Recorded cash deposits during demonetisation cannot be taxed as unexplained income without defects in the books or proof of circular transactions.

Cash deposits made during demonetisation could not be treated as unexplained under section 69 where they were duly recorded in the assessee's cash book, supported by stock, purchase and sales records, and the books of account were neither rejected nor shown to be defective. The Revenue's allegation of a circular transaction involving a purchase from a father's concern and a subsequent gift was not substantiated, as the purchase was separately accounted for, paid through banking channels, and the gift was backed by a gift deed. On those facts, the addition under section 69 was unsustainable and was deleted.

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Issues: Whether the addition made under section 69 for cash deposits during demonetisation was sustainable when the deposits were recorded in the assessee's cash-book, the books were not rejected, and the Revenue's case rested on an alleged circular transaction involving purchase and gift.

Analysis: The assessee produced cash-book, stock register, purchase and sales records, and VAT-related material to show that the cash deposited was available from the business cash balance at the time of demonetisation. The assessing authority did not reject the books of account and did not point out any specific defect in the recorded cash balance. The alleged connection between the purchase from the father's concern and the later gift was found to be unsubstantiated, as the purchase transaction was separately accounted for, paid through banking channels, and the gift was supported by a gift deed. Section 69 applies where an is not recorded in the books, whereas the impugned deposit stood recorded in the accepted cash-book.

Conclusion: The addition under section 69 was unsustainable and was deleted.

Ratio Decidendi: Where a cash deposit is duly recorded in the assessee's books of account and the books are neither rejected nor shown to be defective, the deposit cannot be treated as unexplained under section 69 merely on suspicion or on an unproved inference of circular transactions.

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