The Cuttack Bench of the Income Tax Appellate Tribunal (ITAT) has overturned the addition of Rs. 5,01,500 made by the Assessing Officer (AO) under Section 69A of the Income Tax Act, 1961 and ruled that the cash deposits made during the demonetisation period were substantiated as business receipts.

Tekchand Harilal (assessee), a firm engaged as a distributor of FMCG products of Nestle, Amul, and PDS kerosene, filed its income tax return for the Assessment Year (AY) 2017-18, declaring a total income of Rs. 83,940. The case was selected for scrutiny due to an abnormal increase in cash deposits during the demonetisation period.

The AO disallowed Rs. 5,01,500 out of total cash deposits of Rs. 13,68,500 by invoking Section 69A of the Income Tax Act, and made an adhoc disallowance of Rs. 19,360, being 10% of carriage outward expenses.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s findings. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before ITAT.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

The assessee’s counsel argued that the assessee regularly collected cash from retailers as part of its business operations and deposited these amounts into its bank account. The counsel contended that the cash deposits, including those in Specified Bank Notes (SBNs) during demonetisation, were accounted for in the books of account and represented business receipts.

The counsel further relied on a decision by the Visakhapatnam Bench of ITAT in the case of Polepalli Srinivasulu Gupta vs. DCIT, which held that sale proceeds consistently deposited in the bank are legally valid and not subject to addition.

The single-member bench, comprising Duvvuru RL Reddy (Vice President), observed that the assessee was engaged in two businesses: the sale of FMCG products and the distribution of subsidized PDS kerosene.

The Bench observed that the assessee had submitted bank statements, purchase and sale registers, cash books, and month-wise cash deposit details for the AY 2017-18, as well as for the preceding and succeeding years, which showed consistent business operations.

The bench observed that the CIT(A) had acknowledged the nature of the assessee’s business in its order, and no discrepancies were found in the cash deposits across the years.

The Tribunal held that the assessee had adequately explained the source of the cash deposits as business receipts, and the AO was not justified in treating them as unexplained money under Section 69A. It directed the AO to delete the addition of Rs. 5,01,500. The appeal of the assessee was allowed.