Cash Deposits During Demonetisation Accepted as Genuine Business Sales: ITAT Deletes Double Addition
The period of demonetisation (November–December 2016) saw intense scrutiny from the Income Tax Department, especially regarding large cash deposits made into bank accounts. Many taxpayers faced additions under Section 68 treating such deposits as “unexplained cash credits,” even when they were part of regular business sales.
In a significant and taxpayer-friendly ruling, the Income Tax Appellate Tribunal (ITAT), Delhi recently held that when cash deposits are fully supported by genuine business records—such as stock registers, sales accounts, VAT returns, and cash books—the department cannot treat the same deposits again as unexplained income. Doing so would amount to double taxation, which is legally impermissible.
Facts of the Case
The assessee was engaged in the trading business of various imported products. During the demonetisation window, the assessee deposited around ₹1.66 crore in cash into the bank. These cash deposits were claimed to be the proceeds of genuine cash sales, which were already recorded as part of the total turnover of about ₹5.39 crore in the books of accounts.
The assessee had maintained detailed and verifiable business records, including:
- Day-to-day cash book showing all cash sales and deposits
- Stock register showing movement of goods
- Purchase bills and import documents (including Bills of Entry)
- Sales ledgers for both cash and credit sales
- VAT returns, which reflected the same turnover declared in the income-tax return
- Proper opening and closing stock statements
The Assessing Officer (AO), however, took a contrary view. He held that the assessee had failed to prove the genuineness of cash sales conducted during the demonetisation period. Without rejecting the books of accounts, the AO treated the cash deposits of ₹1.66 crore as unexplained cash credits under Section 68 and applied the provisions of Section 115BBE, which impose a higher tax rate on unexplained income.
The assessee challenged the addition on multiple grounds, including:
- The cash deposits were not unexplained—they originated from recorded cash sales.
- The turnover declared in the Profit & Loss Account included these cash receipts.
- Purchases were verifiable and accepted by the department.
- VAT authorities had already accepted the sales figures.
- Books of accounts remained unchallenged and were not rejected.
Additionally, a jurisdictional challenge was raised on the basis that the assessing officer who issued the scrutiny notice was different from the officer who framed the final assessment order, owing to reallocation of jurisdiction between different wards.
Observations of the Tribunal
The ITAT examined all evidence placed on record and made several crucial observations:
a. Jurisdictional Issue
The tribunal noted that internal restructuring of jurisdiction among assessing officers had taken place under section 120 of the Act. Since the department satisfactorily explained the transfer of jurisdiction, the tribunal rejected the assessee’s objection and held that the assessment was validly completed.
b. Cash Sales Were Part of Recorded Turnover
The most important finding was that the assessee had already included the cash sales as part of business turnover, and the AO had accepted the overall turnover. When turnover is accepted, the cash generated from such sales also stands accepted.
The tribunal emphasized that:
- Purchase records were never disputed.
- Stock movement was fully supported and correlated with reported sales.
- VAT returns matched the sales declared in the income-tax return.
- No adverse finding existed that suggested manipulation of books.
- The AO did not reject the books under section 145(3).
Therefore, once the sales are accepted, the cash realisation of such sales cannot be treated separately as unexplained cash.
c. No Negative Cash Balance or Suspicious Transactions
One of the key indicators of genuineness was that the assessee’s cash book:
- Showed daily cash flow movement
- Did not show any negative cash balances
- Matched exactly with the cash deposits in the bank
This demonstrated that the assessee physically had the cash available before depositing it, confirming that the deposits came from genuine business activity.
d. VAT Acceptance Supports Authenticity of Sales
The tribunal emphasised that if another statutory authority, such as the VAT department, has already accepted the turnover, it further proves the genuineness of sales. This strengthened the assessee’s argument that the cash deposits represented legitimate business receipts.
e. Double Addition Not Permissible
The core of the tribunal’s reasoning was that if a sale is already included in the P&L statement and taxed as business income, treating the same amount again as unexplained income under Section 68 results in double taxation, which cannot be allowed.
Since:
- Sales were genuine
- Cash was received from customers
- Deposits were made from recorded cash balance
- Books were not rejected
there was no ground for making a separate addition.
f. Section 115BBE Higher Tax Rate Not Applicable for AY 2017-18
Another significant finding was that the higher tax rate on unexplained credits under Section 115BBE became effective only from Assessment Year 2018-19 onwards.
Since this case related to AY 2017-18, the higher rate could not be applied, even if the addition had been upheld.
The tribunal thus deleted the entire addition of ₹1.66 crore.
Conclusion
This decision is a major relief for taxpayers who deposited business cash during the demonetisation period. The ruling makes several important legal principles clear:
1. Genuine Cash Sales Cannot Be Taxed Again
If cash deposits are supported by proper books of accounts, stock records, VAT returns, and sales registers, the department cannot treat them as unexplained. Once turnover is accepted, the cash portion of that turnover stands automatically explained.
2. No Double Taxation Allowed
Treating the same cash receipts both as business income and again as unexplained income under Section 68 is unlawful.
3. Books Must Not Be Rejected Without Reason
The AO cannot selectively accept turnover but reject the cash component of that turnover unless the books are declared unreliable. In this case, since books were intact and audited, the assessee was protected.
4. VAT and External Evidence Strengthen the Case
When indirect tax authorities accept sales, it becomes harder for the income-tax department to dispute them without strong evidence.
5. Higher Tax Rate Under Section 115BBE Not Applicable to AY 2017-18
This prevents harsh taxation during the demonetisation assessment year.
Final Takeaway for Businesses
If you maintain clean books, verifiable stock records, and proper cash flow statements, cash deposits made during demonetisation cannot be arbitrarily taxed. This ruling reinforces that proper documentation is the strongest defence against unwarranted additions by the tax authorities.
