The Income Tax Appellate Tribunal, Kolkata, has clarified that cash deposits made during the demonetization period, if traceable to a consistently maintained cash book and supported by corroborative records, do not constitute unexplained income under Section 68 of the Income Tax Act. This ruling reinforces the principle that statutory additions must be grounded in positive evidence of concealment, not mere statistical disparity.
Background & Facts
The Dispute
The assessee, New Saha Dyers and Processors, operates in the clothing, dyeing, and retail business. During the demonetization period in November 2016, the assessee deposited ₹1,43,54,500 in its bank account using currency notes that were subsequently withdrawn from circulation. The Assessing Officer (AO) initially assumed the deposit amount to be ₹3,45,00,450 based on data from the Income Tax Settlement (ITS) portal, but ultimately made an addition of ₹1,48,53,500 under Section 68 of the Income Tax Act, treating it as unexplained cash credit.
Procedural History
The case progressed through the following stages:
- 2017-18 Assessment Year: AO made addition of ₹1,48,53,500 under Section 68
- 2025: Commissioner of Income Tax (Appeals) enhanced the addition to ₹3,45,00,450, relying solely on ITS portal figures
- 2026: Appeal filed before the Income Tax Appellate Tribunal (ITAT), Kolkata
Relief Sought
The assessee sought deletion of the addition, arguing that the deposits were fully accounted for through its cash book and stock register, both of which were submitted to the AO during assessment proceedings. The assessee also highlighted consistent cash deposit patterns across assessment years 2016-17, 2017-18, and 2018-19, indicating no anomalous inflow.
The Legal Issue
The central question was whether Section 68 of the Income Tax Act permits an addition for cash deposits made during demonetization solely on the basis of ITS portal data, when the assessee has produced contemporaneous cash books and stock registers demonstrating the source of funds.
Arguments Presented
For the Appellant
The assessee’s representative argued that the deposits were not unexplained income but were drawn from the assessee’s own cash book, which had been audited and found free of irregularities. The comparative chart of cash deposits over three assessment years showed uniformity, negating any inference of concealment. Reliance was placed on CIT v. M/s. Sree Ramakrishna Enterprises and CIT v. M/s. R.K. Industries, where courts held that Section 68 cannot be invoked merely because deposits occurred during demonetization; the burden shifts to the revenue only if the source is genuinely untraceable.
For the Respondent
The Departmental Representative contended that the ITS portal reflected a higher deposit figure of ₹3,45,00,450, suggesting possible underreporting. He argued that the cash book could have been manipulated and pointed to ledger entries dated before demonetization as evidence of irregular accounting. He conceded, however, that if the matter was remanded to the AO for re-examination, he would not oppose such a course.
The Court's Analysis
The Tribunal examined the nature of Section 68, which allows the Assessing Officer to treat any sum found in the books as unexplained income if the assessee fails to explain its nature and source. The Court emphasized that Section 68 is not a tool for speculative taxation but requires a reasonable basis for doubt.
"The perusal of the cash book maintained by the assessee shows that the cash has been deposited in the bank of the assessee out of the cash available in the cash book. The deposits are not amounts which has been deposited in the cash book."
The Tribunal noted that the AO had not alleged any falsification of records, nor had any discrepancy been found in the cash book or stock register. The consistency of cash deposits across three financial years further undermined the claim of unexplained inflow. The ITS portal data, while indicative, could not override primary documentary evidence produced by the assessee. The Tribunal held that reliance on automated portal data without cross-verification against primary books is legally insufficient to trigger Section 68.
The Court also rejected the notion that demonetization alone creates a presumption of tax evasion. It affirmed that the burden of proof remains on the revenue to establish a prima facie case of concealment, not on the assessee to disprove an assumption.
The Verdict
The assessee won. The Tribunal held that cash deposits traceable to a consistently maintained cash book, with no evidence of manipulation, cannot be taxed under Section 68 merely because they occurred during demonetization. The additions made by the AO and enhanced by the CIT(A) were deleted.
What This Means For Similar Cases
Documentary Evidence Prevails Over Portal Data
- Practitioners must insist that revenue authorities cross-verify ITS or other digital data against primary books like cash books, ledgers, and stock registers
- Automated system outputs alone cannot form the basis for additions under Section 68
- Where the assessee produces contemporaneous, audited records, the burden shifts decisively to the revenue to prove fraud or falsification
Demonetization Does Not Create Presumption of Concealment
- Assessing Officers cannot treat all cash deposits during demonetization as suspicious by default
- Taxpayers engaged in cash-intensive businesses (retail, agriculture, textiles) may rely on this precedent to challenge arbitrary additions
- The Tribunal’s reasoning reinforces that economic context alone cannot substitute for evidentiary proof
Procedural Compliance Is Non-Negotiable
- Even if technical grounds (e.g., notice under Section 143(2)) are raised, the Tribunal may dispose of appeals on merits if the substantive issue is resolved
- Practitioners should prioritize substantive defenses over procedural objections unless procedural defects are jurisdictional
- This case underscores that merits-based adjudication takes precedence over technicalities when justice is served on the former
