Recorded sales and supported books can explain demonetisation cash deposits; suspicion alone will not sustain an addition.

Cash deposits during the demonetisation period were examined against section 68, with the key question being whether deposits claimed to arise from recorded sales could be treated as unexplained income. The note states that where cash book entries, sale records, audited accounts, stock registers and VAT returns supported the turnover, and the books were not rejected or shown to contain specific defects, the deposits were not to be treated as unexplained cash credits. It further records that Form-F declarations and accepted VAT assessments reinforced the genuineness of inter-branch stock movements and the source of cash. The stated result was deletion of the addition because the revenue relied only on suspicion and sales-pattern anomalies without contrary material.

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Issues: (i) whether cash deposits made during the demonetisation period, claimed to be out of recorded cash sales, could be assessed as unexplained cash credits under section 68 of the Income-tax Act, 1961; (ii) whether the surrounding materials, including audited books, stock records, VAT returns and Form-F declarations, supported the genuineness of the sales and the source of the deposits.

Issue (i): whether cash deposits made during the demonetisation period, claimed to be out of recorded cash sales, could be assessed as unexplained cash credits under section 68 of the Income-tax Act, 1961

Analysis: The cash deposits were supported by cash book entries and sale records. The books of account were not rejected, and no specific defect in the sales, purchases, or stock position was established. A mere increase in cash sales during the demonetisation window, or the fact that many invoices were below the PAN threshold, was held insufficient by itself to dislodge the explanation where the receipts were already recorded as business turnover.

Conclusion: The deposits could not be treated as unexplained cash credits under section 68.

Issue (ii): whether the surrounding materials, including audited books, stock records, VAT returns and Form-F declarations, supported the genuineness of the sales and the source of the deposits

Analysis: The assessee produced audited accounts, cash books, stock movement records and VAT returns showing corresponding turnover. The inter-branch stock transfers were supported by Form-F declarations and the VAT assessments had accepted the returns. In the absence of contrary material or any demonstrated mismatch in stock flow, the contemporaneous documentary record supported the assessee's explanation of the source of cash.

Conclusion: The documentary evidence was accepted as sufficient to explain the deposits and to establish the genuineness of the sales.

Final Conclusion: The addition sustained on account of demonetisation-period cash deposits was deleted, and the assessee succeeded on the merits of the appeal.

Ratio Decidendi: Where cash deposits are traced to recorded sales supported by audited books, stock records and accepted tax returns, and the revenue fails to show a defect or contrary material, such deposits cannot be brought to tax as unexplained income merely on suspicion or on the basis of sales-pattern anomalies.

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