ITAT Deletes Addition of Cash Deposits During Demonetization as Assessee Proved Sufficient Stock

ITAT Deletes Addition of Cash Deposits During Demonetization as Assessee Proved Sufficient Stock

Issue

Whether cash deposits made during the demonetization period can be treated as unexplained cash credits under Section 68 (read with Section 115BBE) when the assessee demonstrates that the deposits were proceeds from genuine cash sales supported by sufficient available stock.

Facts

• Assessee Profile: An individual engaged in the wholesale and retail sale of essential commodities like sugar, edible oil, and food grains.

• The Dispute: During the demonetization period, the assessee deposited cash amounting to Rs. 68,35,000/-.

• AO’s Action: The Assessing Officer (AO) accepted only Rs. 4,60,000/- as genuine cash sales. He treated the balance Rs. 63,41,000/- as unexplained money under Section 68 and taxed it at the higher rate under Section 115BBE.

• Reasoning by AO: The AO bifurcated the year into the “demonetization period” vs. the “rest of the year” and concluded that the cash deposits during the specific window were excessive and unexplained.

• Assessee’s Defense: The assessee argued that he held sufficient stock-in-trade. The cash deposited was purely the sale proceeds of this stock. He contended that the AO failed to look at the stock position holistically for the entire year (01.04.2016 to 31.03.2017).

Decision

• The Income Tax Appellate Tribunal (ITAT) allowed the appeal and deleted the addition of Rs. 63,41,000/-.

• Holistic View Required: The Tribunal criticized the Revenue authorities for reading the details “halfheartedly” and creating an “artificial bifurcation” of the business period. The AO should have examined the stock position for the whole year rather than isolating the demonetization window.

• Stock Justifies Sales: A perusal of the records indicated that the assessee had sufficient stock available. This stock was sold, and the resulting cash was deposited. Without a finding that the stock records were bogus, the sales could not be doubted.

• Nature of Business: The Tribunal noted that the assessee dealt in essential commodities (edible oil, sugar, grains), and was therefore eligible/likely to make cash sales even during the demonetization period.

Key Takeaways

• Stock Register is Vital: The strongest defense against Section 68 additions for cash sales is a verifiable stock register. If the quantitative tally (Opening Stock + Purchases – Sales = Closing Stock) matches, the cash sales are substantiated.

• No Artificial Bifurcation: Tax authorities cannot isolate the demonetization period to make additions if the overall annual trends and books of accounts support the turnover.

• Essential Commodities: Traders in essential goods have a recognized defense regarding cash sales during the demonetization period due to the nature of consumer demand.

• Section 115BBE: This section imposes a steep tax rate (60% + surcharge) on unexplained credits. Successfully proving the source as “business sales” not only deletes the addition but also saves the assessee from this penal tax rate.

THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, ‘B’ CHANDIGARH

Shri Sudesh Jain,
C/o Rajiv Goel & Associates
179, Bank Road,Ambala Cantt.

Vs
The ITO,
Ward – 4,Ambala