Demonetization cash deposit addition deleted as AO accepted sales, stock and purchases without evidence of undisclosed income.

By | November 17, 2025
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Demonetization cash deposit addition deleted as AO accepted sales, stock and purchases without evidence of undisclosed income.

Issue

Whether the Assessing Officer (AO) can treat a portion of cash sales deposited during the demonetization period as unexplained cash credits, relying on assumptions and the lack of prior deposits, even when the assessee’s audited books, purchases, and stock records are accepted and no defects are pointed out.

Facts

  • The assessee deposited cash amounting to Rs. 43,72,500/- in its bank account during the demonetization period.

  • The source of the deposit was explained as cash sales made prior to the demonetization announcement.

  • The assessee submitted audited accounts, evidence of purchases, stock-in-trade, closing stock, and details of both credit and cash sales.

  • The Assessing Officer (AO) found no defects or discrepancies in the audited accounts, purchases, or stock details.

  • However, the AO accepted cash sales only to the extent of Rs. 22,85,915/- and treated the balance Rs. 20,86,585/- as unexplained income.

  • The AO’s primary justification was that the assessee had not deposited cash in the bank during the earlier period of the year, raising a suspicion that unaccounted income was introduced as sales.

Decision

  • The Income Tax Appellate Tribunal (ITAT) allowed the appeal and deleted the addition of Rs. 20,86,585/-.

  • The Tribunal noted that the AO himself recorded the month-wise cash sales (July to November 2016) and did not dispute the sales made in earlier months.

  • The Tribunal held that since the purchases, stock-in-trade, and closing stock were not suspected, the rejection of sales was based merely on assumptions and presumptions.

  • Regarding the AO’s argument about the lack of earlier deposits, the Tribunal observed that the demonetization scheme estopped/prevented the assessee from circulating cash for reinvestment, forcing them to deposit it into the bank. Thus, this fact supported the assessee’s case rather than the Revenue’s.

  • The Tribunal also noted that the total cash sales constituted only 4.57% of the turnover, which was reasonable for the business.

Key Takeaways

  • trading Results Accepted: An AO cannot accept the purchases and stock records while arbitrarily rejecting a portion of the corresponding sales without specific evidence of inflation or manipulation.

  • Suspicion is Not Proof: Additions cannot be made solely on the suspicion that an assessee might have introduced unaccounted income; there must be concrete evidence to disprove the assessee’s explanation.

  • Business Expediency during Demonetization: The Tribunal recognized that during demonetization, the normal cycle of rotating cash for business purchases was broken, providing a valid justification for sudden cash deposits where there were none previously.

  • Reasonableness of Turnover: Demonstrating that cash sales form a small, reasonable percentage of total turnover can serve as strong supporting evidence for the genuineness of the transactions.

THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH
BENCH “SMC” CHANDIGARH
Raideep Bhalla & Sons,
51-A, Kitchlu Nagar,
Ludhiana.
Vs
The ITO,
Ward – VII (2),
Ludhiana.
ITA No.869/CHD/2025
Date of Pronouncement : 07.11.2025

Source :- 1762508394-3dWpxg-1-TO