Demonetization cash deposits tied to VAT-reported sales and cash book records; s.68 "unexplained credit" addition deleted on appeal

Where cash deposits during demonetization were added as unexplained cash credit under s.68 on the allegation of inflated sales, the Tribunal held that turnover had already been disclosed in the VAT return for October 2016, negating any inference of post-facto manipulation. The deposits were reconciled with cash availability recorded in the cash book, and the AO neither disputed the cash book, stock position/stock statements, nor the underlying sales. Treating recorded cash arising from accepted sales as unexplained would implicitly require a corresponding reduction in sales or rejection of stock, which was not done. The s.68 addition was held unsustainable and was directed to be deleted; the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether cash deposited in the bank during the demonetization period, when stated to be sourced from cash sales and reflected in the regular books (including cash book) and VAT returns, could be treated as an unexplained cash credit and added under section 68.

(ii) Whether the addition based substantially on abnormal increase in cash sales/cash deposits (human probability considerations), without disputing the assessee's recorded sales, stock position, or cash book availability, could be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Addition under section 68 on cash deposits claimed as cash sales recorded in books and VAT returns

Legal framework (as discussed by the Court): The Court proceeded on the basis that section 68 concerns sums found credited in the books for which the assessee's explanation of nature and source is not satisfactory; however, where the cash deposit is explained as coming from recorded business receipts supported by regular books and related records, the foundation for invoking section 68 is not made out on mere suspicion.

Interpretation and reasoning: The Court found material facts decisive: (a) the assessee dealt in VAT-liable goods; (b) VAT returns were filed regularly; (c) turnover for October 2016 was already disclosed in VAT returns; and (d) the cash deposits were explained as available cash as per the cash book. The Court reasoned that since the turnover was disclosed contemporaneously in VAT returns, it could not be concluded that the sales of October 2016 were manipulated merely because demonetization later occurred and deposits were made thereafter. The Court further noted that if the cash deposited is recorded in the cash book, then questioning such deposit would logically require disputing the underlying stock/sales linkage; yet the Assessing Officer did not dispute the stock statement or sales and did not reduce sales while making the addition.

Conclusions: The Court held that the cash deposit stood explained by recorded cash availability and disclosed sales (including VAT disclosures). Accordingly, the addition under section 68 on the bank cash deposit was unsustainable and was directed to be deleted to the extent added.

Issue (ii): Sustainability of addition based on abnormal pattern/human probability when sales/stock/books were not disputed

Legal framework (as applied by the Court): While the revenue relied on a "human probability" approach due to unusually high October cash sales and rapid deposits post-demonetization, the Court assessed whether such probability-based suspicion could override recorded and undisputed business records.

Interpretation and reasoning: The Court emphasized that the assessee could not have anticipated demonetization, undermining the inference that October sales were engineered for depositing demonetized currency. The Court treated the non-dispute of key business facts as determinative: the Assessing Officer neither rejected the recorded sales nor disputed the stock statement, and accepted that the deposits were reflected in and explained by the cash book. The Court reasoned that sustaining the addition would effectively require treating the corresponding recorded sales as not genuine or reducing the sales figure-yet no such adjustment was made. Therefore, mere abnormality in comparison with earlier months, without contradicting the assessee's recorded sales/stock/cash book, was insufficient to sustain the addition.

Conclusions: The Court concluded that the addition founded primarily on suspicion arising from an unusual sales/deposit pattern, without any dispute of sales, stock, or recorded cash availability, could not stand. The addition was deleted and the appeal was allowed.

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