The Income Tax Appellate Tribunal, Delhi, has clarified that cash deposits made during the demonetization period, when sourced from documented cash sales and supported by audited books of accounts, cannot be treated as unexplained income under Section 68 of the Income-tax Act. This ruling reinforces the principle that tax authorities must evaluate the totality of evidence rather than impose additions based on temporal proximity to demonetization.
Background & Facts
The Dispute
The assessee, Jagpreet & Co, is a firm engaged in trading dairy, kirana, confectionery, and toiletry goods. For assessment year 2017-18, it declared total income of ₹22,52,520 and maintained regular, audited books of accounts including cash book, ledger, stock register, and purchase-sale vouchers. During the demonetization period (November-December 2016), the firm deposited ₹2,97,30,000 in cash into its bank account, comprising ₹2,45,00,000 in old ₹500 and ₹1000 notes and ₹52,30,000 in new currency.
Procedural History
- 24.10.2017: Assessee filed return declaring income of ₹22,52,520
- 25.12.2019: Assessing Officer made addition of ₹2,97,30,000 under Section 68 as unexplained cash credit, invoking Section 115BBE for enhanced taxation
- 16.07.2025: National Faceless Appeal Centre (CIT(A)) deleted the addition
- 27.01.2026: Hearing before ITAT Delhi
- 11.03.2026: ITAT dismissed revenue’s appeal
Relief Sought
The assessee sought deletion of the addition under Section 68, arguing that the cash deposits were sourced from documented cash sales, closing stock, and debtor recoveries, all reflected in its audited books. It also challenged the retrospective application of Section 115BBE.
The Legal Issue
The central question was whether Section 68 of the Income-tax Act permits an addition for cash deposits when the assessee has established a credible, documented source from its own business operations, and whether Section 115BBE can be applied to deposits made before 01.04.2017.
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the sudden surge in cash deposits during demonetization, coupled with the absence of direct documentary linkage between individual cash sales and specific deposits, raised a presumption of unexplained income. It relied on the principle that large, unexplained cash inflows during demonetization warrant scrutiny under Section 68, and argued that the assessee failed to provide a clear, transaction-by-transaction trail.
For the Respondent (Assessee)
The assessee relied on its audited books, cashbook, stock registers, VAT/CST returns, and month-wise cash flow statements to demonstrate that the deposits were sourced from cash sales and debtor recoveries. It cited the consistent pattern of cash sales (26-30% of total turnover) and cash deposits over five years, showing no anomaly. It further argued that Section 115BBE was not applicable for AY 2017-18, as per the Madras High Court’s ruling in SMILE Microfinance Limited v. ACIT.
The Court's Analysis
The Tribunal emphasized that Section 68 requires the revenue to establish that the funds are unexplained, not merely that they are large or coincided with demonetization. The burden shifts to the assessee only after a prima facie case is made, but once the assessee provides credible, corroborated evidence, the revenue must rebut it with specific contrary evidence.
"The assessee has furnished month-wise cash withdrawals, cash deposits, cash sales, cash utilization together with opening and closing cash balance... None of the books of account have been rejected by the ld AO."
The Tribunal noted that the cash deposits (₹2,97,30,000) were nearly identical to the cash sales for the year (₹6,83,50,255), and that the firm’s historical cash deposit-to-sales ratio (26-42%) remained stable. The AO had accepted the return, including cash sales, making the separate addition under Section 68 a case of double taxation. The Tribunal also affirmed that Section 115BBE applies only from AY 2018-19 onwards, as held in SMILE Microfinance Limited, and thus could not be invoked for AY 2017-18.
The Verdict
The assessee won. The ITAT Delhi held that cash deposits sourced from documented, audited cash sales and maintained books of accounts cannot be treated as unexplained income under Section 68, and that Section 115BBE is inapplicable for assessment year 2017-18. The addition was deleted and the revenue’s appeal dismissed.
What This Means For Similar Cases
Cash Sales Documentation Is Sufficient Under Section 68
- Practitioners must ensure clients maintain detailed, contemporaneous cashbooks and monthly reconciliation of cash sales, deposits, and stock movements
- Audited financials and VAT/CST returns serve as critical corroborative evidence
- A consistent historical pattern of cash sales and deposits defeats the presumption of unexplained income
Section 115BBE Cannot Be Applied Retroactively
- Section 115BBE applies only from AY 2018-19; any addition for earlier years invoking it is legally invalid
- Taxpayers must raise this as a jurisdictional objection in appeals, citing SMILE Microfinance Limited
- Revenue authorities cannot use Section 115BBE to enhance tax on demonetization-era deposits for AY 2017-18 and prior
Double Addition Is Legally Impermissible
- If the AO has accepted cash sales as part of total income, a separate addition under Section 68 for the same funds constitutes double taxation
- This principle applies to all cases where income is disclosed in the return and later taxed again as "unexplained"
- Advocates should file objections on this ground at the first opportunity, even before CIT(A)
