The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that where cash deposits are duly recorded as sales in the books of account and supported by documentary evidence, they cannot be treated as unexplained money merely on the basis of suspicion.

The bench of Suchitra Kamble (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) has observed that once the cash deposits had been recorded as sales in the regular books of account, Section 69A could not be invoked. 

The Bench distinguished the Revenue’s reliance on the Punjab and Haryana High Court ruling in Namdeo Arora, noting that the said case involved unexplained loans unsupported by documentary evidence, whereas the present case involved recorded business transactions backed by books, stock records, sales records, VAT returns and audit reports.

The assessee, a partnership firm engaged in the business of trading gold and diamond jewellery, had filed its return for Assessment Year 2017-18 declaring income of ₹42.67 lakh. During scrutiny proceedings, the Assessing Officer (AO) noticed that the firm had deposited cash amounting to ₹5.61 crore in its bank account during the demonetisation period in November 2016.

The assessee explained that the deposits represented proceeds from cash sales of jewellery made on 8 November 2016, the day the demonetisation announcement was made. However, the AO found the explanation doubtful and observed that more than 350 cash sales had been recorded on a single day, with each transaction ranging between ₹1.75 lakh and ₹1.99 lakh, remaining below the ₹2 lakh threshold that triggered mandatory PAN disclosure requirements.

According to the AO, the structured nature of these transactions, absence of buyer details and the unusually high volume of sales raised serious doubts about their genuineness. Applying the principle of human probability laid down by the Supreme Court in Sumati Dayal v. CIT, the AO treated the cash deposits as unexplained money under Section 69A and made an addition of ₹5.61 crore.

The assessee contended that the demonetisation announcement triggered a massive rush of customers to its two jewellery showrooms between 8:30 PM and midnight. It submitted that customers hurriedly purchased jewellery using demonetised currency notes before they ceased to be legal tender. Due to the extraordinary crowd, transactions were completed rapidly and many customers intentionally kept purchases below ₹2 lakh to avoid PAN disclosure requirements.

The firm also highlighted that the sales were duly recorded in the books of account. The cash deposits were reflected in the cash book. Sufficient stock was available to support the sales. VAT returns disclosed the sales turnover. The books of account had not been rejected under Section 145(3).

The Commissioner of Income Tax (Appeals) accepted these submissions and deleted the entire addition, observing that Section 69A applies only where money is not recorded in the books of account. Since the cash sales were duly recorded and supported by records, the addition was unsustainable.

The department argued that the invoices lacked customer identification details such as PAN and addresses and that the transactions appeared to have been deliberately structured below ₹2 lakh. The Department also questioned the adequacy of stock records and contended that the CIT(A) had accepted the assessee’s explanation without sufficient verification.

The department submitted that even if entries were recorded in the books, the addition could still be sustained where the genuineness of transactions remained doubtful.

The Tribunal observed that the law did not require PAN disclosure for cash transactions below ₹2 lakh. Therefore, merely because customers structured purchases within the legally permissible limit could not justify an adverse inference against the assessee.

The Bench further noted that the assessee had maintained stock records and furnished them during proceedings. Stock details were reported in the tax audit report. The AO did not reject the books of account. No defects were found in purchases, stock movement, VAT returns or financial statements. No independent inquiry was conducted to establish that the sales were fictitious.

The Tribunal emphasized that suspicion, however strong, cannot replace evidence. Since the sales were reflected in the books, VAT returns and stock records, the Revenue was required to bring positive evidence to disprove them, which it failed to do.

The Tribunal also agreed with the CIT(A) that the addition would effectively result in taxing the same sales receipts twice, since the sales had already been credited to the profit and loss account and offered to tax.

Upholding the appellate order, the ITAT concluded that the assessee had successfully explained the source of the cash deposits through recorded sales and supporting documentation. Since the Revenue failed to establish any material discrepancy or conduct any meaningful investigation to disprove the transactions, the addition of ₹5.61 crore under Section 69A was rightly deleted.

Accordingly, the Tribunal dismissed the Revenue’s appeal and confirmed the relief granted to the assessee.

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