Explained cash deposits cannot be taxed as unexplained credits where audited books and agent refunds remain unchallenged by evidence.

Audited books recording business advances, agent refunds and cash deposits may substantiate specified bank note deposits where the books remain unrejected, the opening cash balance is accepted, and no enquiry or evidence shows the entries to be fictitious. Suspicion alone does not satisfy the conditions for treating deposits as unexplained cash credits. Voluntary lawful commercial receipt of specified bank notes before 31 December 2016 was not prohibited solely because the notes had ceased to be legal tender. On the stated facts, the deposits were explained as genuine refunds, making the proposed unexplained-credit addition and consequential special-rate taxation unsustainable.

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Issues: Whether cash deposits in specified bank notes during the demonetisation period, stated to be refunds of business advances from purchase agents, could be treated as unexplained cash credits.

Analysis: The assessee maintained audited regular books containing the advances, refunds, cash deposits and supporting particulars of 57 purchase agents. The books were neither rejected nor found incorrect, and the Revenue accepted the opening cash balance recorded therein. No enquiry was made with the agents and no material established that the advances, refunds or book entries were fictitious. There was also no abnormal increase in cash deposits compared with the preceding year. Receipt of specified bank notes before 31.12.2016 in voluntary lawful commercial transactions was not statutorily prohibited merely because the notes had ceased to be legal tender. The statutory conditions for invoking the unexplained-credit provision were therefore not established by suspicion alone.

Conclusion: The deposits stood explained as genuine refunds of business advances; the addition under Section 68 and consequential taxation under Section 115BBE were unsustainable.

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