Cash Deposits During Demonetisation Cannot Be Treated as Unexplained Income

The assessee Paaneri Exim Private Limited is involved in a retail business of sarees and dress materials and filed a return declaring a total income of Rs 35.83 lakh for the assessment year 2017-18. During the period of demonetization, Rs 1.90 Crore were deposited by the company in its bank account as Specified Bank Notes. The AO had doubts during the scrutiny assessment under Section 143(3) about the genuineness of cash deposited during the demonetisation period because of the higher cash balance.

The CIT (A) upheld the addition made by the AO of Rs 1.90 Crore as an addition despite the records shown by the assessee through day-wise cash books, sales registers, purchase records, stock statements and VAT returns to explain the source of deposits. The ITAT had to decide whether the cash deposits during demonetisation could be treated as unexplained money under Section 68 or 69A.

The ITAT observed that the assessee had maintained regular books of account, duly audited under Section 44AB of the Act. It had also produced other maintained records such as cash books, sales registers, purchase registers, stock registers, month-wise stock summaries and quarterly VAT returns that duly reflect the sales recorded by the assessee, and also the AO had not invoked Section 145(3) nor rejected the books of account.

Accordingly, ITAT held that if the cash deposits arise from the duly recorded business transactions, then they can not be treated as unexplained money just because they were deposited during demonetisation. It clarified that any addition solely based on suspicion arising from a higher cash balance without material evidence can not be established. ITAT set aside the appellate order and directed the AO to delete the addition of Rs 1.90 Crore and allowed the appeal of the assessee in full.