Cash deposits during demonetization cannot be taxed under Section 69A when bank credits are accepted as business turnover.

ORDER

S.R. Raghunatha, Accountant Member.- The present appeal of the assessee is directed against the order dated 02.02.2026 of the Learned Commissioner of Income Tax (Appeals) , NFAC, Delhi (hereinafter referred to as “the Ld.CIT(A)”), arising out of the assessment order dated 18.12.2019 passed u/s.144 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) by the Income Tax Officer, Ward 2(2), Erode (hereinafter referred to as “the Act”) pertaining to the Assessment Year 2017-18.

2. The brief facts of the case, as emanating from the records, are that the assessee is a partnership firm engaged in the business of trading in puffed rice. For the A.Y.2017-18, the assessee did not file its return of income within the time prescribed u/s.139(1) of the Act.

3. The AO, on the basis of information available on record, noticed that during the relevant previous year there were aggregate credits of Rs.52,39,458/- in two bank accounts maintained by the assessee with Canara Bank, Sangapalli Branch, Tirupur. Out of the aforesaid aggregate credits, a sum of Rs.14,83,500/- represented cash deposits made during the demonetization period.

4. During the course of assessment proceedings, the AO issued several statutory notices calling upon the assessee to furnish the requisite details and explain the transactions reflected in the aforesaid bank accounts. However, according to the AO, the assessee failed to comply with the said notices. Subsequently, on 06.12.2019, the assessee filed a return of income declaring total income of Rs.4,19,870/- by offering its business income under the presumptive scheme of taxation prescribed u/s.44AD of the Act. The AO, however, observed that the said return was filed beyond the time stipulated in the notice issued u/s.142(1) of the Act as well as beyond the time prescribed for filing a belated return u/s.139(4) of the Act and, therefore, did not take cognizance of the same as a valid return of income.

5. In view of the non-compliance on the part of the assessee with the statutory notices issued during the course of assessment proceedings, the AO proceeded to complete the assessment to the best of his judgment u/s.144 of the Act vide order dated 18.12.2019. While doing so, the AO noticed that, after excluding the cash deposits of Rs.14,83,500/- made during the demonetization period, the balance credits in the bank accounts aggregated to Rs.37,55,958/-. The AO treated the said bank credits as representing the business turnover of the assessee and estimated the income therefrom at 8%, resulting in an addition of Rs.3,00,476/- towards business income.

6. In respect of the cash deposits aggregating to Rs.14,83,500/- made during the demonetization period, the AO was of the view that the assessee had failed to furnish any satisfactory explanation regarding the nature and source thereof. Consequently, the AO treated the entire amount of Rs.14,83,500/- as unexplained money u/s.69A of the Act and brought the same to tax. Accordingly, the assessment was completed determining the total income of the assessee at Rs.17,83,976/-.

7. Aggrieved by the aforesaid assessment order, the assessee carried the matter in appeal before the Ld.CIT(A). The Ld.CIT(A), vide the impugned appellate order dated 02.02.2026, confirmed the addition of Rs.14,83,500/-made by the AO u/s.69A of the Act in respect of the cash deposits made in the assessee’s bank accounts during the demonetization period.

8. Insofar as the estimation of business income is concerned, the Ld.CIT(A) noticed that the assessee itself had disclosed business income of Rs.4,19,870/-in the return of income filed on 06.12.2019, albeit belatedly, whereas the AO had estimated the business income at Rs.3,00,476/-. Taking note of the income so declared by the assessee itself, the Ld.CIT(A) enhanced the business income from Rs.3,00,476/- assessed by the AO to Rs.4,19,870/- as disclosed by the assessee in the belated return of income.

9. Thus, while the Ld.CIT(A) sustained the addition of Rs.14,83,500/- made u/s.69A of the Act, the Ld.CIT(A) enhanced the business income assessed by the AO from Rs.3,00,476/- to Rs.4,19,870/- by passing an order dated 02.02.2026.

10. Aggrieved by the aforesaid findings of the Ld.CIT(A), the assessee is in further appeal before the Tribunal.

11. We have heard the rival submissions and perused the materials available on record. The solitary issue which arises for our consideration is whether, on the facts and circumstances of the case, the authorities below were justified in treating the cash deposits aggregating to Rs.14,83,500/- made in the assessee’s bank accounts during the demonetization period as unexplained money u/s.69A of the Act, particularly when the assessee is admittedly carrying on the business of trading in puffed rice and the remaining credits appearing in the very same bank accounts have been accepted by the AO as representing its business turnover.

12. At the outset, it is an undisputed fact that the assessee is a partnership firm engaged in the business of trading in puffed rice. It is also not in dispute that during the relevant previous year aggregate credits of Rs.52,39,458/- were found in the two bank accounts maintained by the assessee with Canara Bank, Sangapalli Branch, Tirupur. Out of the aforesaid total credits, a sum of Rs.14,83,500/- represented cash deposits made during the demonetization period, whereas the balance credits amounted to Rs.37,55,958/-.

13. A perusal of the assessment order shows that the AO himself treated the bank credits of Rs.37,55,958/- as representing the business turnover of the assessee and estimated profit thereon at 8%, thereby determining business income at Rs.3,00,476/-. The Ld.CIT(A), on the other hand, noticed that the assessee, in the return of income filed on 06.12.2019, had itself disclosed business income of Rs.4,19,870/- under the presumptive scheme of taxation. The Ld.CIT(A), therefore, enhanced the business income assessed by the AO from Rs.3,00,476/- to Rs.4,19,870/-. Thus, the factum of carrying on business by the assessee and the existence of business receipts routed through the very same bank accounts stand accepted by both the authorities below.

14. However, insofar as the cash deposits of Rs.14,83,500/- are concerned, the AO segregated the said deposits from the other credits in the bank accounts solely for the reason that they were made during the demonetization period and, in the absence of an explanation to his satisfaction, treated the entire amount as unexplained money u/s.69A of the Act. The said action of the AO has been sustained by the Ld.CIT(A). In our considered view, such an approach cannot be countenanced on the facts obtaining in the present case.

15. Section 69A of the Act, inter alia, contemplates a situation where an assessee is found to be the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee either offers no explanation about the nature and source thereof or the explanation offered is not found satisfactory. Thus, before invoking the deeming fiction contained in section 69A, the Revenue must bring the case within the ingredients prescribed therein. The mere existence of cash deposits in a bank account, by itself, cannot inexorably lead to the conclusion that such deposits constitute unexplained money, more particularly where the surrounding facts disclose an existing and admitted source in the nature of business activity capable of generating such cash receipts.

16. In the present case, the Revenue has not disputed the assessee’s business of trading in puffed rice. On the contrary, the AO himself has accepted that substantial credits appearing in the very same bank accounts represent the assessee’s business turnover. Once the Revenue accepts that the bank accounts were being used for the purposes of the assessee’s business and that credits therein represented business receipts, there must be some cogent material on record before a part of the credits appearing in the very same accounts could be carved out and assigned an altogether different character as unexplained money. We find no such material brought on record by the AO.

17. Significantly, the AO has not pointed out any independent or undisclosed source from which the impugned cash of Rs.14,83,500/- could have emanated. There is no finding that the assessee was carrying on any activity other than its disclosed business of trading in puffed rice. There is also no material brought on record to establish that the impugned cash deposits represented receipts from any source unconnected with the assessee’s business. No incriminating material, unexplained asset, investment or expenditure relatable to any alleged undisclosed source has been identified by the AO. In the absence of such material, the conclusion that the cash deposits constituted unexplained money rests merely upon presumption.

18. We further find that the aggregate credits in the bank accounts were Rs.52,39,458/-. The AO accepted credits aggregating to Rs.37,55,958/- as business turnover but excluded Rs.14,83,500/- merely because the latter amount represented cash deposited during the demonetization period. In our view, the mere timing of a cash deposit, namely, that it was made during the demonetization period, cannot by itself alter the intrinsic character of the receipt. The demonetization of specified bank notes did not create any separate charging provision under the Act nor did it dispense with the requirement of establishing the ingredients of section 69A before an addition could be made thereunder. A cash receipt does not become unexplained money merely because the corresponding cash was deposited into a bank account during the demonetization period.

19. The approach adopted by the AO also gives rise to an inherent inconsistency. On the one hand, the AO has treated credits in the bank accounts as arising out of the assessee’s admitted business and has brought only the profit element embedded therein to tax. On the other hand, another set of deposits in the same bank accounts has been treated in its entirety as unexplained money without demonstrating any distinguishing feature, except that the deposits were made during the demonetization period. In our considered opinion, such selective treatment of the bank credits is unsustainable unless supported by positive material demonstrating that the impugned cash deposits had a source distinct from the admitted business activity.

20. It is well settled that when the turnover or gross receipts of a business are taken as the basis for determining business income, ordinarily what can be brought to tax is the income or profit embedded in such receipts and not the entire gross receipts themselves. The gross business receipts cannot simultaneously be treated as income in their entirety unless there is material to show that the receipts themselves bear the character of income from an independent unexplained source. Otherwise, it would result in taxing the business receipts as such over and above the income attributable to the business activity.

21. In this regard, we also cannot lose sight of the fact that the assessee had filed a return of income on 06.12.2019 declaring business income of Rs.4,19,870/- u/s.44AD of the Act by showing 8% of the gross collection. Though the AO declined to recognize the said return as a valid return on account of its belated filing, the Ld.CIT(A) has specifically relied upon the income disclosed therein and enhanced the assessed business income from Rs.3,00,476/- to Rs.4,19,870/-. Having adopted the business income disclosed by the assessee in the said return for the purpose of enhancement, the Revenue cannot, at the same time, completely disregard the factual assertion underlying such disclosure, namely, that the assessee was carrying on the disclosed business and earning income therefrom. The evidentiary value of the particulars furnished by the assessee does not disappear merely because the return was filed beyond the statutory period.

22. It is also pertinent to observe that an assessment framed u/s.144 of the Act, though necessarily based upon the best judgment of the Assessing Officer, cannot be arbitrary or founded merely upon conjectures and surmises. The expression “best judgment” necessarily postulates a fair and reasonable estimate based upon relevant material available on record. The absence of compliance by the assessee may entitle the AO to proceed ex parte and draw permissible adverse inferences, but such non-compliance, by itself, cannot constitute substantive evidence that every cash deposit appearing in the bank account represents unexplained money within the meaning of section 69A of the Act. The addition must nevertheless satisfy the statutory requirements of the provision under which it is made.

23. In the facts before us, there was an identifiable and admitted source of cash generation, namely, the assessee’s business of trading in puffed rice. The Revenue has accepted the existence of the said business as also the fact that the bank accounts in question contained business receipts. Once such business source is accepted, the burden was upon the Revenue, before invoking section 69A in respect of a particular segment of the bank deposits, to demonstrate on the basis of material available on record that such deposits were not attributable to the said business but represented money from an independent unexplained source. No such exercise has been carried out in the present case.

24. We may further observe that the assessee is a trader in puffed rice, where cash transactions cannot, in the absence of material to the contrary, be regarded as inherently improbable. The AO has neither examined the pattern of deposits preceding the demonetization period nor demonstrated any abnormality in the volume of business corresponding to the impugned cash deposits. There is no finding that the deposits were disproportionate to the scale of the assessee’s admitted business. Nor has any material been brought on record to establish that the cash could not reasonably have arisen from the business receipts of the assessee. In the absence of such enquiry and corresponding adverse material, the impugned addition cannot be sustained merely on account of the fact that the cash happened to be deposited during the demonetization period.

25. We also find merit in the proposition that the same stream of receipts cannot, without a proper factual foundation, be subjected to two mutually inconsistent treatments. If the credits in the bank accounts constitute business turnover, the income embedded therein has to be assessed under the head “Profits and gains of business or profession” in accordance with law. Conversely, if the Revenue seeks to treat any particular credit as unexplained money u/s.69A, it must establish a reasonable basis for excluding such amount from the business receipts and treating it as arising from an unexplained source. Such foundational exercise is conspicuously absent in the orders of the authorities below.

26. The Ld.CIT(A), while sustaining the impugned addition, has principally proceeded on the failure of the assessee to satisfactorily establish the source of the cash deposits. However, in our considered view, the matter cannot be examined in isolation from the undisputed surrounding circumstances. The assessee had an existing business; the bank accounts were admittedly used in connection with such business; substantial credits in those very accounts were accepted as business turnover; and no other source of income or activity capable of generating the impugned cash has been identified by the Revenue. These facts constitute material circumstances which could not have been brushed aside merely because the deposits were made during the demonetization period.

27. The deeming provisions contained in sections 68 to 69D of the Act are intended to bring to tax amounts whose nature and source remain unexplained. Such deeming provisions cannot be invoked mechanically where the record itself discloses an apparent and admitted source and the Revenue has not brought any material to dislodge the nexus of the receipt with such source. The fiction created by section 69A cannot be extended beyond the purpose for which it has been enacted so as to convert every cash deposit into unexplained money merely on account of an inadequacy in the explanation furnished by the assessee, irrespective of the other material circumstances available on record.

28. In the present case, the Revenue having accepted the business activity of the assessee and having treated the other credits in the same bank accounts as business turnover, we find no justifiable basis for treating the cash deposits of Rs.14,83,500/- separately as unexplained money u/s.69A of the Act, in the absence of any positive material demonstrating that such deposits emanated from a source other than the assessee’s business. The fact that these deposits were made during the demonetization period, without anything more, cannot supply the missing evidentiary link required for invoking section 69A of the Act.

29. We are, therefore, of the considered view that the addition of the entire cash deposits of Rs.14,83,500/- u/s.69A of the Act is not sustainable. At best, the said deposits form part of the business receipts of the assessee. Once the business income has already been determined at Rs.4,19,870/- by the Ld.CIT(A), on the basis of the income disclosed by the assessee itself, no separate addition of the gross cash receipts is warranted in the absence of material establishing an independent unexplained source.

30. Accordingly, considering the totality of the facts and circumstances of the case, we hold that the AO was not justified in treating the cash deposits aggregating to Rs.14,83,500/- as unexplained money u/s.69A of the Act and the Ld.CIT(A) erred in sustaining the same. We, therefore, set aside the finding of the Ld.CIT(A) on this issue and direct the AO to delete the addition of Rs.14,83,500/- made u/s.69A of the Act.

31. Before parting, we make it clear that the business income of Rs.4,19,870/- determined by the Ld.CIT(A), being the income disclosed by the assessee itself in the return filed on 06.12.2019, is not disturbed by us. Our interference is confined to the separate addition of Rs.14,83,500/- made u/s.69A of the Act. Consequently, the grounds raised by the assessee challenging the addition of Rs.14,83,500/- u/s.69A of the Act are allowed.

32. In the result, the appeal of the assessee stands allowed.

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