Rejection of books and unexplained cash additions

Rejection of books and unexplained cash additions under Section 69A are unsustainable when turnover is accepted.

Issue

Whether rejection of books of accounts under Section 145(3) is valid without identifying specific defects or independently estimating business profits, when disclosed turnover and trading results are accepted.
Whether demonetisation cash deposits explained by cash sales and debtor recoveries, forming part of accepted turnover, can be added as unexplained money under Section 69A, alongside Section 115BBE tax rates and Section 271AAC penalties.

Facts

Business Profile & Filing: The assessee, engaged in wholesale trading of pulses, filed a return declaring an income of approximately ₹9.63 lakhs for AY 2017-18.
Scrutiny Selection: The case was selected for scrutiny due to high-value cash receipts and bank deposits during the demonetisation period.
Submissions: The assessee furnished VAT returns, cash book, bank statements, trading results, stock particulars, and offered computerized books for physical verification.
Assessing Officer’s Action:
- Rejected books of accounts under Section 145(3) citing incomplete records, but did not estimate business income, disturb turnover, or find evidence of fictitious entries.
- Added the cash deposited in the bank account under Section 69A as unexplained money, applying Section 115BBE and initiating penalty proceedings under Section 271AAC.
Explanation for Cash: The cash deposits were explained as arising from cash sales and recoveries from trade debtors, which were integrated into the disclosed turnover and offered to tax.

Decision

Rejection of Books Invalidated: Rejection of books under Section 145(3) must be based on specific defects rendering accounts incomplete or incorrect; since disclosed turnover was accepted without independent profit estimation, the rejection was unjustified. [Para 30] [In favour of assessee]
Section 69A Addition Deleted: Since cash deposits originated from disclosed sales and debtor recoveries, and the AO failed to establish suppressed sales, inflated purchases, or conduct inquiries with identified parties, addition under Section 69A was set aside. [Paras 36 and 45] [In favour of assessee]
Consequential Relief: Invocations of Section 115BBE and penalty proceedings under Section 271AAC failed to survive, as they were founded entirely upon the deleted Section 69A addition. [Para 46] [In favour of assessee]

KeyTakeaways

Prerequisites for Section 145(3): Rejection of books requires specific, demonstrable defects showing income cannot be correctly deduced; arbitrary rejection without estimating business income is legally unsustainable.
Double Taxation Prohibition: Cash sales and debtor recoveries already included in accepted turnover and offered to tax cannot be re-taxed as unexplained money under Section 69A.
Burden of Proof for Evasion: The Revenue cannot treat demonetisation cash deposits as unexplained without conducting inquiries or disproving the source, especially when sales records and trading results are accepted.
Consequential Invalidation: Provisions like Section 115BBE higher tax rates and Section 271AAC penalties automatically fall away when the primary underlying addition under Section 69A is deleted on merits.

IN THE ITAT JODHPUR BENCH ‘DB’

Ajay Lunawat

Income-tax Officer

SAKTIJIT DEY, Vice President
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 1122 (JODH) of 2025
[Assessment year 2017-18]

SEPTEMBER 4, 2026

Amit Kothari, CA for the Appellant. Ms. Shivani Bansal, CIT-DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member. – This appeal by the assessee is directed against the order dated 27.11.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the CIT(A)”], under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for Assessment Year 2017-18. The impugned appellate order arose from the assessment order dated 17.12.2019 passed by the Income Tax Officer, Ward 3(1), Jodhpur [hereinafter referred to as “Assessing Officer”]. Though the assessment order is captioned as an order under section 143(3), the Assessing Officer invoked section 145(3), rejected the books of account and stated that the assessment was being completed in the manner provided under section 144 of the Act.

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

a. The order passed by ld. CIT(A) sustaining order passed by ld. AO is bad in law, bad in facts and perverse, contrary to material available on record without assigned any reason and the assessment order made only on basis of surmises.

The addition so sustained is bad in law and bad on facts. The order so sustained is contrary to principle of natural justice and without granting of opportunity of being heard.

a. The ld. CIT(A) has erred in sustaining an addition of Rs.42,00,000 for alleged unexplained deposit in the bank account of the appellant. The ld. CIT(A) had erred in not properly appreciating the facts and circumstances.

b. The ld. CIT(A) has erred in rejecting the books of accounts u/s 145(3).The rejecting of the books of accounts is bad in law and bad on facts.

The appellant craves liberty to add, alter, amend or vary from the above the above grounds of appeal at or before the time of hearing.

Facts of the case:

3. The assessee is an individual engaged in the wholesale trading of pulses and allied commodities at Krishi Upaj Mandi, Mandore, Jodhpur. The assessment order records that the return of income was filed on 30.10.2018 declaring total income of Rs.9,62,750/-. The case was selected for complete scrutiny through CASS on account of “High Value Receipt of Cash shown from third parties in response data” and “Cash deposit During Demonetisation period”. The Assessing Officer issued notices under sections 143(2) and 142(1) and required the assessee to explain the source, timing, amount and frequency of the cash deposited during 09.11.2016 to 30.12.2016 and to furnish the relevant books and supporting records.

4. The assessee furnished VAT returns and certain other particulars on 07.12.2019. A detailed reply dated 13.12.2019 was thereafter filed. The assessment order refers to the reply as having been furnished on 14.12.2019. The assessee also furnished the cash book for the period from 01.11.2016 to 31.12.2016.

5. The Assessing Officer examined the cash book and observed that cash was deposited continuously in the HDFC Bank account from 01.11.2016 to 07.11.2016, while the assessee simultaneously claimed an increasing cash balance. The Assessing Officer also noticed several receipts from the same or similar parties in amounts of Rs.19,000/-, Rs.18,900/-, Rs.17,000/- and similar sums. Illustratively, the Assessing Officer referred to six receipts from Mohan Traders, Pali, aggregating to Rs.1,00,000/- on 05.11.2016 against the same bill, and five receipts from Bhavika Traders, Bastava, aggregating to Rs.70,463/- on 07.11.2016. According to him, splitting the receipts into smaller amounts and recording several receipts from the same party on the same date rendered the cash book unreliable.

6. The Assessing Officer further observed that the complete cash book for Financial Year 2016-17, stock register, sale and purchase registers, names, addresses, PANs and confirmations of the parties were not furnished. He therefore held that the alleged cash sales and realisations from debtors could not be verified. The Assessing Officer also referred to the fact that the assessee maintained an interest-bearing HDFC cash credit account. He found it commercially improbable that the assessee would retain a substantial amount of cash instead of depositing the same into the interest-bearing account. He further observed that, despite depositing Rs.1,70,000/- on 05.11.2016, the cash book reflected opening and closing cash balances exceeding Rs.37,00,000/-.

7. On these considerations, the Assessing Officer invoked section 145(3), rejected the books and proceeded in the manner provided under section 144. The assessment order proceeds on the basis that the assessee claimed cash in hand of Rs.45,00,000/- as on 08.11.2016. The Assessing Officer accepted Rs.3,00,000/- as explained cash having regard to the nature of the assessee’s business and treated the balance amount of Rs.42,00,000/- as unexplained money under section 69A. The returned income of Rs.9,62,750/- was accordingly assessed at Rs.51,62,750/-. Tax was directed to be computed under section 115BBE, and penalty proceedings under section 271AAC were initiated.

8. The assessee filed an appeal before the CIT(A). Before the CIT(A), the assessee contended that cash sales and cash collections from debtors constituted a regular feature of the wholesale trade in pulses. It was submitted that goods were sold through brokers and commission agents, who procured orders and also collected the sale consideration. The disputed receipts were recorded in the audited books and the corresponding sales formed part of the turnover disclosed in the return. The CIT(A) held that the assessee had not furnished the complete and reliable cash book, stock register, quantitative particulars, confirmations from debtors and reconciliation of cash in hand with the deposits. He further held that the Cash Transaction Portal response was preliminary and did not substitute production of the primary evidence during assessment. The CIT(A) upheld the assessment under section 144, rejection of the books under section 145(3), and the addition under section 69A. He further held that section 69A could be applied even where cash was entered in the books if the assessee failed to prove its source and genuineness. The appeal was accordingly dismissed.

9. During the course of hearing before us, the learned AR submitted that the findings of the lower authorities proceeded on an incorrect factual premise that no supporting material was furnished. Our attention was invited to the detailed reply dated 13.12.2019, which contained the bank particulars, date-wise cash balances, comparative trading results, cash-flow particulars and explanation of the source of cash. The learned AR submitted that the assessee disclosed turnover of Rs.20,49,34,509/- and gross profit of Rs.38,13,930/- at the rate of 1.86% for the year under consideration. In the immediately preceding year, the turnover was Rs.24,36,72,571/- and gross profit was Rs.36,37,693/- at the rate of 1.49%. The turnover and trading results disclosed by the assessee were not disturbed by the Assessing Officer.

10. The learned AR submitted that total cash of Rs.1,20,72,000/-was deposited in the following three bank accounts during 09.11.2016 to 30.12.2016:

Bank account	Amount	Nature of currency
HDFC cash credit account No. 9868970000090	Rs.45,00,000/-	Old currency
HDFC current account No. 9862320000467	Rs.57,77,000/-	Regular currency
Induslnd Bank current account No. 650014068080	Rs.17,95,000/-	Included Rs.5,25,000/- released by Court
Total	Rs.1,20,72,000/-

11. The learned AR submitted that the actual closing cash balance as on 08.11.2016 was Rs.48,29,204.23, out of which Rs.45,00,000/- in old currency was deposited into the HDFC cash credit account. The following cash balances were furnished before the Assessing Officer:

Date	Cash in hand
31.03.2015	Rs.33,40,632.61
31.03.2016	Rs.26,25,479.42
01.04.2016	Rs.28,07,407.42
01.10.2016	Rs.31,42,960.84
01.11.2016	Rs.34,47,303.08
07.11.2016	Rs.42,31,454.78
08.11.2016	Rs.48,29,204.23
01.12.2016	Rs.16,80,528.16
30.12.2016	Rs.17,10,517.48
31.03.2017	Rs.8,37,861.33

12. It was further submitted that Rs.7,82,000/- had been looted from the assessee on 07.04.2016, out of which Rs.5,25,000/- was recovered and kept in court custody. The amount was released on 15.12.2016 and deposited in the IndusInd Bank account on 19.12.2016.

13. The learned AR submitted that the assessee maintained computerised books. Since the data was voluminous and could not be uploaded on the portal, the assessee expressly offered the cash book, ledgers, sales and purchase registers, bank statements, sales and purchase vouchers and other records for physical verification. The Assessing Officer passed the order on 17.12.2019 without examining the material so offered.

14. The learned AR further submitted that, though the Assessing Officer used the expression “rejection of books”, he accepted the returned business income and did not estimate the profits after such rejection. Neither the turnover nor the gross profit was disturbed. The disputed deposits represented recorded cash sales and collection from trade debtors. Adding the entire receipt of Rs.42,00,000/- under section 69A over and above the business profits already offered resulted in bringing the recorded business receipts to tax for a second time.

15. Reliance was placed upon the decision of the co-ordinate Jodhpur Bench in Ramesh v. ITO (Jodhpur – Trib.), ITA No. 401/Jodh/2023, Assessment Year 2017-18, order dated 24.04.2024.

16. The relevant submission recorded by the co-ordinate Bench in paragraph 7 reads:

“Thus, the ld. AR of the assessee submitted that once the sale is accepted the realisation of the same from the customer cannot again be added as unexplained money u/s. 69A of the Act. The ld. AO has not rejected the book result declared by the assessee and therefore, the amount supported by the sale again cannot be added once the same is realised and reflected in the books as cash realisation when out of total realisation in that period accepted for an amount of Rs. 32,61,029/-.”

17. The operative finding recorded in paragraph 9.1 reads:

“It was the ld. AO who might have issued the 133(6) to the respective party or to the bank and called for the details to justify the averments made by the assessee and thus, when the sales is not disputed and in fact the part of the cash in the demonetised period is not disputed the action of the lower authority in sustaining the addition u/s. 69A is incorrect and thus hereby directed to be deleted.”

18. The learned AR submitted that the Assessing Officer did not make any inquiry from the debtors and did not disprove the connection between the disclosed sales, debtor realisations and cash appearing in the books.

19. The learned DR relied upon the orders of the Assessing Officer and the CIT(A). He invited our attention to pages 6 and 7 of the assessment order and submitted that the complete cash book for Financial Year 2016-17, stock register, sale and purchase registers and confirmations from the concerned parties were not furnished. Therefore, the alleged cash sales and debtor realisations could not be verified.

20. The learned DR also invited our attention to page 64 of the order of the CIT(A) and relied upon the following observation:

“The reply of the appellant about the cash transaction reply was vague, self-serving, and contradicted by appellant’s own books. The books of appellant showed abnormal increase in cash-in-hand, no stock register, no debtor confirmations, no complete & reliable cash book, no evidence of specific cash sales, no pattern of such high cash deposits in earlier years. Thus, the explanation was internally inconsistent, making the AO’s addition fully justified.”

21. We have considered the rival submissions and perused the material available on record. The substantive controversy is whether the recorded cash balance deposited into the bank during the demonetisation period could be treated as unexplained money under section 69A.

22. The Assessing Officer has formally invoked section 145(3). However, after purportedly rejecting the books, he has not estimated the business income of the assessee. The turnover of Rs.20,49,34,509/-, gross profit of Rs.38,13,930/- and returned business income have not been disturbed. No suppressed sale, inflated purchase or discrepancy in the overall trading account has been identified.

23. The primary basis for rejection of the books was that the assessee had not furnished the complete cash book, stock register and supporting records. The contemporaneous reply dated 13.12.2019, however, specifically stated that the assessee maintained computerised books and that, owing to the volume of the data, the complete cash book, ledgers, sales and purchase registers, bank statements and vouchers were being offered for physical verification.

24. The assessment order was passed on 17.12.2019. It does not indicate that the Assessing Officer called upon the assessee to produce the books physically pursuant to the express offer contained in point No. 18 of the reply, fixed any date for their inspection or recorded that the assessee failed to produce them despite such direction.

25. The assessee had also furnished the cash book for 01.11.2016 to 31.12.2016, date-wise cash balances, bank statements, comparative trading results, VAT returns and quantitative stock particulars. These documents might have required verification, but their existence could not have been disregarded altogether.

26. The Assessing Officer doubted the receipts because multiple sums of. Rs.19,000/- and similar amounts were recorded from the same parties. Suspicion arising from the denomination or frequency of the receipts could justify further inquiry. It could not, by itself, establish that the recorded receipts were fictitious. No notice under section 133(6) was issued to any of the identified parties. No statement was recorded from any debtor. No sale invoice was found to be false, and no corresponding sale was excluded from the disclosed turnover.

27. The CIT(A) went further and characterised the cash book as manipulated. Such a categorical finding required supporting evidence. Neither the assessment order nor the appellate order identifies any independent material demonstrating fabrication of the books. The finding rests upon perceived improbability and non-production of material, despite the contemporaneous offer to produce the computerised books physically.

28. The commercial decision of retaining cash cannot be judged solely from the standpoint of the Assessing Officer. The fact that the assessee maintained an interest-bearing cash credit account may create a doubt regarding business prudence, but commercial imprudence is not equivalent to undisclosed income. The Assessing Officer must establish that the cash balance did not exist or that the corresponding entries were false.

29. The arbitrary nature of the estimate is further evident from the acceptance of Rs.3,00,000/- as explained cash without any discernible basis. The assessee’s books reflected cash of Rs.48,29,204.23 as on 08.11.2016, out of which Rs.45,00,000/-was stated to have been deposited. The Assessing Officer neither reconciled this balance nor demonstrated how only Rs.3,00,000/- represented genuine cash.

30. Rejection of books under section 145(3) must be based on specific defects which render the accounts incapable of correctly determining the business income. In the present case, the disclosed turnover and trading results were accepted, and no independent estimation of business profits was undertaken. Considering the material furnished and offered for verification, we find that rejection of the books was not justified merely on the basis of suspicion surrounding certain cash receipts. Ground No. 2(b) is accordingly allowed.

31. Section 69A applies where the assessee is found to be the owner of money, bullion, jewelry or another valuable article which is not recorded in the books of account, if any, maintained by the assessee, and the assessee either offers no explanation regarding its nature and source or the explanation offered is found unsatisfactory.

32. Thus, the following conditions are material:

the assessee must be found to be the owner of money or another specified article;

ii.

such money or article must not be recorded in the books of account maintained for any source of income; and

iii.

the assessee must either offer no explanation regarding its nature and source or the explanation must be found unsatisfactory.

33. In the present case, it is not the finding of the Assessing Officer that the bank deposits were omitted from the books. The assessment order itself examines the cash book and rejects the assessee’s explanation regarding the recorded cash balance. The dispute is therefore not whether the amount was recorded. The dispute is whether the recorded source, namely cash sales and collection from debtors, was acceptable.

34. The CIT(A) held that section 69A could be invoked even where the cash was recorded in the books. We are unable to sustain such a broad proposition. The statutory expression “not recorded in the books of account” cannot be rendered redundant. Mere dissatisfaction with the explanation does not dispense with the anterior statutory requirement that the money should not be recorded in the books.

35. Even if the correctness of the books is doubted, a formal rejection under section 145(3) does not automatically convert an amount recorded in those books into money not recorded in the books for the purpose of section 69A. Rejection of books permits determination of business income on a reasonable basis. It does not, without anything further, establish that every recorded receipt represents unexplained money.

36. The assessee furnished an immediate and identifiable source for the deposit. The cash was explained as arising from cash sales and recovery from trade debtors. The sales formed part of the disclosed turnover, and the corresponding business profits were offered to tax. The Assessing Officer accepted the turnover and did not make any adverse finding regarding suppressed sales or inflated purchases.

37. Where the corresponding sales form part of the disclosed turnover and the business profits arising therefrom have been offered, the same business receipt cannot again be treated in its entirety as an independent item of income unless the Revenue establishes that the receipt arose from a source outside the recorded business.

38. The Assessing Officer has not brought any material on record establishing that the deposited cash arose from an undisclosed source. No inquiry was made from the identified parties. No corresponding sale was found fictitious. No material was found outside the books. The addition was made because the Assessing Officer considered the accumulation and retention of cash commercially improbable. Such improbability, without corroborative evidence, cannot satisfy the statutory conditions of section 69A.

39. The assessee furnished the progressive cash balances from 31.03.2015 onwards. The cash balance was stated to be Rs.34,47,303.08 on 01.11.2016, Rs.42,31,454.78 on 07.11.2016 and Rs.48,29,204.23 on 08.11.2016. The cash deposit of Rs.45,00,000/- was therefore within the cash balance appearing in the books.

40. The Assessing Officer did not find that the amount deposited exceeded the cash balance appearing in the cash book. He also did not establish that the bank deposit was not reflected in the books. The cash-book entries might have called for inquiry, but in the absence of any contrary evidence, the recorded cash balance could not be replaced by an ad hoc figure of Rs.3,00,000/-.

41. The assessee also furnished month-wise comparative details of cash sales and bank deposits for Financial Years 2015-16 and 2016-17. The deposits during the demonetisation period were stated to be lower than those in the corresponding period of the preceding year. The Assessing Officer did not undertake an objective comparison with the earlier business pattern before rejecting the explanation.

42. In Sh. Ramesh v. ITO, the co-ordinate Jodhpur Bench considered cash deposited during the same demonetization period against recorded sales and realization from customers. The Tribunal held that when the sales were not disputed and part of the cash realized during the same period was accepted, the remaining receipt could not be treated as unexplained merely because it consisted of Specified Bank Notes. The operative portion of paragraph 9.1 reads:

“In nutshell when the sales are not in dispute and found genuine and even for that part of the cash is considered as explained in the same demonetisation period which are not SBN out of the same sales merely the part of the other amount directly deposited into the bank account by the seller though SBN cannot be considered as unexplained money in the hands of the assessee as the same has not been received by the assessee directly and the same was received by the bank which was permitted till 31st December to be received by the bank.”

43. The facts of the present case are not identical in every respect, since the Assessing Officer herein formally rejected the books. However, for the reasons already recorded, such rejection is itself found unsustainable. The material principle of the decision, namely that realisation of an accepted sale cannot again be assessed as unexplained money without disproving its nexus with the recorded business, squarely applies.

44. The learned DR has not brought to our notice any binding contrary decision or any material establishing that the cash deposited by the assessee represented income from a source outside the recorded business.

45. On an overall consideration of the material, we find that –

(a)

the disputed cash was recorded in the books;

(b)

the cash deposited did not exceed the cash balance appearing in the cash book;

(c)

the assessee furnished an explanation identifying cash sales and debtor realisations as the source;

(d)

the disclosed turnover and business profits were not disturbed;

(e)

no suppressed sale or inflated purchase was established;

(f)

no inquiry was conducted from the identified parties to disprove the explanation;

(g)

no material was brought on record indicating an undisclosed source of the cash;

(h)

the complete computerised books were expressly offered for physical verification, but no effective opportunity for such verification was shown to have been provided;

(i)

acceptance of only Rs.3,00,000/- as explained cash was without any rational or evidentiary basis; and

(j)

the statutory condition that the money should not be recorded in the books, as required under section 69A, was not satisfied.

46. In view of the above, the addition of Rs.42,00,000/- under section 69A cannot be sustained. The consequent application of section 115BBE and initiation of penalty proceedings under section 271AAC, insofar as founded upon this addition, do not survive.

47. We accordingly set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.42,00,000/-.

48. Ground Nos. 1(a), 1(b), 2(a) and 2(b) are allowed. Ground No. 4, being general in nature, does not require separate adjudication.

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