Unexplained cash credit under section 68 rejected where deposits were supported by books and documentary evidence.

Addition treating deposits of specified bank notes during demonetization as unexplained cash credits under section 68 was contested. The taxpayer produced cash book entries, deposit slips, balance sheet and audit report showing part of the cash pre-existed demonetization and a smaller sum was received from a member; books were not rejected and no adverse material was recorded by the assessing officer. Applying the principle that documented deposits supported by books not rejected cannot be treated as unexplained credits, the addition of Rs. 6,19,500 was deleted.

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Issues: Whether the addition of Rs. 6,19,500/- made under section 68 of the Income-tax Act, 1961 treating deposits of specified bank notes (SBNs) during the demonetization period as unexplained cash credits is sustainable.

Analysis: The assessee explained that the deposits in SBNs comprised (i) cash forming part of closing balance as on 08/11/2016 collected prior to demonetization and (ii) a smaller sum received from a member during the demonetization period, with documentary support including cash book entries, cash deposit slips, balance sheet and audit report. The books of account were not rejected and the assessing officer did not record any adverse material rebutting the explanation as to source and nature of the deposits. The question for income-tax purposes is whether the amounts are unexplained credits under section 68 of the Income-tax Act, 1961, not whether any separate regulatory breach of demonetization notifications occurred; any action for contravention of RBI/other guidelines lies with competent authorities. Coordinate Tribunal decisions on identical facts have held that deposits explained by records and books which are not rejected cannot be treated as unexplained cash credits under section 68. Applying those principles to the factual matrix and documentary evidence on record leads to the conclusion that the addition is not warranted.

Conclusion: Addition of Rs. 6,19,500/- under section 68 of the Income-tax Act, 1961 is deleted; the assessee's ground challenging that addition is allowed.

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