined against the factual information forming the basis of the Assessing Officer’s belief that income had escaped assessment.
The discrepancy between annual deposits and actual demonetisation deposits went to the very foundation of that belief. Reassessment initiated on this erroneous factual premise could not be sustained.
Section 68 addition deleted as consequence
The Tribunal set aside the reassessment proceedings. Consequently, the ₹1,72,90,000 addition, including the portion sustained by the CIT(A), could not survive and was directed to be deleted.
The assessee’s appeal was allowed. The Revenue’s challenge to the partial relief became academic following invalidation of the reassessment and was dismissed.
The relief arose from the defective factual foundation of reopening; the Tribunal did not separately adjudicate the source of each deposit on merits.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT RAJKOT
ITA Nos. 442 and 450/Rjt/2025 for Assessment Year 2017-18 are directed against the order dated 2nd May 2025 passed by the Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as ‘Ld.CIT(A)’], arising out of the assessment order dated 30th March 2022 passed under section 147 read with section 143(3) of the Income-tax Act, 1961. ITA No. 442/Rjt/2025 has been filed by the assessee, whereas ITA No. 450/Rjt/2025 has been filed by the Revenue against the same order of the Ld. CIT(A). The assessee seeks further relief against the additions sustained by the Ld. CIT(A), whereas the Revenue has challenged the partial relief granted to the assessee.
2. Since both appeals arise from the same assessment order and involve interconnected issues, they are taken up together for hearing and adjudication. Accordingly, we take ITA No. 442/Rjt/2025 as the lead appeal, and our findings and decision therein shall apply, mutatis mutandis, to ITA No. 450/Rjt/2025.
3. Brief facts of the case are that the assessee is, an individual and proprietor of M/s Raviraj Enterprise, engaged in the business of trading in cement and iron/steel products, filed his return of income for the Assessment Year 2017-18 on 02.11.2017, declaring a total income of Rs.3,41,630/-. Subsequently, the assessment was reopened under Section 147 of the Income-tax Act, 1961, by issuing notice under Section 148 of the Act dated 30.03.2021, on the basis of information that the assessee had deposited cash aggregating to Rs.1,72,90,000/- in his bank account maintained with Navanagar Co-operative Bank Ltd. during the relevant previous year, including cash deposits of Rs.10,10,000/- during the demonetisation period. During the reassessment proceedings, the assessee explained that the cash deposits represented business receipts from the sale of cement and iron/steel products and that a portion of the deposits was sourced from cash withdrawals from his bank accounts. In support of his explanation, the assessee furnished his return of income, computation of income, tax audit report, Form 26AS, bank statements and ledger account. He also submitted that approximately 15% to 20% of his sales were made in cash and that cash withdrawals of Rs.67,90,000/- from HDFC Bank Ltd. and Rs.32,00,000/- from Navanagar Co-operative Bank Ltd. contributed to the cash available for redeposit. The assessee further objected to the reopening of the assessment, which objections were disposed of by the Assessing Officer. The Assessing Officer, however, held that the assessee had failed to substantiate the nature and source of the cash deposits by furnishing supporting documentary evidence, such as sales and purchase bills, cash book and corresponding details of cash withdrawals and redeposits. Accordingly, holding the explanation of the assessee to be unsatisfactory, the Assessing Officer treated the entire cash deposits of Rs.1,72,90,000/- as unexplained cash credits under Section 68 of the Act and subjected the same to tax under Section 115BBE of the Act. The Assessing Officer accordingly completed the reassessment under Section 147 read with Section 144B of the Act vide order dated 30.03.2022, determining the total income at Rs.1,76,31,630/-. Penalty proceedings under Section 271AAC of the Act were also initiated separately.
4. Aggrieved by the assessment order passed by the Assessing Officer, the assessee preferred an appeal before the Ld. CIT(A), who partly allowed the appeal. Out of the total addition of Rs.1,72,90,000/- made under Section 68 of the Income- tax Act, 1961, the Ld. CIT(A) accepted the assessee’s explanation regarding cash withdrawals of Rs.1,00,00,000/- from the bank accounts and the cash deposit of Rs.10,10,000/- during the demonetisation period, thereby sustaining the addition to the extent of Rs.62,70,000/-.
5. Both the assessee and the Revenue, being aggrieved by the order of the Ld. CIT(A), preferred cross-appeals before the tribunal in ITA Nos. 442 and 450/Rjt/2025, respectively.
6. During the course of hearing, the Ld. AR challenged the validity of the reassessment proceedings, contending that the reopening was based on incorrect factual information. It was submitted that, as recorded in the reasons for reopening, the assessee was stated to have deposited cash of Rs.1,72,90,000/- during the demonetisation period. However, the assessee had deposited only Rs.10,10,000/- during the said period, whereas the aggregate cash deposits of Rs.1,72,90,000/- pertained to the entire financial year. Accordingly, it was contended that the reassessment proceedings, having been initiated on an erroneous factual premise, were bad in law and that the entire addition was liable to be deleted. The Ld. AR in order to sustained the claim produce the copy of the relevant document in paper- book at page no. 258 which is here inunder:
“Basis of forming reason to believe and details of escapement of income :- As per information available with this office, during the A.Y.2017-18, In this case, as per AIR data available with this office, the assessee had deposited cash of Rs.17290000/- in his bank account held with Navanagar Co-operative Bank Ltd., during demonetization period i.e. from 8-11-16 to 30-12-16. The source of cash deposits is remain unexplained. Hence, I have reason to believe that income chargeable to tax of Rs.17290000/- has escaped assessment within the meaning of section 147 of the I. T. Act. Hence it is fit case for re- opening the assessment under section 147 of the Income tax Act, 1961 for the A. Y. 2017- 18.”
7. The Ld. DR, on the other hand, supported the validity of the reassessment proceedings.
8. We have heard the rival submissions and perused the material available on record. The principal issue for our consideration is whether the reassessment proceedings were validly initiated when the reasons recorded for reopening proceeded on the factual premise that the entire cash deposits of Rs.1,72,90,000/- had been made during the demonetisation period, whereas the assessee had deposited only Rs.10,10,000/- during that period and the aggregate deposits pertained to the entire financial year. On examination of the facts, we find merit in the contention of the Ld. AR. The reasons recorded for reopening must be examined with reference to the factual information forming the basis of the Assessing Officer’s belief that income had escaped assessment. In the present case, the discrepancy between the aggregate cash deposits during the financial year and the cash deposits actually made during the demonetisation period goes to the very foundation of the reasons recorded for reopening. The reassessment proceedings, having been initiated on the aforesaid erroneous factual premise, cannot be sustained on that basis. We, therefore, hold that the reopening of the assessment is not sustainable in law and set aside the reassessment proceedings. Consequently, the addition of Rs.1,72,90,000/- made under Section 68 of the Act, and the portion thereof sustained by the Ld. CIT(A), cannot survive. The same is accordingly directed to be deleted. The appeal filed by the assessee is allowed.
9. As regards the Revenue’s appeal being ITA No 450/Rjt/025 challenging the relief granted by the Ld. CIT(A), we find that, in view of our decision holding the reassessment proceedings to be invalid, the dispute concerning the partial deletion of the addition becomes academic. Accordingly, the Revenue’s appeal is dismissed.
10. In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on this 14th day of October, 2026.
