Books Rejected, Sales Recorded, Section 68 Invoked? ITAT Mumbai Draws a Clear Line in Demonetisation Cash Deposit Cases
One of the most litigated questions arising from demonetisation assessments continues to be this: Can cash deposits made during the demonetisation period be taxed as unexplained cash credits under Section 68 when the assessee has duly recorded them as cash sales in the books of account? The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), in Rakesh Jain v. DCIT (ITA No. 546/Mum/2025, order dated 4 December 2024), has provided a reasoned and authoritative answer—particularly relevant where the Assessing Officer (AO) himself has rejected the books of account under Section 145(3).
This ruling is of immense importance for jewellers, traders, and cash-intensive businesses that faced aggressive additions under Section 68 read with Section 115BBE during demonetisation. It also settles, once again, the legal position that the Revenue cannot tax the same receipt twice—once as business income and again as unexplained cash credit.
Core Issue Before the Tribunal
The Tribunal examined three interlinked legal questions. First, whether cash deposits during demonetisation can be taxed under Section 68 when they are already recorded as cash sales in the books. Second, whether Section 68 can be invoked after the AO has rejected the books of account under Section 145(3) and completed the assessment under Section 144. Third, whether such additions result in impermissible double taxation when the sales have already been offered to tax as business income.
Facts of the Case in Brief
The assessee was a proprietor engaged in the manufacture and sale of gold bars and jewellery. During the demonetisation window in November 2016, he deposited ₹3.49 crore in old currency notes into his bank account. The books of account were duly audited under Section 44AB and were also subject to VAT audit. The AO noticed a sharp increase in cash deposits during the demonetisation period and alleged discrepancies in the reported cash sales.
The AO rejected the books of account under Section 145(3), completed the assessment under Section 144, treated the entire cash deposit of ₹3.49 crore as unexplained cash credit under Section 68, and further applied the harsh provisions of Section 115BBE, taxing the amount at 60% plus surcharge. The CIT(A) confirmed the addition, following which the assessee carried the matter in appeal before the ITAT.
Assessee’s Defence: Cash Deposits Were Genuine Cash Sales
The assessee demonstrated that the cash deposits represented genuine cash sales duly recorded in the regular books of account. Cash sales of ₹3,44,86,172 excluding VAT were recorded in the sales register. The total bank deposit of ₹3,49,00,000 including VAT exactly matched the cash receipts from sales. The assessee produced complete quantitative records showing matching stock movement—opening stock, purchases, sales, and closing stock. The cash book, stock register, purchase and sales register, VAT audit report, and audited financial statements were all placed on record.
It was further argued that once sales are recorded and offered to tax as business income, the same receipts cannot again be taxed under Section 68. The assessee emphasised that after rejecting the books of account, the AO could not selectively rely on the very same books to pick and choose certain entries and label them as unexplained. This, it was argued, amounted to the AO “blowing hot and cold at the same time.” Importantly, no defect was found in the purchases. Once purchases were accepted, corresponding sales could not be disbelieved in the absence of any adverse material.
Section 68 Requires Valid Books of Account
The Tribunal reaffirmed a settled legal principle: Section 68 can be invoked only when there are valid and accepted books of account. Once the AO rejects the books under Section 145(3), he cannot rely on entries in those rejected books to make an addition under Section 68. The ITAT categorically observed that “once books are rejected, the AO cannot rely on entries therein to make addition under section 68.” The correct course for the AO, after rejecting the books, is to estimate income by applying a reasonable profit rate-not to treat recorded business receipts as unexplained cash credits.
Recorded Cash Sales Cannot Become Unexplained Cash Credits
The Tribunal held that cash sales recorded in the books cannot be treated as unexplained cash credits under Section 68. Doing so would amount to taxing the same transaction twice-first as sales forming part of business turnover and again as unexplained income. The law does not permit such double taxation of the same receipt under different heads.
Double Taxation Is Impermissible in Law
A crucial takeaway from the decision is the reaffirmation of the principle that if a receipt is already taxed as business income, it cannot again be taxed under Section 68. The ITAT made it clear that demonetisation does not create a special charging provision that overrides fundamental principles of income taxation. Even during demonetisation, the burden remains on the Revenue to prove that recorded sales are fictitious before invoking Section 68.
No Requirement to Collect PAN or Address for Small Cash Sales
The Tribunal also dealt with a common argument raised by the Department-that the assessee could not produce details of walk-in customers. It noted that Section 139A and Rule 114B require quoting of PAN only where cash transactions exceed ₹2 lakh per transaction. In the present case, individual cash bills were below this threshold. Courts have consistently held that inability to identify retail or walk-in customers does not, by itself, render cash sales bogus, especially in businesses like jewellery where counter sales are common.
Key Takeaways from ITAT Mumbai Ruling
The decision in Rakesh Jain v. DCIT sends a strong message in demonetisation-related assessments. Where cash deposits are duly recorded as cash sales, supported by stock records and audited books, addition under Section 68 is not permissible. Once books of account are rejected under Section 145(3), the AO cannot rely on those very books to make additions under Section 68. Taxing recorded sales again as unexplained cash credits results in illegal double taxation. Finally, Section 115BBE cannot be mechanically invoked without first establishing that the income is genuinely unexplained.
Conclusion
This ITAT Mumbai ruling is a significant relief for taxpayers facing demonetisation-era additions under Section 68. It reinforces the principle that recorded business receipts cannot be converted into unexplained income merely because they arise during demonetisation. For tax professionals and assessees alike, this judgment provides a strong legal foundation to challenge arbitrary additions where books are rejected but sales are otherwise duly recorded and supported by evidence.
The copy of the order is as under:
