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 furnished identification of creditors, books of account, bank entries, purchase invoices, stock records and comparative sales data; where statutory identification and source explanations were met, purchases were through banking channels, stock availability supported sales and profit on sales was offered to tax, regulatory contravention alone did not convert recorded sales into unexplained income; consequence: the addition under section 68 was held unsustainable and deleted in favour of the assessee.

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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.

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