The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has substantially restricted an addition arising from cash deposited during the demonetisation period, reducing an addition of ₹1.80 crore under Section 68 of the Income Tax Act, 1961 to a lump-sum amount of ₹5 lakh.
The bench of Satbeer Singh Godara (Judicial Member) and Naveen Chandra (Accountant Member) observed that the department’s attempt to disbelieve the explanation that the deposits arose from higher hospital fees could not be fully justified, although it also found that some failure to explain a portion of the deposits could not be ruled out.
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The controversy centred on ₹1.80 crore deposited in cash during the demonetisation period. The Assessing Officer treated the amount as an unexplained deposit and made an addition under Section 68 of the Income Tax Act. The assessee had filed its original return for AY 2017-18 declaring income of ₹1,25,63,340 under the normal provisions and ₹1,33,61,734 under Section 115JB.
The assessee challenged the assessment before the CIT(A), which allowed its appeal. The Income Tax Department subsequently approached the ITAT against the appellate relief.
The Revenue’s principal objection was that the CIT(A) had wrongly deleted the entire ₹1.80 crore addition without properly appreciating the Assessing Officer’s findings concerning cash deposits made in Specified Bank Notes during demonetisation. According to the Revenue, cash expenses had fallen unusually during the relevant period despite a substantial rise in cash receipts, resulting in what the Department considered an abnormal accumulation of cash immediately before demonetisation.
The Department also questioned the explanation that a higher patient load and increased business activity had resulted in increased cash receipts. It contended that there was no supporting documentary evidence establishing a connection between the claimed rise in patient inflow or disease outbreaks and the substantial increase in cash receipts and deposits.
Another important question raised in the appeal concerned the relevance of the assessee’s regularly maintained books of account.
The Revenue argued that the CIT(A) was incorrect in holding that no addition could be made merely because the books had not been rejected under Section 145(3). According to the Department, an addition under Section 68 could still be made where the nature and source of a credit had not been satisfactorily explained, notwithstanding the maintenance of books of account.
The Department further pointed to what it considered an unusually high cash-in-hand position immediately before demonetisation compared with similar dates in preceding years. It also invoked the Supreme Court’s ruling in Sumati Dayal v. CIT, arguing that the explanation should have been examined through the “test of human probabilities” and in the context of the surrounding circumstances.
The department additionally contended that merely recording transactions in books of account did not automatically establish their genuineness. Referring to PCIT v. NRA Iron & Steel Pvt. Ltd., it maintained that an assessee must establish the genuineness of transactions rather than relying solely on accounting entries.
The department argued that the cash deposits in the bank were not connected with an increased flow of patients.
The assessee, on the other hand, relied on the CIT(A)’s order and submitted that the addition had been made without rejecting the books of account and without supporting evidence. It argued that the Assessing Officer’s conclusion rested on conjectures and surmises.
The central factual explanation offered by the assessee was that the cash deposited during the demonetisation period originated from higher business turnover generated from patients.
After considering the rival submissions and material on record, the Tribunal adopted a middle course rather than accepting either side’s position in full.
The ITAT recorded that the assessee had attempted to establish that the entire source of the cash deposited during demonetisation was higher business turnover from patients. At the same time, it held that the Revenue’s attempt to disbelieve the assessee’s contention that the cash deposits were made from higher hospital fees “cannot be fully justified.”
The Tribunal did not accept that the entire amount stood conclusively explained. It observed that, considering the factual matrix, “some element of failure to explain some of the cash deposit, cannot be ruled out.”
It therefore considered it appropriate, in the larger interest of justice, to sustain only a lump-sum addition of ₹5 lakh.
The Tribunal specifically added a rider that this determination “shall not be treated as a precedent”, stating that the limited addition was considered just and proper so as to cover the loopholes in the factual circumstances of the case. Consequently, the Revenue’s ground on this issue was partly allowed.
Thus, while the Assessing Officer had originally brought ₹1.80 crore to tax as unexplained cash deposits, the ITAT ultimately sustained only ₹5 lakh, effectively granting relief in respect of ₹1.75 crore of the disputed addition.
The Tribunal separately considered whether the amount ultimately sustained could be subjected to the higher rate of tax prescribed under Section 115BBE.
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