The Indore bench of the Income Tax Appellate Tribunal (ITAT) ruled that the taxation of unexplained cash credit is invalid after rejecting the books of accounts following a sharp rise in cash deposits during the demonetization period.
The assessee, Dharmendra Doshi, who runs Parsvnath Industries, a proprietorship that deals in plastic scrap and old bottles, filed an income tax return for the fiscal year 2017-18. The return was later selected for scrutiny due to a significant increase in cash deposits during the demonetization period.
The Assessing Officer (AO) identified total cash deposits of ₹42,52,500 during this period, accepting only ₹9,85,000 as explained and treating the remaining as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The AO also rejected the assessee’s books of accounts under Section 145(3) of the Act.
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The department’s counsel, Sanjeev H. Bhagat, argued that the assessee failed to provide books of accounts despite repeated notices under Section 142(1). He pointed out that a key debtor, Sati Polyweave Ltd. did not respond to a summons issued under Section 131, which raised doubts about the assessee’s claim of cash realization.
He also highlighted a significant increase in cash deposits in the assessee’s bank account during the demonetization period, arguing that unverified sources and inconsistencies in records justified the rejection of books under Section 145(3).
Meanwhile, the assessee’s counsel, Kunal Agrawal, argued that all cash deposits made during demonetization were valid and not unaccounted for.
He claimed that the period coincided with Diwali, a cash-heavy time for the business, explaining the large cash holdings. This was supported by bank statements, cash books, and purchase details, which showed increased activity during the festive season.
The counsel also defended that the AO wrongfully rejected the books despite their submission and stressed that the assessee should not be held responsible for Sati Polyweave Ltd.’s failure to respond to a summons.
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The assessee also claimed that after the rejection of books of accounts under Section 145(3), no additions could be made under Section 68, quoting the case of CIT v. Dulla Ram (2014).
After hearing both parties, the bench of Vijay Pal Rao (Vice President) and B.M. Biyani (Accountant Member) observed that the assessee submitted sufficient evidence to support cash deposits during demonetization.
The bench concluded that after the AO rejected the books under Section 145(3), no addition could be made under Section 68. Citing CIT v. Dulla Ram (2014), the Tribunal directed the AO to delete the addition, granting relief to the assessee.
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