Chennai ITAT deleted partial addition of cash deposited during demonetisation and ordered taxation at Normal Tax Rate for other additions
The ITAT bench of Chennai [ITA No.: 650/Chny/2023, date of order 23.08.2023] has held that cash deposited during demonetization shall be treated as income from the business and taxed at normal rates, rather than the higher rate of 60% specified in Section 115BBE of the Income Tax Act, where the sole source of income was the business and the claimed source of cash deposits was business sales for the year.
In this case, the Assessing Officer raised concerns about large cash deposits of Rs. 38,40,000/- during the demonetization period by the assessee, who was engaged in the retail trading of readymade garments. The assessee claimed that the cash deposits were from business receipts and provided a day book as evidence. However, the Assessing Officer questioned the explanation and suspected that the assessee had inflated sales during demonetization to justify the cash deposits.
Upon reviewing the financial statements, it was observed that the sales for the previous financial year were approximately Rs. 1 crore, with average daily sales ranging from Rs. 30,000 to Rs. 35,000. In contrast, the assessee reported sales of Rs. 1.65 crores for the assessment year in question, with average daily sales estimated at Rs. 50,000 to Rs. 55,000. This indicated a substantial increase in sales during demonetization.
Additionally, the assessee had significant trade payables on their books despite having a substantial cash balance of Rs. 38.41 lakhs. The Assessing Officer found this inconsistency and suspected that the higher sales were fabricated to account for the cash deposits.
Ultimately, the Appellate Tribunal disagreed with the Assessing Officer’s conclusion. They found that the mere increase in sales was not sufficient to establish unexplained cash deposits. They also noted that the assessee had provided evidence of the cash balance before demonetization. Therefore, they directed the Assessing Officer to consider Rs. 25,00,000 as the cash balance in hand available to the assessee during demonetization, providing relief for this amount. The remaining Rs. 13,40,000 was treated as unexplained.
Regarding the tax rate, the Appellate Tribunal directed that the addition be treated as income from the business and taxed at normal rates, rather than the higher rate of 60% specified in Section 115BBE of the Income Tax Act, considering the sole source of income was the business and the claimed source of cash deposits was business sales for the year.
The copy of the order is as under: