Liquor Traders Cash Deposits Taxed Twice? ITAT Deletes ₹3.19 Crore Additions on Unexplained Cash and Purchases

In a significant judgment that brings clarity on the taxation of cash-intensive business transactions, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, ruled in M.L.A

Facts and Issue of the Case

M.L.A Associates is a partnership firm engaged in the retail sale of alcoholic liquor. For Assessment Year 2019–20, the firm failed to file its income tax return on time due to serious health problems affecting both partners. Because of this non-compliance with statutory timelines, the Assessing Officer (AO) initiated proceedings and eventually completed the assessment ex-parte (i.e., without the taxpayer’s participation) under Sections 143(3) read with 144 of the Income-tax Act.

During the assessment, the AO made two major additions to the firm’s income:

1. Cash deposits of ₹1.51 crore in the bank were treated as “unexplained money” under Section 69A of the Act read with Section 115BBE (which deals with taxation of unexplained cash credits), and
2. Payments of ₹1.67 crore toward the purchase of liquor were treated as “unexplained expenditure” under Section 69C of the Act (also brought to tax under Section 115BBE).

The AO’s view was that since the firm did not respond to notices and had not filed returns, these large cash movements and liquor purchases could not be satisfactorily explained and hence were taxable as unexplained. The total additions amounted to about ₹3.19 crore—a substantial tax impact for the firm. Aggrieved by this assessment, the firm filed an appeal before the Commissioner of Income-tax (Appeals), but that appellate authority dismissed the appeal simply on the ground of delay in filing it. Thus, two key issues arose for the tribunal’s consideration:

• Whether the delay in filing the appeal should be condoned, and
• Whether the additions made by the AO under Sections 69A and 69C were justified in view of the nature of business and the evidence provided.

Observation by the Tribunal

Condonation of Delay

The first hurdle for the taxpayer was the delay in filing the appeal before the CIT(A). The tribunal carefully examined medical records and circumstances that led to the non-filing of the return and the inaction in the appellate process. It observed that:

• The delay was genuine and bona fide, caused by the serious health conditions of both partners and a resultant miscommunication between the taxpayer and their consultants.
• There was no intentional avoidance of compliance; rather, the circumstances were beyond the control of the assessee, justifying condonation of delay in the interest of justice.

Merits: Cash Deposits and Purchases Cannot Be Taxed Twice

On the merits of the case, the tribunal undertook a detailed factual analysis of banking transactions and business records. It noted that:

• The cash deposits corresponded to money received from retail liquor sales. Liquor retail is a cash-intensive trade with regulated prices fixed under state excise laws.
• The receipts represented legitimate business proceeds already reflected in the firm’s banking and trading records.
• The liquor purchases were made from the Karnataka State Beverages Corporation Ltd. (KSBCL)—a government undertaking—which was corroborated by ledger confirmations and third-party reconciliation.

The tribunal also emphasized that the Assessing Officer had not pointed out any defect in the firm’s books of account, nor had the books been rejected or shown to be unreliable. In fact, since the sales and purchases were accepted, treating bank deposits as unexplained and purchases as unexplained expenditure would result in double taxation of the same economic activity—a stance the tribunal rejected.

Law Applicable

To understand the tribunal’s conclusion, it is important to review the legal principles involved:

Section 69A and Section 69C of the Income-tax Act

• Section 69A deals with cases where the Assessing Officer considers that any money found in the hands of the taxpayer (or deposited into a bank) is unexplained; in such a case, the value of such money can be added to the income of the taxpayer.
• Section 69C deals with unexplained expenditure. If a taxpayer has incurred any expenditure for which the source of funds is not explained satisfactorily, it can be brought to tax.
• Section 115BBE provides for special taxation of unexplained cash credits, money, or expenditure added under Sections 68, 69, 69A, 69B, 69C, 69D or 69E.

Legal precedents—such as decisions of various High Courts and ITAT benches—hold that cash receipts recorded in books of account and accepted as business income cannot be treated as unexplained money merely because they were received in cash and later deposited in the bank. Otherwise, this would lead to double taxation: once as normal business income and again as unexplained cash credit.

Conclusion by the Tribunal

After evaluating all submissions, documentary evidence, and legal principles, the ITAT reached the following conclusions:

1. Delay in filing the appeal before the CIT(A) was condoned on grounds of sufficient cause, allowing the matter to be heard on merits.
2. Cash deposits in the bank represented genuine business receipts from liquor sales and could not be treated as unexplained money.
3. Payments for liquor purchases, supported by confirmations from a government undertaking and reconciled with books of account, were not unexplained expenditure.
4. The Assessing Officer’s approach resulted in double taxation—thus the additions made under Sections 69A and 69C read with Section 115BBE of the Act were unsustainable.

Accordingly, the tribunal deleted the entire additions of ₹3.19 crore and allowed the taxpayer’s appeal.

Moreover, if purchases are fully documented and reconciled with third-party confirmations (as in the case of payments made to KSBCL), there is no basis to treat them as unexplained expenditure under Section 69C unless there is cogent evidence to the contrary.