It is well-settled that once the source of cash is explained to be business receipts already accounted for and taxed, addition u/s 68 is unwarranted – ITAT
In a recent judgment, ITAT Surat has deleted addition u/s 68 of the Income Tax Act, 1961 (the Act) holding that it is well-settled that once the source of cash is explained to be business receipts already accounted for and taxed, addition under section 68 of the Act is unwarranted.
ABCAUS Case Law Citation:
4682 (2025) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition as unexplained cash credit u/s 68 of the Act.
The appellant assessee was engaged in wholesale footwear business. The Assessing Officer (AO) observed that that during the demonetization period, the assessee deposited large amount of old currency notes (SBNs) in two bank accounts but incorrectly mentioned only one account in the online response filed with Department and gave incorrect deposit figures.
The Assessing Officer noted that the bank records confirmed the correct amounts, but the assessee failed to report them properly in the return and also in the online reply. The assessee also did not submit the vital documents like the copy of the online response and VAT returns.
The Assessing Officer observed that the records showed that the assessee had a large cash balance before demonetization and he had deposited large amount of cash during that period. However, a significant part of the SBNs was deposited even after November, raising doubts about whether the money was genuinely held before the prohibition or came from unaccounted sources.
The Assessing Officer also noted that there was a significant increase in sales just before demonetization and instead of clearly explaining the source of the cash deposited, the assessee tried to justify them using sales turnover and debtor receipts, which as per the Assessing Officer was not found to be acceptable and was unverified.
Since the assessee failed to give proper evidence to the satisfaction of the AO about from where the cash came from, the entire deposit amount was treated as unexplained income under Section 68 of the Act and taxed the same at 60% under Section 115BBE of the Act.
The CIT(A) noted that that the assessee had explained that cash came from his regular business sales and even mentioned a new business deal which led to more cash sales. The assessee submitted month-wise sales, purchase details, and confirmations from a few customers.
However, the CIT(Appeals) observed that this was not enough to verify the actual sales or source of the cash. Also, the books submitted were not audited, and the sudden increase in cash sales compared to preceding year raised serious doubts. Accordingly, CIT(Appeals) held that since the asseseee could not provide proper documentary evidence to support his explanation, and the basic proof like stock details and customer confirmations were missing, the asseseee failed to prove that the cash deposits were genuine.
The Tribunal noted that during the assessment proceedings, the assessee had submitted that the source of such deposits was cash sales and collection from debtors. In support, the assessee submitted audited financial statements, cash book, month-wise sales and purchase details, confirmation from 35 customers, and also explained that the increase in sales was on account of a new agency obtained and the Diwali festive season. The Assessing Officer, however, doubted the explanation on the grounds that full confirmations were not filed, there was a sudden increase in sales in October 2016, and certain documents such as stock registers and GST returns were not furnished.
The Tribunal further observed it was evident that the cash deposits during the relevant period were duly accounted for in the books of account by the assessee and arose out of sales (which had been duly recorded) and receipts from debtors. The assessee had filed audited financials, offered the entire turnover to tax, and no discrepancies had been pointed out in the financial results declared by the assessee or in the stock position.
It was further observed that the Assessing Officer had accepted the book results without invoking section 145 of the Act. The assessee’s explanation regarding the increase in turnover due to the new agency and festive season was also reasonable and is supported by corresponding increases in purchases as well. The confirmation of 35 debtors and the list of all customers were also submitted and remained uncontroverted by the AO.
The Tribunal stated that it is well-settled that once the source of cash is explained to be business receipts already accounted for and taxed, addition under section 68 of the Act is unwarranted, as held in various decisions on the subject.
Accordingly, the addition made under section 68 of the Act was held as not sustainable and quashed.
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