Section 68 Addition Not Justified When Cash Deposits are From Recorded Sales and Books Not Rejected: ITAT Indore

ITAT Indore Quashes ₹70 Lakh Addition, Citing Recorded Sales & Unrejected Books in Demonetization Case

Indore, India – March 7, 2025 – The Income Tax Appellate Tribunal (ITAT), Indore Bench, has ruled in favor of Piyush Jain , an assessee engaged in the wholesale trade of gold and silver, setting aside an addition of ₹70,00,000 made under Section 68 of the Income Tax Act, 1961. The Tribunal, comprising Accountant Member Sh. Bhagirath Mal Biyani and Judicial Member Sh. Udayan Dasgupta , found that the cash deposits made during the demonetization period were adequately explained as proceeds from recorded sales and that the Assessing Officer (AO) had improperly rejected the assessee's books of accounts.

Case Overview

The case (I.T.A. No. 368/Ind/2024) arose from an assessment year 2017-18 order where the AO, under Section 143(3) of the Income Tax Act, added ₹70 lakh to Mr. Jain ’s income. This addition was based on cash deposits of Specified Bank Notes (SBNs) made during the demonetization period. The AO had rejected the assessee’s cash book under Section 145(3) and deemed the cash deposit as unexplained under Section 68. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, leading Mr. Jain to appeal before the ITAT.

Assessee's Arguments

Represented by Sh. Gagan Tiwari & Ms. Priyal Jain , ARs, Mr. Jain argued that the deposited cash originated from sales of gold and silver ornaments and bullion. He maintained that he operates wholesale businesses under the name M/s ‘ Rajshree Enterprises ’ with branches in Satna and Katni , in addition to his Indore head office. Cash sales from branches are centrally deposited. He presented audited books of accounts, sales invoices, VAT returns, and stock registers to substantiate his claim. Crucially, he argued that the cash balance in his books was sufficient to cover the SBN deposits and that his trading results were accepted as genuine. He emphasized that Section 68 is inapplicable when cash is received as sales consideration already recorded in books of accounts.

Revenue's Stance

Represented by Sh. Ashish Porwal , Sr. D. R., the Income Tax Department defended the CIT(A)’s order, asserting that Mr. Jain failed to adequately explain the source of the cash deposits. The department highlighted discrepancies such as cash withdrawals despite cash balances and questioned the reliability of the cash book, especially concerning large cash inflows on November 7th and 8th, 2016, immediately before demonetization. The Revenue contended that the assessee did not sufficiently prove the sales were the source of the deposits.

Tribunal's Observations and Decision

The ITAT bench meticulously examined the records and arguments. They noted that Mr. Jain 's sales for the assessment year were actually lower than the previous year, contradicting the AO’s claim of inflated sales. The Tribunal also observed that a substantial cash deposit of ₹51,80,000 was made on November 8, 2016, before the demonetization announcement, indicating regular business deposits.

The Tribunal highlighted a crucial flaw in the CIT(A)'s order, pointing out that while the CIT(A) scrutinized the stock register for gold ornaments and found discrepancies, he overlooked the stock register for gold bars. The ITAT noted that the gold bar stock register did show significant outward movement of gold bars on November 7th and 8th, 2016, correlating with the claimed sales and cash deposits.

"Moreover, we also note that the reason put forth by the AO for the purpose of rejection of books of accounts being cash drawn from bank by the assessee, in spite of cash availability in the cash book, is no ground for rejection of books in absence of any adverse findings regarding the entries in the books of accounts because how the assessee runs his business is his prerogative and in the instant case there is no evidence on record indicating incorrect entries," the Tribunal stated in its order.

Relying on numerous judicial precedents, including CIT v. Pancham Dass Jain and Abhishek Prakashchand Chhajed vs Income Tax Officer , the ITAT reiterated the principle that Section 68 cannot be applied to sales receipts already recorded in books of account, especially when the books have not been justifiably rejected and trading results are accepted. The Tribunal concluded that the AO’s rejection of the cash book under Section 145(3) was legally unjustified and that the addition under Section 68 was unsustainable.

Implications

The ITAT Indore's decision provides significant relief to Piyush Jain and reinforces the legal position that tax authorities cannot arbitrarily reject books of accounts and make additions under Section 68 when sales are duly recorded and explained, particularly when supported by stock movements and other business records. This ruling underscores the importance of maintaining proper documentation and accounting practices, especially in the context of demonetization-related cash deposits, and clarifies the limitations on the application of Section 68 when sales are legitimately accounted for.

Final Order: The appeal filed by the assessee was allowed, and the addition of ₹70,00,000 was deleted.

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This article is for informational purposes only and should not be considered legal advice.