ORDER
Keshav Dubey, Judicial Member.- This appeal at the instance of the assessee is directed against the order of learned CIT(A)/NFAC dated 17-09-2025 vide DIN and Order No. ITBA/NFAC/S/250/2025-26/1080837221(1) passed under Section 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:-
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That the Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 29,27,000/- u/s 68 of the Act, despite the fact that the said amount represents recorded business receipts duly supported by audited books of account, VAT returns, stock registers, invoices, and cash book. |
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That the Ld. CIT(A) has failed to appreciate that the essential conditions for invoking Section 68 of the Act were not satisfied, inasmuch as (i) the entries are recorded in the regular books of account, and (ii) the Appellant has furnished a complete and satisfactory explanation regarding the nature and sources of the deposits. |
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That the Ld. CIT(A) has erred in holding that cash sales effected after 08.11.2016 cannot be treated as genuine merely because SBNs were tendered as payment, whereas alleged violation of RBI guidelines cannot override the statutory provisions of the Income-tax Act nor convert a recorded business receipt into unexplained income. |
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That the Ld. CIT(A) has misdirected himself in substituting the test of “legality of tender of currency” in place of the statutory test of “nature and source of credit”, thereby travelling beyond the scope of Section 68 of the Act. |
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That the Ld. CIT(A) has erred in law in ignoring the fact that the books of account are audited, produced, verified, and never rejected u/s 145(3) of the Act; consequently, selective rejection of recorded sales is bad in law. |
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That the Ld. CIT(A) has erred in disregarding crucial evidences such as VAT returns, sales bills, stock registers, bank deposit slips, and audited financial statements, all of which sufficiently establish the nexus between cash deposits and business turnover. |
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That the finding of the Ld. CIT(A) that acceptance of SBN renders the sales non-genuine is perverse, arbitrary, and contrary to law, as neither the Income-tax Act nor Section 68 authorizes such disallowance on the basis of tendered currency. |
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That the Ld. CIT(A) has erred in ignoring binding judicial precedents which categorically hold that cash deposits supported by books and tax returns cannot be treated as unexplained; that retail cash sales do not require identification of each customer; that Section 68 of the Act does not apply to business turnover; and that cash deposits during demonetization cannot be treated as income when supported by records. |
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That the impugned addition results in double taxation, as the turnover corresponding to the deposits has already been subjected to VAT and offered as business income, and taxing the same again u/s 68 of the Act is wholly unjustified. |
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That the Ld. CIT(A) has erred in sustaining interest u/s 234A/B/C without proper computation, and without appreciating that interest is consequential in nature. |
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That the orders of the authorities below suffer from incorrect appreciation of facts, non-consideration of documentary evidences, misapplication of statutory provisions, and lack of judicial reasoning; therefore, the same deserve to be qualified. |
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That the Appellant craves leave to add, alter, amend, or withdraw any ground at the time of hearing. |
3. The brief facts of the case are that the assessee is a proprietor of M/s Kalleshwara Enterprises and engaged in the business of trading in Borewell tubes, pipes, collars, GI pipes, bore caps and other allied agriculture equipments etc. The assessee filed his return of income for the AY 2017-18 on 22.09.2017 declaring total income of Rs.5,57,560/-. Thereafter, the case was selected for scrutiny under CASS. Accordingly, the notices under Section 143(2) of the Act as well as 142(1) of the Act were issued and served on the assessee calling for the various details required to complete the assessment. The assessee submitted the details as called for.
3.1 During the course of assessment proceedings, it as observed by the AO that the Specified Bank Notes (SBN) deposited by the assessee in Corporation Bank and Pragathi Grameena Bank during the demonetization period was Rs. 14,89,500/- and Rs. 30,92,000/- respectively. The assessee has e-filed cash book wherein it was seen that the cash balance available as on 08.11.2016 was at Rs. 16,54,500/-. However, the assessee had deposited a sum of Rs. 45,81,500/- during the demonetization period. Thus, the AO was of the clear view that the assessee had made cash sales during the period from 10/11/2016 to 17/12/2016 and accepted SBN which the assessee was not authorized to accept in view of RBI guidelines. Considering the fact that the cash balance available as on 08.11.2016 was only Rs. 16,54,500/- and accordingly the balance cash deposit of Rs.29,27,000/ – (Rs.45,81,500 – Rs.16,54,500) was treated as unexplained cash credit under Section 68 read with Section 115BBE of the Act under the head income from other sources. The AO completed the assessment proceedings under section 143(3) of the Act on a total assessed income of Rs. 34,84,560/-.
4. Aggrieved by the assessment order passed under Section 143(3) of the Act dated 17.12.2019, the assessee preferred an appeal before the learned CIT(A)/NFAC.
5. The learned CIT(Appeal)/NFAC held that the explanation of the assessee that the excess deposits of Rs. 29,27,000/- during the demonetization period represents subsequent cash sales is not sustainable, as the assessee was prohibited by law from accepting the SBNs after 08.11.2016. Any such claim of sales in contravention of RBI guidelines cannot be treated as genuine for tax purposes. Further, the learned CIT (Appeal)/NFAC observed that the reliance on VAT returns, stock registers and bank acceptance of SBNs does not strengthen the case of the assessee because the real issue is not whether the bank credited the money, but whether the assessee has satisfactorily explained the source of deposits in compliance with law and in view of above, the action of AO in treating Rs. 29,27,000/- as unexplained cash credit under Section 68 of the Act was found to be correct and in accordance with law & accordingly dismissed the appeal of the assessee.
6. Again aggrieved by the order of learned CIT Appeal/NFAC dated 17/09/2025, the assessee has filed the present appeal before this Tribunal.
7. Before us, the learned AR of the assessee vehemently submitted that the Authorities below had accepted the source of cash deposits which was nothing but the cash sales made during the demonetization period. The authorities below had not accepted the contentions of the assessee solely on the ground that the assessee had accepted the SBNs in violation of RBI guidelines & accordingly treated the balance amount of Rs. 29,27,000/- as unexplained cash credit under Section 68 of the Act which is illegal and bad in law and accordingly prayed that appeal of the assessee may be allowed.
8. The learned DR on the other hand relied on the order of the Authorities below and vehemently submitted that the assessee had accepted the SBNs during the demonetization period in violation of RBI guidelines and therefore that cannot be considered as valid explanation towards the source of deposit of cash into the bank account.
9. We have heard the rival submissions and perused the material available on record. The assessee in the present case is the proprietor of M/s Kalleshwara Enterprises and engaged in the business of trading in Borewell tubes, pipes, collars, GI pipes, bore caps, etc. The assessee maintains books of accounts on day-to-day basis such as cash book, ledger, VAT returns, stock register along with Bills and vouchers. The books of accounts of the assessee were also audited by Chartered Accountant. The claim of the assessee is that all the cash sales are properly recorded in the books of accounts and the assessee had also furnished the complete and satisfactory explanations regarding the nature and sources of cash deposits into the bank account. We observed that the AO has accepted the books of accounts maintained by the assessee on the day-to-day basis. On perusal of the assessment order dated 17.12.2019, we also observed that the AO has categorically stated that the assessee had made cash sales during the demonetization period i.e. from 10.11.2016 to 17.12.2016 and accordingly deposited the SBNs on various dates. The AO did not accept the source of deposit solely on the ground that the assessee had accepted the SBNs and remitted to bank in violation of RBI guidelines. Further, considering the fact that the cash balance available as on 08.11.2016 amounting to Rs. 16,54,500/-, the AO treated the balance cash deposit of Rs. 29,27,000/- as unexplained cash credit under Section 68 of the Act. Therefore, in our considered opinion there is no dispute that the cash deposits were made out of the cash sales proceeds made by the assessee during the demonetization period. The learned CIT(A)/NFAC also held that the explanation of the assessee that the excess deposits of Rs. 29,27,000/- during the demonetization period represents subsequent cash sales is not sustainable, as the assessee was prohibited by law from accepting the SBNs after 08.11.2016. Thus, in our considered opinion, both the Authorities below admitted the fact that the cash deposits were made out of the cash sales but did not accept the contentions as the assessee had accepted SBNs which the assessee was not authorized to accept in view of RBI guidelines. Thus, undisputedly the assessee has explained the sources and nature of cash deposits into the bank accounts. It is also an undisputed fact that the cash sale proceeds are disclosed by the assessee in his audited books of accounts which were also accepted by the AO. The assessee had also produced the cash book, copy of the VAT returns, sales bill, stock registers, bank deposit slips and audited financial statement to substantiate his claim. In view of this, the provision of Section 68 invoked by the AO is completely incorrect & bad in law. Further, we observed that even the learned CIT Appeal/NFAC without appreciating the fact of the case that when the source & nature of the transaction is not disputed and the assessee had in fact furnished the complete detail such as cash book, copy of the VAT returns, sales bill, stock registers, bank deposit slips and audited financial statement should not have confirmed the addition under Section 68 of the Act.
9.1 The banks where the money was deposited have also accepted the same as valid tender by giving full credit to the assessee. We could not understand merely because the assessee had accepted the SBNs after demonetization, why these cash sale proceeds cannot be treated as part of sales declared by the assessee especially when the said cash were undisputedly deposited into the bank accounts & accepted by the bank. Admittedly the Specified Bank Notes (cessation of liabilities) Act, 2017 defines “appointed day” vide Section 2(1)(a). As per Section 2(1)(a), “appointed day” means the 31st day December, 2016. Further, Section 5 of the Specified Bank Notes (cessation of liabilities) Act, 2017 also deals with prohibition on holding, transferring or receiving Specified Bank Notes. Section 5 states that “on and from the appointed day, no person shall, knowingly or voluntarily, holds, transfer or receives any specific bank note”. We therefore, finds that the Specified Bank Notes was cease to be liabilities of the Reserve Bank under section 34 and also was cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act only on and from 31/12/2016. In view of the above, the contentions of the learned DR that the receipt of SBNs on account of cash sales during the demonetization period were just worthless pieces of paper having zero value cannot be accepted. Admittedly, the assessee may not be authorized to receive the SBNs, but this is not in the dominion of taxation under section 68 of the Act. The provisions of section 68 of the Act says that if the nature & source of the sum credited in the books of accounts of the assessee is not explained to the satisfaction of the AO, then it can be added as unexplained cash credit in the hands of the assessee. In the present case, the assessee had appropriately explained from where the SBN notes have come and such notes have also been deposited in the respective banks & therefore additions under section 68 of the Act is unwarranted. The assessee has clearly demonstrated the nexus of cash sales with the amount of cash deposited into the bank accounts. The AO had also not brought any adverse material on record except by saying that the assessee was not authorized to accept the SBNs in view of RBI guidelines. Thus, we are of the considered opinion that once the assessee had already declared the cash sales as part of the total sales and the AO had also not doubted the same, taxing the same once again under section 68 of the Act as unexplained cash credit will amount to double taxation. Therefore, the addition made by the AO are not sustainable and accordingly, we direct the AO to delete the addition of Rs. 29,27,000/- as made under Section 68 of the Act.
10. In the result the appeal filed by the assessee is allowed.
