Trading results accepted without rejecting book accounts bars

Trading results accepted without rejecting book accounts bars Section 68 additions for demonetization cash deposits.

Issue

Whether cash deposits made by a jeweler during the demonetization period can be treated as unexplained cash credits under Section 68 when the deposits originate from recorded sales that are fully supported by books of accounts, VAT returns, and trading results that were never rejected by the tax department.
Whether the non-furnishing of corporate documents (like a Board Resolution or share application form) can justify an addition under Section 68 for unallotted share application money, even though the identity and creditworthiness of the payer are undisputed and the amount was refunded in the subsequent financial year.

Facts

Demonetization Deposits: The assessee, a jewelry business operator, deposited ₹6.34 crores in cash into its bank account during the 2016 demonetisation window. The assessee declared that these deposits came directly from cash sales recorded in its regular books of accounts.
AO & CIT(A) Action: The Assessing Officer (AO) doubted the authenticity of these cash sales and treated the entire deposit as unexplained cash credit under Section 68. The CIT(A) upheld this addition.
Assessee’s Evidence: The assessee provided comprehensive documentation, including sale bills, vouchers, bank extracts, and official VAT returns. Crucially, the tax authorities accepted the overall trading results and did not reject the underlying books of accounts.
Share Application Money: During the same assessment year (AY 2017-18), the assessee received ₹60,00,000 as share application money from a private limited company. No shares were ultimately issued, and the entire amount was refunded in the following financial year.
Company Law Infraction: The AO added this ₹60,00,000 to the assessee’s taxable income under Section 68 solely because the assessee failed to produce the relevant Board Resolution or share application form, thereby violating provisions of the Companies Act. However, the AO did not discover any negative evidence regarding the actual identity or creditworthiness of the investor.

Decision

On Demonetization Cash Sales: Decided in favor of the assessee. The High Court/Tribunal held that where an assessee’s sales are duly supported by primary records, books are not formally rejected, and the regular trading results are accepted, the Revenue cannot selectively isolate cash deposits and label them as unexplained cash credits under Section 68. The addition was ordered to be deleted.
On Share Application Money: Decided in favor of the assessee. A procedural infraction or non-compliance under the Companies Act does not automatically invite a tax addition under Section 68 of the Income-tax Act, especially when the investor’s identity/creditworthiness is clear and the funds were fully refunded next year. For corporate law violations, penalties are prescribed within the Companies Act itself; the Income Tax Act cannot be used as a proxy tool to punish corporate non-compliance. The addition was deleted.

Key Takeaways

The “Books Rejection” Prerequisite: For the Revenue to successfully label business receipts or cash sales as “unexplained cash credits,” they must first establish a fatal flaw in the taxpayer’s accounting and formally reject the books of accounts under Section 145(3).
Consistency Across Tax Verticals: If cash sales are integrated into the audited trading results and matched inside statutory VAT returns (indirect taxes), the Income Tax department cannot arbitrarily treat the physical cash version of those identical transactions as black money.
Separation of Statutory Powers: The Income-tax Act and the Companies Act operate in entirely distinct jurisdictions. A technical failure to maintain internal corporate documentation (like board resolutions) cannot turn a legally transparent, refundable financial transaction into taxable income if the core elements of Section 68 (identity, creditworthiness, genuineness) are met.

IN THE ITAT DELHI BENCH ‘E’

Indowestem Commodities and Energy Trade (P.) Ltd.

ITO

Vimal Kumar, Judicial Member
and AMITABH SHUKLA, Accountant Member

IT Appeal No.5027 (DEL) of 2025
[Assessment year 2017-18]

MAY 15, 2026

Gaurav Jain and Tarun Chanana, Advs. for the Appellant. Ms. Ankush Kalra, Sr. DR for the Respondent.

ORDER

Amitabh Shukla, Accountant Member.- This appeal by the assessee is directed against the order of National Faceless Appeal Centre/Ld. Commissioner of Income Tax(Appeals), New Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 25.06.2025 arising out of assessment order dated 28.12.2019 passed under section 143(3) of the Income Tax Act, 1961, for the Assessment Year 2017-18. The word ‘Act’ herein this order would mean Income Tax Act, 1961.

2. The assessee has raised following grounds of appeal :-

“1. That the learned CIT(A) erred on facts and on law in upholding the addition of Rs.6,34,53,500/- and Rs. 60,00,000/- as unexplained cash credits under section 68 of the Income Tax Act 1961, made in the assessment order dated 28.12.2019 under section 143(3) of the Act.

2. That the Id. CIT(A) erred on facts and on law in upholding the addition of Rs. 6,34,53,500/- made by AO holding the cash deposits made by the appellant in the bank account during demonetisation period as unexplained credit under section 68 of the Act, despite the fact that the said sum pertained to cash sales made by the appellant in the regular course of business during the relevant year.

2.1 That the learned CIT(A) erred in law and on facts in disbelieving the appellant’s sales during October and November solely on the ground that they constituted 95% of the total turnover, without appreciating that the appellant is engaged in the jewellery business, wherein high value sales are customary during the festive period of Diwali and Dhanteras.

2.2. That the ld. CIT(A) erred in law and on facts in rejecting the appellant’s sales for the months of October and November on the ground of non-submission of comparative figures, without appreciating that the relevant year was the appellant’s first year of full-scale operations.

2.3. That the Id. CIT(A) erred in law and on facts in disbelieving the cash sales made on 08.11.2016 by treating them as abnormal, without appreciating that the spike in cash sales was a direct and natural consequence of the sudden announcement of demonetisation on the same date, which triggered a surge in public demand for high-value assets like jewellery.

2.4. That the ld. CIT(A) erred in law and on facts in rejecting the appellant’s cash sales on 08.11.2016 by relying on conjectural assumptions regarding customer behavior and staff limitations, without appreciating that the appellant had 12 staff members actively handling operations, and that the transactions were duly recorded in the books of account.

2.5. That the ld. CIT(A) erred in law and on facts in drawing an adverse inference against the appellant for holding cash, merely due to a short delay in deposit, despite the fact that the source of cash was duly explained, being out of recorded sales on which tax had already been paid.

2.6. That the ld. CIT(A) erred in law and on facts in questioning the credibility of the appellant’s books of account and in upholding the AO’s action based merely on suspicion and conjecture, while ignoring that the Assessing Officer had, in fact, accepted the net profit as declared by the appellant in the duly audited financial statements.

2.7. That the ld. CIT(A) erred in law and on facts in placing reliance on the alleged stock variation noted by the Assessing Officer to discredit the appellant’s explanation, without appreciating that the said variation was merely notional, arising from timing differences in recording purchases on 09.11.2016, which were duly reconciled in the regular course of business and did not reflect any suppression or inflation of stock.

2.8. That on the facts and circumstances of the case, the ld. CIT(A) erred both on facts and on law in upholding the said addition as unexplained cash credits under section 68 of the Act despite the fact that the said amount was already offered to tax and the appellant maintained the proper books of accounts which were subject to tax audit under section 44AB of the Act.

2.9. That the Id. CIT(A) and the AO erred both in fact and in law in treating the cash sales made by the appellant as ingenuine despite the fact that the appellant had duly discharged its Value Added Tax (VAT) liabilities on the alleged cash sales amounting to Rs. 6,34,53,500, and had appropriately filed the corresponding VAT returns for the sale and purchase transactions.

3. That the Id. CIT(A) erred in law and on the facts of the case in upholding the addition of Rs.60.00,000/- made by AO treating share application money received from Jyotigamya Advisory Private Limited (JAPL) as unexplained cash credit under section 68 of the Act and doubted the genuineness of the transaction on the ground that the appellant failed to allot the shares against the said application money, despite the fact that the said amount was duly paid through proper banking channels.

3.1 That the ld. CIT(A) erred in upholding the said addition on the ground of non fulfilment of procedural requirements of allotment of shares within in the prescribed period under the Companies Act, 2013, while ignoring the fact that the appellant had duly discharged its onus under section 68 of the Act by furnishing confirmation from JAPL along with supporting documents such as PAN, bank statements, and audited financials, thereby establishing the identity, genuineness, and creditworthiness of the investor.

4. That the ld. CIT(A) and AO erred on facts and in law in not appreciating that the higher rate of tax prescribed under section 115BBE, which was introduced subsequently vide The Taxation Law Second Amendment Act, 2016 was not applicable retrospectively to the impugned transactions.

3. The first issue raised by the appellant assessee through its grounds of appeal is regarding the addition of Rs.6,34,53,500/- made by the ld. AO and which has been confirmed by the ld. CIT(A). As per brief factual matrix of the case, the assessee is engaged in the business of jewellery, which had filed its return of income on 29.10.2017 declaring income of Rs.29,98,480/-. According to the AO, a survey under section 133A was conducted upon the assessee on 15.03.2017. During the assessment proceedings, the ld. AO noted that an amount of Rs.6,34,53,500/- was deposited by the assessee in his bank account during the demonetization period. During the course of online enquiries by the revenues authorities, the assessee had informed that the cash received and deposited represented sale of jewellery. The ld. AO indicating to availability of cash in hand in assessee’s book of Rs.4,13,42,413/- as on 31.10.2019, deficient reasons forwarded by assessee for not deposited the said cash in bank account and doubting the factum of cash sales concluded that assessee was not having sufficient justification for the cash. He, therefore, proceeded to make the addition u/s 68 treating the cash deposits as unexplained cash credits.

4. The ld. Counsel for the assessee vehemently argued that no case for making of any addition is made out in its case by treating the impugned cash as unexplained cash under section 68. The ld. Counsel placed on record through a voluminous paper book, bills, vouchers, extracts of bank accounts, VAT returns, to allude that the cash has a direct linkage with its genuine sales. The ld. Counsel further submitted that its books of account has not been rejected and hence the trading results, which included the impugned cash sales have been accepted by the Revenue. It was argued that consequently once again there was no case made out for making any addition. The ld. Counsel further placed heavy reliance upon a catena of judgments, including those of this Tribunal holding that where the trading result of the assessee have been accepted by the Revenue, books of accounts have not been rejected, no addition is permissible.

5. The ld. DR placed reliance upon the orders of the lower authorities.

6. We have heard the rival submissions in the light of material available on record. We have noted that this Tribunal has been consistently holding that where, the trading result of the assessee have been accepted by the Revenue, books of accounts have not been rejected, no addition is permissible. Thus, we have noted that in the case of DCIT v. Adarsh Kanch Udyog (P.) Ltd. [IT Appeal No.4741 (Del) of 2024, dated 21.03.2025], it has been held

“4. The Ld. CIT(A) has rightly held that the books of accounts of appellant have not been rejected and the purchases stand accepted. We find sufficient force in the argument that corresponding sales cannot be suspected. We also find force in the argument that assessee’s VAT orders for F.Y 2016-17 also support his case of genuine sales having undertaken. Accordingly, we are of the considered view that there is no case for any interference to the order of the Ld. CIT(A) at this stage. The same is, therefore, confirmed and all the grounds of appeal raised by the revenue are dismissed.”

7. Again in the case of ITO v. Mobi Tradelink [IT Appeal No.3520 (Del) of 2024, dated 6-12 2024], a Co-ordinate Bench of this Tribunal held :-

“….6. The Revenue’s stand, on the other hand, is that it was the assesee’s onus only to plead and prove all the relevant facts by satisfying the genuineness/creditworthiness of its explanation tendered during scrutiny as per PCIT v. NRA Iron & Steel Pvt. Ltd (2019) 412 ITR 161 and Sumati Dayal v. CIT (1995) 214 ITR 801 (SC). We find no merit in the Revenue’s instant former substantive ground once it has come on record that the assessee had duly explained the source of these cash deposits to regular trading activity in electronics business etc. by filing all the relevant detailswhich have gone unrebutted from departmental side. The Revenue fails in its instant first and foremost substantive grievance in very terms.”

8. Further, in the case of HKT Retail Ventures Pvt. Ltd. v. ITO [IT Appeal No.1337 (Del) of 2024, dated 7-5-2025], another Co-ordinate Bench has held

“….3. We have heard the rival submissions and perused the materials available on record. The Assessee Company is engaged in the business of retail trading of home decor products including furniture, sculptures, lights etc. The return of income for the assessment year 17-18 was electronically filed by the Assessee on 13-01-2018 declaring loss of Rs. 4,71,475/-. During the course of scrutiny assessment proceedings, the learned AO noted that Assessee had made cash deposits of Rs. 53,82,150/- in HDFC Bank Ltd, East Patel Nagar, Delhi during the demonetization period in specified bank notes. The Assessee submitted that the said cash deposits were made out of cash sales which are already disclosed in the books of accounts and in the income tax return. The assessee submitted that during the assessment year 2017-18, it had made cash sales of Rs. 53,50,422/- out of total sales of Rs. 58,37,645/-. The assessee also submitted that major part of cash sales had taken place in the months of October 2016 to 8-11-2016. The assessee explained the reason of huge sales made in cash during this period by attributing the same to various auspicious festival occasions including Diwali. Since the assessee was engaged in the business of selling of home decor items, it is the usual practice for the customers to make huge purchases of home decor items during the festive occasions including the period of Diwali. The assessee specifically stated that the sales made by the assessee had been duly disclosed in the audited books of accounts and also in the income tax return. The assessee had sufficient cash balance to explain the cash deposits and hence nothing could be treated as unexplained there on. The learned AO however disbelieved the entire contentions and observed that similar cash deposits were not made by the assessee in the earlier year. The assessee to buttress this argument submitted that the business itself was started only in October 2016 and hence the same is not comparable with that of the earlier year. The assessee specifically stated that the retail showroom in Delhi started in October 2016. This showroom was taken on rent from Mrs. Rajini Apan from July 2016, post which showroom fit outs took 3 to 4 months and the assessee being a new showroom, lot of retail sales took place during the months of October to 8th November 2016. The assessee also submitted the complete copies of sale bills, cash book, VAT returns (both original and revised) and purchase invoices. The assessee also submitted that it had sufficient stocks in its kitty as is evident from the stock register and to the extent of sales, the stocks were duly reduced and reflected in the books of accounts of the assessee. The learned AO however disregarded all these contentions and proceeded to add the cash deposits made in SBN during the demontization period in the sum of Rs 53,82,150/- as unexplained money under section 68 read with section 115BBE of the Act. This action of the learned AO was upheld by the learned NFAC.

4. We find that the lower authorities had not rejected the books of accounts and book results of the assessee. The assessee had made cash sales of home decor items from its new showroom started in October 2016 only. It is quite normal and usual practice for the customers to make purchase of home decor items during the festive occasions including Diwali that too from new showroom. It is a fact that assessee had made cash sales thereon and had duly reflected the sales in the books of accounts and in the income tax returns. On perusal of the cash book, we find that the said cash sales are duly reflected as receipts thereon and there is absolutely no negative cash balance with the assessee, meaning thereby – the cash deposits made during the whole year including the demonetization period is squarely covered and explained out of cash balance available with the assessee. To the extent of sales made by the assessee, the stocks of home decor items had been duly reduced. The assessee had furnished the sale invoices, purchase invoices, stock registers, VAT returns (both original and revised) cash book , entire books of accounts before the learned AO. None of these documents and records were even rejected by the learned AO. The assessee had filed revised VAT returns for the third quarter only to change the input tax credit figure thereon. The sales figure in original VAT returns and revised VAT returns remain unchanged. The sales made by the assessee had not been doubted by the revenue. Hence the revenue having accepted the sales made by the assessee, ought not to have made separate addition on account of cash deposits by treating it as unexplained. Otherwise, the same would amount to double addition made by the learned AO. On this count itself, the addition made on account of cash deposits deserves to be deleted. Further, the Hon’ble Madras High Court in the case of SMILE Microfinance Limited v. ACIT in WP (MD) No. 2078 of 2020 and WMP (MD) No. 1742 of 2020 dated 19-11-2024 had categorically held that enhanced rate of tax at 60% as provided in section 115BBE of the Act could be made applicable only from Assessment Year 2018-19 onwards and cannot be applied for earlier years. Hence we hold that cash deposits made by the assessee is duly explained and no addition is warranted thereon. Accordingly, the grounds raised by the assessee are allowed. “

9. We have noted that the facts of the present case are akin to those deliberated in judicial precedents above. Accordingly, in respectful compliance to the decision of Co-ordinate Benches of this Tribunal as well as for the purposes of consistency, we are of the view that no case for any addition is made out in the hands of the assessee. Accordingly, we set-aside the order of the ld. CIT(A) and direct the ld. AO to delete the addition of Rs.6,34,53,500/-u/s 68 of the Act. The appellant succeeds on this issue.

10. The next issue is regarding an addition of Rs.60 lakhs made by the ld. AO again u/s 68 of the Act on account of share application money. As per brief factual matrix, the assessee had received share application money of Rs.60 lakhs, which was pending allotment. During the year under consideration, the assessee has received Rs.60 lakhs from one Jyoti Gamya Advisory Pvt. Ltd. No shares were issued to the party and the share application amount was refunded back in FY 2018-19. The ld. AO had observed that the assessee had failed to file a copy of the Board Resolution by which the impugned share application money was to be received, copy of share application form and also the fact that as per companies act, the amounts have to be refunded if no shares are allotted within 60 days. Considering all these deficiencies, the ld. AO proceeded to make the impugned addition of Rs.60 lakhs, which was confirmed by the ld. CIT(A).

11. The ld. Counsel for the assessee fiercely argued that the conditions prescribed under section 68 have not been fulfilled by the ld. AO while making the impugned addition. It was contended that the party from whom Rs.60 lakhs was received was totally identifiable and thus its identity was established. The ld. AO did not make any additions qua deficient creditworthiness of that party to render Rs.60 lakhs and hence its creditworthiness was also deemed to have been established. The ld. Counsel argued that merely because there were some non-fulfilments of provisions of the Companies Act qua passing of prior Board Resolution, non-refund of share application money within 60 days, etc would not make the transaction as ingenuine transaction. It was accordingly argued that considering the fact that the amount was returned in subsequent year and thus the transaction became a revenue neutral causing no prejudice to the Revenue, the impugned addition be deleted.

12. The ld. DR vehemently argued in favour of the orders of the lower authorities. Ms. Ankush Kalra, Sr. DR repeatedly emphasized upon the need for having fulfilled the provisions of the Companies Act. It was submitted that existence thereof indicates that the transaction was ingenuine.

13. We have heard the rival submissions in the light of material placed on record. There is no denying the fact that the addition made by the ld. AO is resting upon the only facts of non-compliance by the assessee to the provisions of the Companies Act. There is nothing on records to suggest that the ld. AO has found any adverse information qua, identity of the Share Application Money payer or its creditworthiness. Thus, nothing has been brought on record to suggest any violation of provisions of section 68. True, the assessee has seemingly violated the provisions of the Companies Act but the same cannot be any ground for invocation of section 68. For infraction of the Companies Act, the assessee is liable for penalties prescribed therein and the same cannot be in the form of any addition under the Income Tax Act. Accordingly, we set-aside the order of the ld. CIT(A) and direct the ld. AO to delete the impugned addition of Rs.60 lakhs. The grounds of appeal on this issue are also allowed.

14. In the result, the appeal of the assessee is allowed.