ITAT Relief: Demonetization Cash Treated as Sales, Not Unexplained Income

In a significant relief for taxpayers affected by demonetization scrutiny, the ITAT deleted an addition of Rs. 58.5 lakhs made under Section 69A of the Income Tax Act. The assessee, a partnership firm in the jewellery trade, deposited money into its bank account in November 2016 and claimed it was for actual October sales that were documented in audited books and reported on VAT returns. During the assessment, it turned in their ledgers, cash books, stock registers, VAT orders, and invoices. However, the Assessing Officer questioned the sales and noted that the amount was not deposited prior to demonetization, treating the deposit as unexplained. The aggrieved assessee went into appeal, and the Ld. CIT(A) sustained the addition made u/s 69A of the Act.

Main Issue: Can cash deposits already recorded in audited books and made during the demonetization period be treated as unexplained money under Section 69A of the Income Tax Act?

ITAT Held: The Tribunal accepted the assessee’s position, emphasising that Section 69A applies only when the asset in question is not recorded in the books of account. The Tribunal held that the addition were unsustainable because the cash deposits were openly accounted for and there were no flaws in the audit, stock records, or reported sales. Invoking Section 69A was deemed unnecessary because the deposited amount was fully accounted for, backed by third-party verification (VAT), and the AO had approved the declared profit margins.

The ITAT held that the audited nature of the books and verifiable sales rendered the invocation of Section 69A improper, referring to precedents from various Tribunals and the High Court. Accordingly, the Rs. 58.5 lakh addition was deleted, and the legal ground in the assessee’s favour was allowed.

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