Cash deposits during demonetization period not unexplained credit when backed by legitimate recorded sales under Section 68

The ITAT Chennai ruled in favor of the assessee regarding cash deposits made during the demonetization period. The AO had treated these deposits as unexplained cash credit under Section 68, but the CIT(A) deleted the addition. The ITAT held that the assessee successfully established the identity of customers and genuineness of transactions, with sales to individual customers not exceeding Rs. 2 lakhs. The tribunal found no abnormal deviation in cash sales during demonetization compared to previous years. Since the assessee explained the source of cash deposits through legitimate cash sales recorded in books, the deposits could not be treated as unexplained credit under Section 68.

---

---

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the cash deposits made by the assessee during the demonetization period can be considered as explained based on the assessee's claim that the source is from sales and admitted as revenue receipts.
• Whether the assessee's acceptance of specified bank notes (SBNs) during the demonetization period contravenes the notifications issued by the Government of India and the Reserve Bank of India (RBI).
• Whether the cash deposits should be treated as unexplained cash credits under Section 68 of the Income Tax Act, 1961 due to the failure to produce details of persons who paid in cash for sales during the demonetization period with documentary evidence.
• Whether the CIT (A) erred in applying the decision of ITAT in the case of M/s Hirapanna Jewellers to the present case.

ISSUE-WISE DETAILED ANALYSIS

1. Explanation of Cash Deposits as Sales Revenue

The relevant legal framework involves Section 68 of the Income Tax Act, which deals with unexplained cash credits. The court considered whether the cash deposits during the demonetization period could be explained as sales revenue.

The court noted that the assessee had maintained proper books of accounts, which were audited and showed sales supported by sales bills and corresponding purchases. The CIT (A) found no discrepancies in the books of accounts or stock records. The court emphasized that the cash sales were recorded in the books and reported to GST authorities, and there was no evidence of backdating or fictitious sales.

The court concluded that the assessee had satisfactorily explained the source of cash deposits as sales revenue, and the Assessing Officer's (AO) addition under Section 68 was not justified.

2. Acceptance of Specified Bank Notes (SBNs) During Demonetization

The legal issue revolves around the notifications issued by the Government of India and RBI, which restricted the acceptance of SBNs post-demonetization.

The court observed that while the RBI and government notifications restricted the acceptance of SBNs, the Specified Bank Notes (Cessation of Liability) Act, 2017, provided that no person could transact in SBNs from the appointed date, which was 31.12.2016. The court noted that there was no clear prohibition on accepting SBNs between 08.11.2016 and 31.12.2016.

The court concluded that the genuine explanation offered by the assessee for cash deposits during this period could not be rejected solely based on the alleged violation of notifications.

3. Applicability of Section 68 for Cash Deposits

Under Section 68, the assessee must prove the identity, genuineness, and creditworthiness of the transactions. The court analyzed whether these criteria were met for the cash deposits.

The court found that the assessee had issued sale bills to customers and recorded sales in the books. The AO had not pointed out any discrepancies in the sales or stock records. The court noted that as per Rule 114B of the Income Tax Rules, the assessee was not required to collect KYC details for sales below Rs. 2 lakhs.

The court concluded that the assessee had established the identity of customers and the genuineness of transactions, and the AO's addition under Section 68 was unwarranted.

4. Application of Judicial Precedents

The CIT (A) had relied on the decision in the case of M/s Hirapanna Jewellers, where cash deposits during demonetization were explained as sales. The court considered whether this precedent was applicable to the present case.

The court found that the facts of the present case were similar to the Hirapanna Jewellers case, where the source of cash deposits was explained as sales revenue. The court noted that the AO had not found any defects in the assessee's books of accounts or stock records.

The court upheld the CIT (A)'s reliance on the precedent, concluding that the AO's addition was not justified.

SIGNIFICANT HOLDINGS

The court held that the assessee had satisfactorily explained the source of cash deposits during the demonetization period as sales revenue, supported by proper documentation and books of accounts.

The court emphasized that the AO had not pointed out any discrepancies in the books of accounts or stock records, and the assessee's explanation was consistent with past sales trends.

The court concluded that the AO's addition under Section 68 was based on suspicion rather than evidence, and the CIT (A) had rightly deleted the addition.

The court dismissed the revenue's appeal, upholding the CIT (A)'s order to delete the additions made by the AO.

---