Cash sales and deposits during demonetization and festive season: s.68/69 addition questioned, deleted to avoid double taxation

Addition under s. 68/69 for cash deposits during the demonetization period was examined where the AO treated reported cash sales as unexplained solely because they exceeded prior average cash sales. The ITAT held that sales during the festive season and demonetization could legitimately be higher, and the assessee had already recorded the sales in books and offered them to tax. Treating the corresponding cash receipts again as unexplained would result in impermissible double taxation, particularly when stock movement and sales reconciled with the book results and no cogent adverse material was produced. The addition was deleted and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether cash deposited in bank during the demonetization period, claimed to be out of recorded cash sales and existing cash-in-hand reflected in the audited books and supported by stock movement, could be treated as unexplained income merely because sales for a short period were higher than average sales.

(ii) Whether such cash deposits could be brought to tax under section 68 or section 69 when the corresponding sales were already declared and offered to tax, and the assessing authority did not find defects in stock movement or in the assessee's books relevant to the deposits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Sustainability of addition for demonetization-period cash deposits based on "abnormally high" sales compared to averages

Legal framework: The Court examined the addition made by treating the demonetization-period cash deposits as unexplained, based on a comparative average-sale analysis adopted by the assessing authority, and the factual explanation offered that deposits were sourced from recorded cash sales and cash-in-hand as on the demonetization date, supported by stock records.

Interpretation and reasoning: The Court found that the assessing authority proceeded on an assumption that the sales pattern must remain uniform throughout the year and determined expected sales on the basis of averages. The Court held this approach insufficient because it ignored (a) the assessee's available cash-in-hand as on 08.11.2016, and (b) the absence of any adverse finding regarding stock movement. The Court accepted that sales during the relevant days coincided with a festive period and the broader context in which increased gold/jewellery sales during demonetization were recorded, and held that the mere fact of higher-than-average cash sales, without cogent corroborative material, could not justify treating recorded receipts as unexplained.

Conclusion: The addition could not be sustained where it rested only on assumptions drawn from average-sale comparisons and the record did not disclose defects in stock movement or other cogent material contradicting the assessee's explanation that deposits came from recorded business sales and cash-in-hand.

Issue (ii): Applicability of section 68/69 to cash deposits representing declared sales; risk of double taxation

Legal framework: The Court addressed whether cash sales receipts deposited in bank, already forming part of declared turnover and offered to tax, could still be assessed as unexplained under section 68 or section 69.

Interpretation and reasoning: The Court emphasized that the assessee had already declared the sales and offered the corresponding income to tax. Treating the cash sales receipts again as unexplained under section 68 or 69 would create a situation where the same income is taxed twice. The Court further noted that the assessing authority did not bring any cogent material to support the addition beyond assumptions about sales averages, and that the assessee demonstrated that stock movement and sales matched the book results.

Conclusion: Cash deposits representing recorded cash sales already declared and offered to tax were not liable to addition under section 68 or section 69 on the facts found; such an addition would amount to impermissible double taxation in the circumstances, particularly where no cogent contrary material and no stock-movement discrepancy was established. The appeal was allowed and the addition deleted.

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