Cash deposits from recorded sales cannot be taxed as unexplained income merely because specified bank notes were accepted during demonetisation.

Cash deposits made during demonetisation were treated as explained where they were traced to recorded business sales supported by regular books, cash book, VAT returns, stock registers, invoices, bank deposit slips and audited financial statements. Section 68 was held inapplicable on these facts because the nature and source of the credits stood satisfactorily explained, and the books were not rejected. The mere fact that specified bank notes were accepted after 08.11.2016, even if said to be contrary to RBI guidelines, did not by itself justify an addition. The same sale proceeds, already disclosed as turnover, could not be brought to tax again as unexplained income.

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Issues: Whether cash deposits made during the demonetization period, being traced to recorded cash sales reflected in audited books and supporting records, could be treated as unexplained cash credit under Section 68 of the Income-tax Act, 1961 merely because the assessee had accepted specified bank notes after 08.11.2016.

Analysis: The cash deposits were accepted by the authorities as arising from cash sales made during the relevant period, and the assessee had maintained regular books, cash book, VAT returns, stock registers, invoices, bank deposit slips and audited financial statements. The books were not rejected and the source and nature of the deposits stood explained. The disallowance rested only on the premise that acceptance of specified bank notes after 08.11.2016 was contrary to RBI guidelines. The statutory test under Section 68 is whether the nature and source of the credit in the books is satisfactorily explained, and not whether the currency received was later alleged to be impermissible under banking directions. The provisions of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 also did not justify treating duly recorded sales proceeds as unexplained income for tax purposes. Once the sale proceeds were already disclosed as turnover and accepted in the books, a further addition on the same amount would amount to double taxation.

Conclusion: The addition under Section 68 was unsustainable and had to be deleted, as the assessee satisfactorily explained the source of the cash deposits from recorded business sales.

Final Conclusion: The assessee succeeded in challenging the addition made on account of cash deposits treated as unexplained income, and the assessment was interfered with to the extent of that addition.

Ratio Decidendi: Where cash deposits are supported by regularly maintained and accepted books of account and the source is explained as recorded business sales, Section 68 cannot be invoked merely because the assessee received specified bank notes during demonetization in alleged breach of RBI guidelines.

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