ITAT Jaipur Rules ₹1.30 Cr Cash Deposits Not Unexplained

The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, recently passed an important order clarifying the treatment of cash deposits made during the demonetization period. The case revolved around whether cash deposits of ₹1.30 crore in the books of a tobacco and mouth freshener trader could be classified as “unexplained income” under Section 68 of the Income Tax Act, 1961.

The Tribunal, after careful consideration of the facts, held that when such deposits are properly recorded in books of account and supported by business records, they cannot be treated as unexplained. This ruling offers crucial guidance for businesses and taxpayers facing scrutiny over large cash deposits during demonetization.

Case Background

The assessee, Mr. Ashok Nariyani, operated his business under a proprietorship firm named M/s Manisha Agencies, engaged in the wholesale and retail trading of tobacco and mouth freshener products.

• For the assessment year, he filed his return declaring a total income of ₹24.46 lakh.

• During the demonetization period (9th November 2016 to 30th December 2016), cash deposits amounting to ₹5.00 crore were made in his bank account.

• Owing to the high value of these deposits, the case was selected for scrutiny by the Assessing Officer (AO).

The AO issued notices asking the assessee to explain the source of deposits, reconcile sales figures with VAT returns, and provide details of old (SBN) and new notes deposited.

The assessee responded with complete documentation: invoices, VAT returns, stock records, and details of cash transactions.

Findings of the AO

During a survey conducted at the assessee’s premises, Mr. Nariyani admitted that ₹1.58 crore of the deposits were unrecorded sales. He offered this income under the Pradhan Mantri Garib Kalyan Yojana (PMGKY), paying the required tax, interest, and penalties.

However, the AO observed that the total old currency deposits stood at ₹2.88 crore, whereas the assessee had admitted only ₹1.58 crore. On this basis, the AO treated the remaining ₹1.30 crore as unexplained cash deposits under Section 68 and taxed it at the higher rate prescribed under Section 115BBE.

Arguments of the Assessee

Aggrieved, the assessee appealed against the addition. His arguments were:

1. Deposits were genuine sales: The cash deposits were duly recorded in the books and supported by VAT returns, stock details, and invoices.

2. Survey statements cannot override records: The AO relied only on survey admissions, which cannot be the sole basis for income additions without corroborating evidence.

3. Section 68 inapplicable: Section 68 applies to unexplained credits that do not appear in the books. Since these transactions were already recorded, the section did not apply.

4. Support from judicial precedent: The assessee cited the Rajasthan High Court’s ruling in Smt. Harshila Chordia v. ITO (298 ITR 349), which held that documented business receipts cannot be treated as unexplained.

ITAT’s Observations

The Jaipur Bench of ITAT, comprising Dr. M.L. Meena (Accountant Member) and Dr. S. Seethalakshmi (Judicial Member), analyzed the matter in detail.

The Tribunal noted:

• The assessee had produced comprehensive supporting evidence such as sales invoices, VAT returns, and stock registers.

• Cash sales were duly recorded in the books of account.

• The AO had relied mainly on the survey statement, ignoring documentary evidence.

• Section 68 is designed for unexplained credits not reflected in books. Deposits backed by recorded business receipts cannot fall under this section.

Accordingly, the ITAT ruled that the addition of ₹1.30 crore was unsustainable and directed the AO to delete it.

Key Legal Takeaways

1. Books of Account Carry More Weight
   Survey statements, while relevant, cannot override well-maintained books of account supported by evidence.

2. Section 68 Has Limited Scope
   The provision applies only to credits or deposits that lack explanation and are not reflected in the books. Recorded business sales are outside its ambit.

3. Taxpayer Declarations under PMGKY Don’t Impact Genuine Sales
   Even though the assessee declared ₹1.58 crore under PMGKY, this did not mean all other deposits automatically became unexplained.

4. Burden of Proof on AO
   The AO must provide valid reasoning and evidence before treating deposits as unexplained. Mere suspicion or reliance on statements cannot justify additions.

Practical Relevance for Businesses

This ruling provides valuable guidance for businesses and professionals:

• Maintain proper documentation: Sales invoices, VAT/GST returns, and stock registers should always be updated and reconciled.

• Be cautious during surveys: Admissions made during survey operations should be carefully worded, as they may be used later in assessment.

• Challenge arbitrary additions: If additions are based only on statements without evidence, they can be contested successfully.

• Strengthen defense with precedents: Referring to earlier High Court and Tribunal rulings adds weight to the taxpayer’s case.

Conclusion

The Jaipur ITAT’s decision in the case of Ashok Nariyani v. ITO reinforces a crucial principle: properly recorded business receipts cannot be treated as unexplained cash deposits under Section 68.

By deleting the addition of ₹1.30 crore, the Tribunal has underlined that genuine transactions supported by books of account and statutory returns are fully acceptable in the eyes of tax law.

For taxpayers, this judgment is a clear reminder of the importance of accurate and transparent record-keeping. In disputes, books of account, invoices, and statutory filings carry far greater weight than survey statements. Businesses that follow compliance rigorously can defend themselves effectively against arbitrary income tax additions.