Demonetisation Cash Deposits Cannot Be Treated as Unexplained Merely Due to Absence of Stock Register: ITAT Indore
ITAT Indore Deletes Section 68 Addition of ₹2.48 Crore – Books of Account Not Rejected, Purchases and Sales Accepted
Case: DCIT v. Prakash Chandra Gupta
ITA No.: 369/Ind/2024
Assessment Year: 2017-18
Order Date: 10 April 2026
Bench: ITAT Indore
Members: Shri B.M. Biyani, Accountant Member and Shri Paresh M. Joshi, Judicial Member
Introduction
Demonetisation-related cash deposits continue to remain a contentious issue in income tax assessments. One common approach adopted by Assessing Officers is to question substantial cash deposits made during the demonetisation period, particularly where the assessee maintains significant cash balances or does not maintain detailed quantitative stock records.
However, can cash deposits arising from recorded business sales be treated as unexplained cash credits under Section 68 merely because the assessee has not maintained a stock register?
The Indore Bench of the Income Tax Appellate Tribunal, in DCIT v. Prakash Chandra Gupta (ITA No. 369/Ind/2024), has delivered an important ruling on this issue. The Tribunal upheld the deletion of an addition of ₹2,48,14,793 made under Section 68, observing that the absence of a stock register, by itself, could not justify doubting the purchases and sales recorded in the regular books of account.
The ruling provides valuable guidance in cases involving demonetisation deposits, cash sales, business receipts and alleged unexplained cash credits.
1. Facts of the Case
The assessee was engaged in the business of purchasing and selling computer hardware and peripheral devices under the proprietorship concern M/s Boot Com System.
For AY 2017-18, the assessee declared total income of ₹30,17,550.
During scrutiny assessment, the Assessing Officer noticed that the assessee had deposited cash aggregating to ₹3,94,33,500 during the demonetisation period.
The Assessing Officer raised several objections:
– The assessee had not disclosed the demonetisation-period cash deposits in the income tax return.
– Monthly average sales were approximately ₹3 crore, with a substantial portion of sales being in cash.
– Average cash sales were approximately ₹1.37 crore per month.
– The average cash balance between June 2016 and 8 November 2016 was approximately ₹2.61 crore, compared with approximately ₹24.94 lakh during the corresponding period of the preceding year.
– Cash in hand had increased substantially during the relevant financial year.
– Despite maintaining substantial cash balances, the assessee had also made cash withdrawals from the bank.
– The assessee had not maintained quantitative stock details or a stock register.
According to the Assessing Officer, the assessee had artificially increased cash balances by preponing cash sales and booking them in the books of account.
The Assessing Officer estimated reasonable cash in hand at ₹50 lakh and treated the balance amount of ₹2,48,14,793 as unexplained cash credit under Section 68 of the Income-tax Act.
The addition was taxed under Section 115BBE.
A further addition of ₹24,40,000 was made under Section 68 towards capital introduced by the assessee.
2. Relief Granted by CIT(A)
The assessee challenged both additions before the CIT(A).
Regarding the addition of ₹2,48,14,793, the CIT(A) observed that:
– The assessee had submitted purchase and sales registers.
– The purchases and cash sales were duly recorded in the books of account along with invoice numbers.
– The Assessing Officer had not rejected the books of account.
– No specific discrepancy had been pointed out in the purchases, sales or stock position.
– The cash generated from business had been recorded in the cash book and was already reflected in the Profit and Loss Account.
The CIT(A) also relied upon judicial precedents, including:
1. Laxmichand Baijnath v. CIT (35 ITR 416).
2. CIT v. Devi Prasad Vishwanath Prasad (72 ITR 194).
3. PCIT v. Agson Global Pvt. Ltd. (441 ITR 550).
4. Dewas Soya Ltd. v. Income Tax (ITAT Indore).
The CIT(A) concluded that the cash deposits represented business receipts already recorded in the books and that taxing the same amount again under Section 68 would result in double taxation.
Accordingly, the entire addition of ₹2,48,14,793 was deleted.
Regarding the capital introduction of ₹24,40,000, the assessee explained that the amount represented a gift received from his maternal uncle.
The CIT(A) accepted the bank transfer of ₹10 lakh but sustained the remaining ₹14.40 lakh because the corresponding cash withdrawals by the donor were not established.
3. Revenue’s Arguments Before the ITAT
The Revenue challenged the relief granted by the CIT(A).
Its principal argument was that the assessee had failed to produce quantitative stock details and that the absence of a stock register made the purchase and sales registers unreliable.
The Department also questioned the substantial increase in cash balances and the simultaneous withdrawal of money from bank accounts despite sufficient cash being available in the books.
Regarding the gift of ₹24.40 lakh, the Revenue argued that the assessee had introduced the explanation of a gift from his maternal uncle only during appellate proceedings.
It was further pointed out that the CIT(A) had not obtained a remand report from the Assessing Officer or conducted proper verification of the donor and the genuineness of the gift.
4. Important Observations of the ITAT on Cash Deposits
After examining the assessment order, appellate order, paper book and rival submissions, the Tribunal upheld the deletion of ₹2,48,14,793.
The Tribunal made several important observations.
A. Absence of Stock Register Cannot Automatically Make Purchases and Sales Unreliable
The Revenue’s principal argument was that, in the absence of a stock or inventory register, the purchase and sales registers could not be relied upon.
The Tribunal did not accept this argument.
It observed that the assessee had submitted purchase and sales registers before the Assessing Officer. The entire purchases and cash sales had been recorded along with invoice numbers.
No specific discrepancy had been identified by the Assessing Officer in the purchases, sales or stock position.
The Tribunal categorically observed:
“In the absence of stock/inventory registry the character of purchases & the sales register cannot be doubted at all.”
It further held that the mere absence of a stock register could not be fatal to the purchases and sales when the Revenue had not brought any contrary material on record.
B. Books of Account Were Not Rejected
Another significant factor was that the Assessing Officer had not rejected the books of account.
The Tribunal noted that the purchases and sales had not been disputed by the Revenue, except for the absence of a stock register.
The assessee had maintained a cash book, and no discrepancy had been noticed in it by the lower authorities.
The Tribunal observed that the Assessing Officer’s analogy for making the addition under Section 68 was not correct and that the CIT(A) had rightly noted that the books of account had not been rejected.
C. No Specific Discrepancy in Purchases or Sales
The Tribunal also took note of the fact that the Revenue had failed to bring any credible evidence or material to dislodge the findings of the CIT(A).
The assessee had explained that it dealt in approximately 1,000 products and undertook physical stock verification at the end of the year.
This explanation was not controverted by the Departmental Representative.
The Tribunal accordingly held that the absence of a stock register could not, by itself, justify doubting the recorded purchases and sales.
D. Cash Sales Were Already Recorded in the Books
The assessee’s case was that the cash deposits represented proceeds of business sales recorded in the regular books of account.
The CIT(A) had specifically noted that the cash generated from business was reflected in the cash book and that the corresponding sales had already been credited to the Profit and Loss Account.
The Tribunal found no cogent material brought by the Revenue to dislodge these findings.
Thus, the addition of ₹2,48,14,793 under Section 68 was rightly deleted.
5. Important Judicial Precedents Relied Upon
The decision also highlights the importance of the following judicial precedents:
Laxmichand Baijnath v. CIT (35 ITR 416)
The CIT(A) relied upon the principle that amounts credited in business books can ordinarily be presumed to relate to the business unless contrary material is brought on record.
CIT v. Devi Prasad Vishwanath Prasad (72 ITR 194)
The Supreme Court decision was relied upon in the context of the assessee’s contention that income already offered for taxation should not be taxed again merely by treating the corresponding business receipts as unexplained credits.
PCIT v. Agson Global Pvt. Ltd. (441 ITR 550)
The Delhi High Court decision was relied upon to support the proposition that cash deposits represented by recorded cash sales cannot be treated as unexplained without material establishing that the deposits actually represented unaccounted income.
Dewas Soya Ltd. v. Income Tax (ITAT Indore)
The CIT(A) also referred to the principle against double taxation of the same business income.
The Indore ITAT found that the Revenue had failed to distinguish the judicial precedents relied upon by the CIT(A).
6. Separate Issue: Gift of ₹10 Lakh from Maternal Uncle Remanded
The Tribunal did not grant complete relief to the assessee.
The second issue concerned capital introduction of ₹24,40,000, claimed to have been received as a gift from the assessee’s maternal uncle.
The CIT(A) had granted relief of ₹10 lakh based on bank transfers and confirmation documents.
However, the ITAT found that the CIT(A) had not followed the proper procedure for accepting additional evidence.
In particular:
– The explanation regarding the gift was introduced for the first time before the CIT(A).
– No proper inquiry had been conducted with the donor.
– The Assessing Officer had not been given an opportunity to examine the additional evidence through a remand report.
– The identity of the donor, nature of the transaction, genuineness and creditworthiness required proper verification.
The Tribunal, therefore, set aside the relief of ₹10 lakh granted by the CIT(A) and remanded the issue to the Assessing Officer for fresh adjudication.
The assessee was directed to furnish the relevant documents and explanations, and the Assessing Officer was required to examine the gift afresh.
The remaining ₹14.40 lakh addition was not contested before the Tribunal.
7. Final Decision of the ITAT
The Tribunal delivered a split decision on the two issues:
Particulars| Amount| Decision
Cash deposits treated as unexplained under Section 68| ₹2,48,14,793| Deletion upheld
Capital introduction claimed as gift| ₹10,00,000| Remanded for fresh verification
Balance capital introduction| ₹14,40,000| Addition remained undisturbed
The Revenue’s appeal was partly allowed.
8. Key Takeaways for Taxpayers and Tax Professionals
This judgment is particularly useful in cases involving demonetisation-related cash deposits and additions under Section 68.
The following principles emerge:
1. Absence of stock register is not conclusive: Non-maintenance of a quantitative stock register cannot automatically render purchase and sales records unreliable.
2. Rejection of books matters: Where the Assessing Officer has not rejected the books of account and has not identified specific discrepancies in purchases or sales, an addition based merely on suspicion requires careful scrutiny.
3. Recorded cash sales deserve consideration: Cash deposits supported by recorded business sales and corresponding cash book entries cannot be treated as unexplained merely because the deposits occurred during the demonetisation period.
4. Double taxation must be avoided: Where business receipts have already been included in the declared sales and offered to tax, the same receipts cannot be mechanically added again under Section 68.
5. Additional evidence must be properly examined: Relief based on documents produced for the first time before the CIT(A) must comply with the applicable procedural requirements, including proper opportunity to the Assessing Officer.
Conclusion
The decision in DCIT v. Prakash Chandra Gupta is an important addition to the jurisprudence relating to demonetisation cash deposits.
The most significant aspect of the ruling is the Tribunal’s refusal to accept the Revenue’s argument that the absence of a stock register automatically makes recorded purchases and sales unreliable.
Where the assessee maintains regular books, records purchases and sales with invoice details, maintains a cash book and the Assessing Officer does not identify specific discrepancies or reject the books, an addition under Section 68 cannot be sustained merely on suspicion arising from substantial cash balances and demonetisation-period deposits.
At the same time, the decision reminds taxpayers that the burden of proving capital introductions and gifts remains a separate matter requiring satisfactory documentary evidence.
The broader message is clear: Suspicion may justify an inquiry, but an addition under Section 68 must ultimately be supported by proper examination of the books, evidence and surrounding facts.
Case Citation: DCIT v. Prakash Chandra Gupta, ITA No. 369/Ind/2024, AY 2017-18, ITAT Indore, order dated 10 April 2026.
The copy of the order is as under:
