ITAT Quashes Section 68 Addition on Demonetization Cash Shown in 44AD Sale

The current case is regarding an income tax appeal made by a businessman named Ankit Umeshkumar Shah, who runs a business of the manufacturing and trading of gold, silver, and related ornaments. The case is between Ankit Umeshkumar Shah and the Income Tax Officer (ITO) Ward 1(2)(1), Ahmedabad.

Background of Case

The present appeal is filed by the assessee raising objections to the order passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi. The order related to the assessment year 2017-18 and was passed on September 25, 2024, as per Section 250 of the Income Tax Act, 1961.

Ankit Umeshkumar Shah filed ITR for the assessment year 2017-18 (financial year 2016-17), announcing his income of Rs. 4,72,880. During the designated assessment year, it was noticed that the assessee deposited cash of Rs. 42,00,000 during the period of demonetisation, i.e., between November 8, 2016, and December 30, 2016. The cash was deposited in his account with the State Bank of India, Nr. Dharnidhar Derasar, Ahmedabad. The amount deposited by the assessee was in old currency notes (which were demonetised). This large deposit during the period of demonetisation, caught the attention of the income tax department’s automated software system (CASS), which declared it as a “suspicious activity,” hence the case taken under investigation by the Income Tax Officer (ITO), Ward 1(2)(1), Ahmedabad.

Assessment Proceedings by AO

The Assessing Officer (AO) then issued several notices against the assessee asking him to disclose his source of cash deposited in his bank account along with evidence.

The assessee explained that the source of this deposit was the profit he earned from the activity/business he ran, i.e., manufacturing and trading gold, silver, and related ornaments. But the assessee did not answer the follow-up on the notices, which led the AO to doubt the explanation.

When deep analysis was done, the AO found several irregularities and doubtful patterns:

Generally, high cash sales were noticed just prior to demonetisation in comparison to the previous year’s same period.

• Current year (pre-demonetization): Rs. 44,60,540
• Previous year (same period): Rs. 2,05,006
• Difference: Rs. 42,55,534 (added to income as “undisclosed income from other sources”)

Several cash loans were taken by the assessee of around Rs. 35,00,590, which remained unexplained with any valid proofs. Hence, AO considered this amount under Section 68 (unexplained cash credit).

50% of conveyance expenses (Rs. 10,010/Rs. 20,020) were disallowed under Section 37, as they were not properly supported with bills.

25% of the total purchases (Rs. 10,04,732/Rs. 40,18,929) were also disallowed as Mr. Shah did not submit supporting purchase evidence.

In conclusion, total additions made by the AO amounted to Rs. 87,70,866, and the total income assessed amounted to Rs. 92,43,746, as against the originally declared Rs. 4,72,880.

First Appeal to CIT(A) Commissioner of Income Tax (Appeals)

The assessee, Ankit Umeshkumar Shah, then raised objections against these additions before the CIT(A)-National Faceless Appeal Centre (NFAC), Delhi. However, CIT (A) confirmed all the additions and dismissed his appeal.

Second Appeal to the ITAT (Current Appeal)

The assessee, Ankit Umeshkumar Shah, then raised his appeal to the ITAT, saying:

• His books of accounts were incorrectly rejected without indicating any specific defects in them.
• His cash deposit of Rs. 42,55,534 was incorrectly considered an unexplained source of income.
• His loan of Rs. 35,00,590 was incorrectly considered under Section 68.
• His expenses of Rs. 10,010 and purchases of Rs. 10,04,732 were incorrectly disallowed.
• Additionally, he stated that the entire assessment order was illegal, as the AO made additions not covered by the original selection reason under CASS, but he later chose not to press this argument during the hearing.

Observation and Final Order by ITAT

After analysing all the aspects, ITAT ruled:

• The CIT(A) ignored significant submissions made by Ankit Umeshkumar Shah.
• Since the assessee has chosen Section 44AD, no books of accounts were required, and therefore, no question of rejecting books or disallowing expenses arises.
• Both CIT(A) and AO did not consider the legal position properly.
• Additionally, the loan details were ignored instead of being explained.

Hence, ITAT considered the order of CIT(A) as invalid due to a lack of application of mind and violation of natural justice.

The ITAT did not give a final decision on the merits of the case but instead chose to send the case back (remand) to the Assessing Officer for a fresh assessment (de novo). The AO has been directed to consider all facts and submissions carefully and pass a fresh order strictly as per law.