Addition under Section 68 for Demonetisation Cash Deposits – Whether Possible When Books Are Rejected and Cash Sales Duly Recorded?

 

ITAT Mumbai – Rakesh Jain v. DCIT (2025)

ITA No. 546/Mum/2025 │ Order dated: 4 December 2025

 

1. Core Issue

The central questions before the Tribunal were:

                1.            Whether cash deposits made during the demonetisation period can be taxed as unexplained cash credits under Section 68 when they are already recorded as cash sales in the books?

                2.            Whether Section 68 can be invoked after the Assessing Officer himself has rejected the books of account under Section 145(3) and completed the assessment under Section 144?

                3.            Whether such additions lead to impermissible double taxation when the sales have already been offered to tax?

 

2. Facts in Brief

The assessee, a proprietor engaged in manufacture and sale of gold bars and jewellery, deposited ₹3.49 crore in old currency notes during the demonetisation window (Nov 2016).

Books were audited under Section 44AB and VAT audit.

The AO observed a significant jump in cash deposits and alleged discrepancies in the reported cash sales.

The AO:

                Rejected books u/s 145(3),

Completed assessment u/s 144,

Treated the cash deposits as unexplained cash credits u/s 68, and

Applied Section 115BBE (60% tax + surcharge).

 

CIT(A) sustained the addition. The assessee appealed before the ITAT.

 

3. Assessee’s Defence

The assessee demonstrated that:

a. Cash depositsrepresented cash sales, duly recorded:

Cash sales of ₹3,44,86,172 (ex-VAT) were recorded in sales register.

Bank deposit of ₹3,49,00,000 (incl. VAT) exactly matched the cash receipts.

Matching stock movement (opening stock → inward → outward → closing stock).

Complete accounting records: cash book, stock register, purchase/sales register, VAT audit, audited accounts.

 

b. Legal submission

Sales are already recognised as income. Once recorded, they cannot be taxed again under Section 68.

When books are rejected, the AO cannot rely on those same books to pick specific entries and treat them as unexplained (Doctrine: AO cannot blow hot and cold).

No defect found in purchases; once purchases stand accepted, corresponding sales cannot be disbelieved without evidence.

 

4. Key Legal Principles Considered

A. Section 68 requires valid “books of account”

If the AO rejects the books, Section 68 cannot be applied on entries in those rejected books.

 

Supported by:

Maddi Sudarsanam Oil Mills (AP HC)

Indwell Constructions (AP HC)

Devi Prasad Vishwanath Prasad (All HC)

Banwarilal Banshidhar (All HC)

 

Principle:

“Once books are rejected, the AO cannot rely on entries therein to make addition under section 68.”

 

B. Cash sales recorded in books cannot be treated as unexplained cash credits

 

Numerous courts have consistently held:

Recorded sales cannot be treated as unexplained cash credits u/s 68.

Otherwise, the same income would be taxed twice.

 

Supported by:

Kailash Jewellery House (Del HC)

Vishal Exports (Guj HC)

Hirapanna Jewellers (ITAT Vizag)

Shree Sanand Textiles (ITAT Ahmedabad)

New Pooja Jewellers (ITAT Kolkata)

Harshil Chordia (Raj HC)

 

C. Double taxation prohibited

If a receipt is already taxed as business income (sales), taxing the same receipt again u/s 68 is illegal.

 

Supported by:

Devi Prasad Vishwanath Prasad (SC)

Dewas Soya Ltd. (ITAT Indore)

Heera Steel Ltd. (ITAT Nagpur)

 

D. No requirement to collect PAN/address for small cash sales

Section 139A/Rule 114B mandate PAN only where cash transactions exceed ₹2 lakh per transaction.

The assessee’s cash bills were below this threshold. Courts have repeatedly held that inability to identify walk-in customers does not make sales bogus.

 

Supported by:

RB Jessaram Fatehchand (Bom HC)

Hirapanna Jewellers (ITAT Vizag)

 

5. Tribunal’s Analysis and Findings

1. Assessee discharged its onus

The ITAT found:

Sales were recorded in books.

Stock reconciliation supported the sales.

Purchases were accepted.

Sales invoices, registers and stock books were produced.

Cash balance on 8 Nov 2016 was ₹3.50 crore, sufficient to cover the deposit.

 

Therefore, source of cash deposit was fully explained.

 

2. AO brought no material to establish bogus sales

 

No enquiry with customers, no independent verification, no evidence of inflated sales, no defect in stock.

 

Suspicion ≠ Evidence.

3. Section 68 cannot operate after books are rejected

Since AO rejected books u/s 145(3), he could not selectively rely on entries to invoke s.68. This is legally impermissible.

 

4. Double taxation prohibited

The ITAT strongly criticised the attempt to apply Section 115BBE to income already taxed as sales:

“The whole purpose of the department in singling out the cash deposits during demonetisation appears to be to re-tax the same sales at 115BBE rates.”

 

5. No prohibition on cash sales

Cash sales are legitimate; demonetisation did not invalidate normal business practice.

 

6. Decision The ITAT held:

The cash deposits were business sale proceeds, already recorded and taxed.

Section 68 cannot be invoked.

Section 115BBE not applicable.

Addition of ₹3,49,00,000 deleted in full.

Penalty proceedings u/s 271AAC no longer survive.

 

Result: Appeal of assessee allowed.

 

List of cases

                1. Maddi Sudarsanam Oil Mills Co. v. CIT 37 ITR 369 (AP HC)

                2.            Indwell Constructions v. CIT 232 ITR 776 (AP HC)

                3.            Devi Prasad Vishwanath Prasad v. CIT 72 ITR 194 (Allahabad HC)

                4.            CIT v. Banwarilal Banshidhar 229 ITR 229 (Allahabad HC)

                5.            R.B. Jessaram Fatehchand (Sugar Dept.) v. CIT 75 ITR 33 (Bom HC)

                6.            Hirapanna Jewellers v. ACIT ITA No. 253/Viz/2020 (ITAT Visakhapatnam)

                7.            Kailash Jewellery House v. CIT 340 ITR 42 (Del HC)

                8.            Vishal Exports Overseas Ltd. v. CIT 372 ITR 212 (Guj HC)

                9.            Dewas Soya Ltd. v. ACIT ITA No. 336/Ind/2012 (ITAT Indore)

                10.         Heera Steel Ltd. v. ITO (2005) 4 ITJ 437 (ITAT Nagpur)

                11.         New Pooja Jewellers v. ITO ITA No. 1329/Kol/2018 (ITAT Kolkata)

                12.         Smt. Harshila Chordia v. ITO 298 ITR 349 (Raj HC)

                13.         Gordhan v. DCIT ITA No. 3741–3746/Del/2019 (ITAT Delhi)

                14.         ACIT v. Baldev Raj Charla 121 TTJ 366 (ITAT Delhi)

                15.         CIT v. Goa Sponge & Power Ltd. Tax Appeal No. 16 of 2012 (Bom HC)

                16.         CIT v. Creative World Telefilms Ltd. 333 ITR 100 (Bom HC)

                17.         CIT v. Steller Investment Ltd. 251 ITR 263 (SC)

                18.         CIT v. Nav Bharat Duplex Ltd. 35 taxmann.com 289 (All HC)

                19.         CIT v. Jay Dee Securities & Finance Ltd. 32 taxmann.com 91 (All HC)

                20.         ACIT v. Venkateshwar Ispat Pvt. Ltd. 319 ITR 393 (Chhattisgarh HC)

                21.         Mod Creations Pvt. Ltd. v. ITO 354 ITR 282 (Del HC)

                22.         CIT v. Al Anam Agro Foods (P.) Ltd. 38 taxmann.com 375 (All HC)

                23.         CIT v. Dwarkadhish Investment (P) Ltd. 330 ITR 298 (Del HC)

                24.         CIT v. Namastey Chemicals Pvt. Ltd. 33 taxmann.com 271 (Guj HC)

                25.         CIT v. People’s General Hospital Ltd. 356 ITR 65 (MP HC)

                26.         CIT v. Shree Rama Multi Tech Ltd. 34 taxmann.com 177 (Guj HC)

                27.         CIT v. Nikunj Eximp Enterprises (P) Ltd. 35 taxmann.com 384 (Bom HC)

                28.         CIT v. Samir Bio-Tech Pvt. Ltd. 325 ITR 294 (Del HC)

                29.         Naresh Kumar Tulshan v. ITO (ITAT Mumbai)

                30.         J.M.J. Essential Oil Co. v. ITO 100 taxmann.com 181 (ITAT Mumbai