Business Cash Deposits During Demonetization: ITAT Accepts Diwali Holiday Delay as Valid Explanation [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the delay in depositing business cash due to Laxmi Pooja and subsequent Diwali holidays was a valid explanation, rejecting the claim that the cash deposits were unexplained during the demonetization period.

Sri Kandaswamy Mohan, the assessee, is engaged in the trading of areca nuts through his proprietary concern, Eswar Supari, and also operates the Eshwar Areca Processing Unit for processing areca nuts. During the demonetization period, he deposited Rs. 37,00,000 in two bank accounts, claiming that Rs. 35,00,000 originated from cash receipts from his processing unit accumulated before Diwali for Laxmi Pooja and later deposited due to staff holidays and business closure.

The AO doubted the existence of the Eshwar Areca Processing Unit, arguing that no machinery, capital investments, or business transactions were recorded. The AO also observed that areca harvesting begins in October, making revenue generation from June to October unlikely.

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Further, the absence of a service tax or GST registration raised additional doubts. The AO rejected third-party affidavits confirming the business activities, citing their delayed submission. The AO completed the assessment holding the processing unit was a fabricated entity created to legitimize unaccounted cash deposits and taxed the amount as unexplained cash under Section 68 of the Income Tax Act.

On appeal, the CIT(A) upheld the AO’s findings. Before the ITAT, the assessee’s counsel argued that the existence of the Eshwar Areca Processing Unit was accepted in subsequent assessment years, proving its legitimacy.

The assessee’s counsel explained that the processing unit operated on leased premises with in-built machinery, eliminating the need for additional capital investment. The assessee’s counsel further argued that areca harvesting varies regionally, with Shivamogga and Bhadravathi experiencing early harvesting due to favorable weather.

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The two-member bench comprising Waseem Ahmed (Accountant Member) and Soundararajan K (Judicial Member) found that the AO and CIT(A) dismissed important evidence without verification. The tribunal acknowledged that the lease agreement and rent receipts substantiated the processing unit’s operations and that affidavits from farmers and customers were wrongly rejected. The tribunal further recognized religious traditions as a valid reason for cash retention before Diwali.

The tribunal ruled that the cash deposit was explained satisfactorily and was not an afterthought. The tribunal observed that subsequent acceptance of the processing unit’s income by the Revenue in later years validated its existence. The tribunal set aside the addition and the appeal was allowed.

To Read the full text of the Order CLICK HERE

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