2026 (3) TMI 1097 - AT - Income Tax

Unexplained cash credits under Section 68: documented sales, banked purchases and stock records can negate additions on demonetisation deposits.

Whether deposits of demonetised banknotes can be treated as unexplained cash credits under section 68 was addressed by examining whether the assessee ... Addition u/s 68 - Treatment of cash deposits as unexplained income - allegation of 'abnormal' sales during the demonetization period - suspicion regarding the sales booked by the assessee prior to the start of demonetization period - violation of RBI demonetisation notifications attracting section 68/69A - rejection of books of accounts Whether the addition u/s 68 treating cash deposits during the demonetisation period as unexplained income is sustainable where the assessee recorded corresponding sales, possessed stock, made purchases through banking channels and offered profit to tax? - HELD THAT: - The Tribunal found that the assessee furnished comparative sales data, books of account, cash book, bank statements, purchase invoices and stock records showing availability of requisite stock and purchases through banking channels. AO did not point to any discrepancy in the stock register nor did he demonstrate that purchases were made out of unexplained income; notices u/s133(6) were largely complied with. Given that sales were recorded in the books and the profit element was offered to tax, the Tribunal held that taxing the gross receipts by invoking section 68 would amount to double taxation and the AO's addition based on suspicion of spike in cash advances was not supported by reliable material. The Tribunal therefore deleted the addition. [Paras 11, 12, 16] Addition u/s 68 deleted as the assessee satisfactorily explained the source of cash deposits by recorded sales and available stock; only the profit element (already offered to tax) could be taxed. Violation of RBI demonetisation notifications attracting section 68/69A - Whether acceptance of Specified Bank Notes in breach of RBI notifications during demonetisation converts such receipts into unexplained income under section 68/69A? - HELD THAT: - The Tribunal held that even if the assessee accepted Specified Bank Notes in contravention of RBI instructions, such contraventions are matters for the competent authority under relevant law and do not, by themselves, transform recorded sales proceeds into unexplained income for the purposes of the Income-tax Act. The Tribunal relied on Girish Karamshi Dedhia [2025 (11) TMI 1892 - ITAT MUMBAI] holding that where sales are recorded in books and the assessee has explained the source of deposits, section 68/69A cannot be invoked merely because receipt of SBNs contravened RBI circulars. [Paras 14, 15, 16] Violation of RBI demonetisation notifications, if any, does not automatically render recorded receipts unexplained under section 68 or 69A; thus such contraventions did not sustain the addition. Rejection of books of account u/s 145(3) - Whether the books of account could be rejected u/s 145(3) merely on suspicion arising from concentrated cash advances on specific dates? - HELD THAT: -Books of account could not be rejected solely on suspicion of concentrated cash advances; rejection u/s 145(3) was not justified and related additions were deleted. Final Conclusion: The impugned addition treating cash deposits during the demonetisation period as unexplained income was deleted; any alleged breach of RBI demonetisation instructions did not, by itself, attract section 68/69A. The assessee's appeal is allowed. Issues: Whether the addition of Rs. 9,65,97,834/- as unexplained cash credits under section 68 of the Income-tax Act, 1961, in respect of specified bank notes deposited during the demonetisation period, is sustainable when the assessee has recorded corresponding sales in books, possessed requisite stock, and furnished supporting documents.Analysis: The assessee produced audited books, cash book, bank statements, purchase and sales invoices, stock records, VAT returns and confirmations from several parties; comparative year-on-year sales and cash-deposit data were furnished showing that cash sales and deposits in the relevant demonetisation period were not abnormally high compared to the preceding year. Purchases were made through banking channels and stock availability was not disputed. Notices issued under section 133(6) were largely complied with. The assessing officer did not point to any specific discrepancy in stock records or show that purchases were not recorded or were made out of unexplained income. The profit element from the recorded sales was offered to tax. Authorities cited treating acceptance of demonetized notes as a regulatory breach were examined and distinguished on the ground that regulatory contravention, without more, does not convert recorded sales into unexplained income under section 68 when the statutory requirements for identification of creditors and source explanation are met or where stock and purchases support the sales.Conclusion: The addition under section 68 is deleted and the appeal is allowed; the impugned amount treated as unexplained cash credits is not sustainable in favour of the assessee.