Section 68 addition on demonetization cash deposits deleted as cash withdrawals and business records support genuine receipts

ITAT Pune set aside the order of CIT(A) sustaining addition under s.68 for alleged unexplained cash deposits made during the demonetization period. It held that the assessee had sufficient cash balance, as total cash withdrawals (Rs. 56.63 lakh) exceeded pre-demonetization cash deposits (Rs. 44.65 lakh), leaving a surplus of Rs. 11.98 lakh, more than the impugned deposit of Rs. 7.40 lakh. Considering the declared cash-based turnover, profit offered, and VAT/GST compliance, the Tribunal treated the deposits as business receipts and deleted the addition, allowing the assessee's appeal.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the addition for unexplained cash deposit of Rs. 7.40 lakh, made on account of cash deposited during the demonetization period, was justified in light of the assessee's business turnover, pattern of cash deposits and withdrawals, and declared income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of addition for unexplained cash deposit of Rs. 7.40 lakh during demonetization period

Interpretation and reasoning

2.1 The Court noted that the assessee is engaged in regular business, having valid VAT registration, filing VAT returns for the relevant financial year, and declaring gross turnover of Rs. 1,27,06,029/-, with major sales in cash. Income was declared under section 44AD at approximately 8.06% of gross sales, and the return had been accepted except for the impugned cash deposit.

2.2 The pattern of cash deposits and withdrawals in the relevant bank account was examined in detail. Total cash deposits during the year amounted to Rs. 52,05,000/-, which included the disputed deposit of Rs. 7.40 lakh. The addition was confined only to the amount of Rs. 7.40 lakh, implying that the remaining cash deposits of Rs. 44,65,000/- were accepted as explained, being related to the assessee's business receipts.

2.3 Total cash withdrawals during the relevant period were recorded at Rs. 61,91,500/-, out of which cash withdrawals of Rs. 56,63,500/- and cash deposits prior to the demonetization period of Rs. 44,65,000/- indicated that there was a surplus cash availability of Rs. 11,98,500/-, which exceeded the disputed deposit of Rs. 7.40 lakh. The Court held that this surplus, arising within the same year, adequately explained the availability of cash for the deposit.

2.4 The Court observed that the Assessing Officer rejected the explanation mainly on the ground of no immediate cash withdrawal prior to the demonetization-period deposit, but failed to consider the overall cash flow, including cumulative deposits and withdrawals over the year, and the nature of the assessee's cash-based business operations.

2.5 The Court further emphasized that the assessee's turnover, predominantly received in cash, was already subjected to presumptive taxation under section 44AD, that VAT returns were filed, and that the impugned cash deposit was part of the total sales consideration already offered to tax. These factors collectively supported the assessee's contention that the cash deposit emanated from regular business activities and not from unexplained sources.

Conclusions

2.6 The Court held that, in view of the accepted turnover, cash-based nature of business, filing of VAT returns, declared income under section 44AD, and demonstrated surplus of cash from withdrawals over deposits prior to demonetization, the cash deposit of Rs. 7.40 lakh was satisfactorily explained as arising from regular business cash sales.

2.7 The addition for unexplained cash deposit of Rs. 7.40 lakh was found unsustainable and was deleted, and the findings of the appellate authority confirming such addition were set aside.

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