The court affirmed that genuine cash sales, adequately supported by documentation, cannot be classified as unexplained income under Section 68 of the Income Tax Act.

O R D E R

PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 30.04.2024 passed for A.Y. 2017-18.

2. The assessee has raised the following grounds of appeal:

“1.1 That the ld. CIT(A) has erred in confirming the addition of Rs. 1,01,94,386/- made by the assessing officer in respect of cash deposited during demonetization period.

1.2 That the various reasons advanced by ld. CIT(A) in upholding the additions are contrary to the facts of the case and evidence on record.

1.3 The appellant respectfully submits that he has deposited cash out of cash sales and all the evidences have been filed by the appellant. Therefore, no addition can be made for Rs. 1,01,94,386/- and in particular when the source of cash deposited is out of sales which is already shown in income, the addition of Rs.

1,01,94,386/- cannot be made on the facts of the case.

1.4 The ld. CIT(A) has further erred in confirming the addition made u/s. 68 of the Act when the source of cash is out of business income only and therefore the addition should be made only as business income. This submission is without prejudice to the contention that no addition can be made on the facts of the case.

1.5 The appellant craves leave to add, alter or amend any of the grounds of appeal before final hearing of the appeal.”

3. The brief facts of the case are that during the assessment proceedings for A.Y. 2017-18, the Assessing Officer examined the return filed by the assessee, who had declared an income of ₹9,64,140/-. The case was selected for scrutiny under CASS due to significant cash deposits made during the demonetization period (₹1,18,30,436/-) in multiple bank accounts. On review of the books, the Assessing Officer noted that the assessee, who was engaged in resale of building material and manufacturing of paver blocks, reported a sudden and disproportionate increase in cash sales during September and October 2016, amounting to nearly 50% of the total annual sales of ₹2.09 crore. In contrast, cash sales after November 2016 plummeted to less than 2%. The assessee's explanation for the cash deposited that the same had been derived from business receipts-was found by the Assessing Officer to be unconvincing, particularly since many invoices did not have proper details, and cash receipts were backdated to inflate the opening balance for F.Y. 2016-17. Further, the Assessing Officer noted an inconsistency of ₹9.37 lakh in the opening cash balance, as books showed opening balance of ₹14.48 lakh against the correctly reported ₹5.11 lakh from the previous year’s return. The assessee submitted that this was on account of clerical errors, but the AO rejected the assessee’s explanation, on the ground that audited books in both years could not reflect such discrepancies. As per the Assessing Officer, the increase in cash sales during the months immediately before demonetization, the lack of customer verification for large cash receipts, and mismatches in accounting entries clearly indicated manipulation by the assessee intended to justify high cash deposits. The AO held that ₹1,01,94,386/- out of the total cash deposited remained unexplained and treated this as income under Section 68 of the Income Tax Act (Act). Accordingly, the income was enhanced to ₹1,11,58,526/-, and penalty proceedings under Section 271AAC were initiated separately for underreporting of income. 4. In appeal, CIT(Appeals) dismissed the appeal filed by the assessee, thereby confirming the addition of ₹1,01,94,386/- made by the Assessing Officer under Section 68 of the Act. Before CIT(Appeals), the assessee challenged the addition, submitting that the cash deposits during the dem