Cash Deposits from Business Sales Cannot Be Taxed as Unexplained: ITAT

The ITAT Kolkata granted full relief to the taxpayer in the case of demonetisation cash deposits. The key issue raised before the tribunal was whether cash deposits of Rs 26.96 lakh made during the demonetisation period could be treated as unexplained income.

The assessee, Sanhati Infocom Services Private Limited, is involved in the business of providing internet services to commercial as well as residential users besides doing other activities. The assessee had made some cash deposits during the period of demonetisation. When the tax authorities noted repeated non-compliance by the assessee in the cash proceedings, they treated these deposits as undisclosed income under Section 69A of the Act and made the total addition amounting to Rs 21.86 lakh (Rs 10.91 lakh by applying a rate of 8% on the difference between the deposits in the bank and the turnover of the assessee and, second, Rs 10.95 lakh expenditure claimed under the head of repair and maintenance).

The dissatisfied assessee filed an appeal before the first appellate authority [CIT(A)], which partly upheld this decision, confirming the addition related to cash deposits. Thereafter, the assessee approached the ITAT Kolkata. When the tribunal analysed the assessee’s books of accounts and bank statements. It found that the company consistently deposited cash throughout the year, and these deposits were connected to its business receipts from customers. The Tribunal observed that sales and purchases were properly recorded, and the cash deposits were consistently made with normal business activity.

Consequently, the tribunal held that the assessee had sufficiently explained the source of cash deposits as coming from its sales. It cited an earlier judgement in the case titled Jayanta Fanzen Lighting Industries (P.) Ltd vs ACIT, where similar additions were deleted when proper explanations and records were provided. Another ruling in the case titled ‘ITO Vs Senco Alankar’ was also cited by the tribunal, which held that “where the purchases were accepted and no specific defect has been pointed out in the books of account, no addition u/s 69A can be made in respect of cash deposited during the demonetisation period.”

The Tribunal held that if cash deposits are supported by books of accounts and no defects are found, they cannot be treated as unexplained. Accordingly, the CIT(A)’s order was set aside and directed the Assessing Officer to delete the addition. In conclusion, the appeal of the assessee was fully allowed.