Cash deposits during demonetisation accepted as explained cash sales, deletion of addition under section 68 cash credits

ITAT Chandigarh allowed the assessee's appeal and deleted the addition made under cash credits for deposits during the demonetization period. The Tribunal held that the AO had proceeded on mere assumptions without any evidence that the bank deposits represented unexplained income. The AO had not doubted the assessee's purchases, stock-in-trade, or closing stock, and the fact that cash was deposited only during demonetization supported the assessee's explanation that cash sales proceeds were compulsorily banked due to the scheme. ITAT also noted that cash sales constituted only about 4.57% of total turnover, a minor and reasonable proportion, and thus no adverse inference was justified.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the cash deposits made during the demonetization period, claimed to be sourced from recorded cash sales, could be treated as unexplained cash credits and added to the income of the assessee in the absence of defects in the books of account or supporting records.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of cash deposits during demonetization as unexplained cash credits

Interpretation and reasoning

2.1 The Tribunal noted that the assessee had deposited Rs. 43,72,500/- in its bank account, claiming the source to be cash sales made prior to the announcement of demonetization. The assessee produced audited accounts and supporting evidences, including purchase records, stock-in-trade, closing stock, and details of both credit/banking channel sales and cash sales.

2.2 The Tribunal observed that the Assessing Officer, despite examining the evidences, did not point out any defect or discrepancy in the audited accounts or in the business records of the assessee. Purchases, stock-in-trade and closing stock were not doubted or disturbed.

2.3 The Tribunal took note of the chart reproduced in the assessment order showing month-wise cash sales and deposits: cash sales of Rs. 2.85 lakhs (July 2016), Rs. 7.93 lakhs (August 2016), Rs. 7.47 lakhs (September 2016), Rs. 20.78 lakhs (October 2016) and Rs. 3.69 lakhs (01.11.2016 to 08.11.2016), against which deposits of Rs. 18.90 lakhs (November 2016) and Rs. 24.82 lakhs (December 2016) were made.

2.4 It was specifically noticed that the Assessing Officer had not disputed the fact of cash sales for July, August, September and, to a large extent, October 2016. Nevertheless, without any concrete evidence of unaccounted income, he presumed that part of the deposits represented unexplained money and allowed only partial credit for cash sales, treating Rs. 20,86,585/- as unexplained cash credits on the basis of assumptions and presumptions.

2.5 The Tribunal held that the mere fact that the assessee did not deposit cash in the bank during earlier periods but did so during demonetization could not, by itself, justify an adverse inference. On the contrary, in view of the demonetization scheme, the assessee was effectively compelled to deposit the cash arising from cash sales into the bank, since it could no longer freely circulate or reinvest such cash; therefore, the timing of deposit supported, rather than undermined, the assessee's explanation.

2.6 The Tribunal further accepted the assessee's demonstration that total cash sales during the entire year were only 4.57% of total turnover, characterizing such a percentage as minor and reasonable for the nature and scale of the assessee's business, thereby lending credibility to the claim that the deposits were backed by recorded cash sales.

Conclusions

2.7 The Tribunal concluded that the addition of Rs. 20,86,585/- as unexplained cash credits was unsustainable, since it was not based on any identified defects in the books, stock records or sales, and was founded merely on conjectures regarding possible introduction of unaccounted income.

2.8 The entire addition sustained by the Commissioner (Appeals) on account of cash deposits during demonetization was ordered to be deleted, and the appeal of the assessee was allowed.

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