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2025 (4) TMI 1445 - AT - Income TaxAddition on account of cash deposit in to bank u/s 69A - HELD THAT - Assessee has source for cash deposits made during the pre-demonetization and also subsequently. AO proceeded to make the addition merely on the basis of sales recorded by the assessee comparatively less during previous assessment year and he has completely overlooked the fact that assessee has sales of cash of selling the fabric during festival season mainly in October and November. They do not deny the fact that the assessee has recorded huge cash sales and credit sales during the festival season and the sales recorded during the current assessment year cannot be compared with previous assessment year due to increase of business recorded only during the current assessment year. The details of two incomparable years cannot be compared. Therefore assessee has a source of cash deposits. Hence the addition made by the AO is not justified and for the sake of overall justice we are inclined to direct the assessee to submit a quantity-wise details of opening purchases and sales recorded of credit as well as cash sales during the year matching with the closing stock declared in the financial statement. AO is directed to verify the same and if the quantity details are properly recorded in the financials statement the additions proposed by him should be deleted. We are inclined to delete the addition after due verification of the quantity details by the AO. Assessee appeal allowed. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal issue considered in this appeal is whether the addition of Rs. 1,19,70,500/- made by the Assessing Officer (AO) under section 69A of the Income-tax Act, 1961, on account of unexplained cash deposits during the demonetization period, was justified. The Tribunal examined the validity of the AO's and Commissioner of Income Tax (Appeals) [CIT(A)]'s findings that the cash deposits were unexplained and whether the assessee had discharged the evidentiary burden to explain the source of such deposits. 2. ISSUE-WISE DETAILED ANALYSIS Issue: Legitimacy of addition under section 69A of the Income-tax Act for unexplained cash deposits during demonetization period. Relevant Legal Framework and Precedents: Section 69A of the Income-tax Act empowers the AO to make additions to income where money is found deposited in bank accounts and the assessee fails to satisfactorily explain the nature and source of such money. The burden lies on the assessee to provide a plausible and credible explanation supported by evidence that the deposits are from legitimate sources. Court's Interpretation and Reasoning: The AO initiated scrutiny under CASS focusing on cash deposits during the demonetization period (8.11.2016 to 31.12.2017). The AO noted that the assessee deposited Rs. 1,19,70,500/- in cash during this period in the current account of Navdurga Fabrics. The AO issued notices under section 133(6) to banks to obtain KYC and bank statements. Upon analysis, the AO observed a sharp increase in cash deposits during demonetization compared to the pre-demonetization period, where cash sales were minimal. The assessee explained that the cash deposits were from cash sales generated during the year, particularly from retail customers, and that TCS was deducted and deposited where applicable. The assessee also submitted a comparative month-wise sales statement showing increased sales in the relevant year due to appointment as distributor for major firms, leading to higher cash sales during festive months (October and November). However, the AO rejected these explanations, noting absence of supporting ledger accounts, cash books, invoices, and party details, and considered the sudden spike in cash sales during demonetization unexplained. The CIT(A) upheld the AO's addition, reasoning that the assessee failed to explain how substantial cash sales were generated during demonetization when fabric trading was not exempted for old currency use. CIT(A) also highlighted the lack of submission of detailed evidence such as ledger accounts and invoices, and pointed out the absence of cash sales data for later years to substantiate the assessee's claim. Before the Tribunal, the assessee reiterated that the cash deposits corresponded to legitimate cash sales, which were only 5% of total sales of Rs. 24.57 crores. The increase in sales was attributed to the distributorships obtained and the festive season, justifying the spike in cash sales during October and November 2016. The assessee argued that the CIT(A) erred in rejecting these explanations. The Revenue relied on the AO and CIT(A) orders, emphasizing the disproportionate increase in cash deposits during demonetization compared to the pre-demonetization period, and the lack of sufficient documentary evidence. Key Evidence and Findings: The Tribunal noted the following:
Application of Law to Facts: The Tribunal observed that the AO's comparison of cash sales during demonetization with the previous year was inappropriate since the business was nascent in the prior year and had significantly expanded in the relevant year due to new distributorships. The Tribunal found that the assessee had a credible source for the cash deposits, supported by the increase in business and sales records. The Tribunal further noted that the AO's addition was based on an incomplete comparison and failure to consider the nature of the business and seasonal sales trends. Treatment of Competing Arguments: The Tribunal gave due consideration to the Revenue's reliance on the disproportionate increase in cash deposits and the lack of detailed documentary evidence. However, the Tribunal found that the assessee's explanation of increased business activity and cash sales during festival months was plausible. The Tribunal also acknowledged the absence of comparable data for earlier years but emphasized the need to consider the business context and growth. Conclusions: The Tribunal concluded that the addition under section 69A was not justified on the facts. It directed the assessee to submit quantity-wise details of opening purchases, sales (both credit and cash), and closing stock to enable verification of the business transactions. The AO was instructed to verify these details and if found satisfactory, to delete the addition. 3. SIGNIFICANT HOLDINGS The Tribunal held that: "Assessee's business has increased manifold during AY 2017-18 compared to AY 2016-17. The increase in cash sales during demonetization period is explained by the appointment as distributor and seasonal festive sales. The AO's addition based on comparison with previous year's sales is not justified as the years are not comparable. The assessee has a source for cash deposits. Hence, addition under section 69A is not justified." The Tribunal established the principle that in cases of unexplained cash deposits under section 69A, the AO must consider the business context, growth, and plausible explanations supported by evidence rather than relying solely on comparative sales figures. The burden on the assessee to explain cash deposits can be discharged by credible documentary evidence and business rationale. The final determination was to delete the addition of Rs. 1,19,70,500/- subject to verification of quantity-wise details of purchases, sales, and stock by the AO, thereby allowing the appeal with directions for further verification.
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