Demonetization cash sales treatment: accounting entries accepted in tax appeal; unexplained cash addition rejected and deletion ordered.

Addition treating bank deposits during demonetization as unexplained cash credits was rejected because sales and purchases were recorded in books of account and accepted in assessment proceedings; therefore the cash receipts from debtors were not treated as sham and the impugned addition could not be sustained. The restriction on holding or receiving specified bank notes applied only after the appointed day, so accepting SBNs against cash sales did not violate law. Consequence: the impugned addition was set aside and directed to be deleted to avoid double taxation.

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Issues: Whether the addition of Rs.1,18,82,000/- to the assessee's income under section 68 of the Income-tax Act, 1961 on account of cash deposits of Specified Bank Notes during the demonetization period is sustainable.

Analysis: The Tribunal examined (i) the statutory position under the Specified Bank Notes (Cessation of Liabilities) Act, 2017 regarding the appointed day; (ii) CBDT SOPs and circulars governing verification of cash deposits made during the demonetization period; (iii) the factual finding that books of account, sales and purchases were accepted and not rejected by the AO; and (iv) whether the deposits represented sales/realisations already recorded and offered to tax or were unexplained credits requiring addition under section 68. The Tribunal noted that the bar on holding, transferring or receiving SBNs operated only from the appointed day (31.12.2016) and that SBNs were legally acceptable until that date. The Tribunal also observed that the AO and the first appellate authority proceeded on surmise and conjecture without requiring or recording what cogent evidence was missing or striking the books of account; further, treating deposited amounts as income when the underlying sales were already admitted would result in double taxation. The Tribunal relied on applicable SOPs and precedents addressing treatment of demonetization-period cash deposits and concluded that mere acceptance of SBNs or deviation in cash ratios, without cogent evidence of bogus entries, does not justify addition under section 68.

Conclusion: The addition of Rs.1,18,82,000/- sustained by the CIT(A) under section 68 is not sustainable and is deleted; the assessee's appeal is allowed.

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