ITAT rejects Income Tax Department’s Algorithm-Based Tax Addition in Cash Deposit Made During Demonetization Period [Read Order]

In a recent ruling, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to delete the ₹1.63 crore addition made by the Assessing Officer (AO) on cash deposits during the demonetization period, holding that the addition based on algorithmic analysis and speculative assumptions lacked concrete evidence.

The assessee, Bimal Jewellers, was engaged in the business of purchasing and selling gold. During the financial year (F.Y.) 2016-17, the assessee deposited ₹2,19,60,000 in cash into two bank accounts maintained with HDFC Bank and Bank of Baroda. Out of this, ₹1,97,00,000 was deposited during the demonetization period.

Want a deeper insight into the Income Tax Bill, 2025? CLICK HERE

The Assessing Officer (AO) noticed that cash sales had sharply increased between 01.10.2016 and 08.11.2016, just before demonetization. This raised doubts about the genuineness of the sales, leading to an addition of ₹1,63,57,462 under Section 68 of the Income Tax Act, 1961.

Aggrieved by the order, the assessee appealed to the CIT(A), who deleted the addition. The Revenue then took the matter before the tribunal.

Read More: The Role of Critical Illness Riders in Both Health & Life Insurance Plans

The counsel representing the Revenue,  Ashish Tripathi, supported the order of the AO. He contended that the sudden increase in cash sales before 08.11.2016 appeared unnatural. He highlighted that the AO had undertaken a comparative analysis of past years and used an algorithm to estimate average sales over 39 days, raising doubts about the legitimacy of such transactions.

Meanwhile, the counsels, Rajat Garg and Ashu Garg, representing the assessee, countered that the sales in question were genuine and duly supported by bills and party details. They submitted that the cash generated was deposited into bank accounts, and all transactions were recorded in the books of accounts.

Tax Planning For NRIs - CLICK HERE

After considering the submissions of both parties, the tribunal led by Vikas Awasthy (Judicial Member) and Amithab Shukla (Accountant Member) held that once the genuineness of the sales was accepted, the cash deposits could not be questioned under Section 68 of the Income Tax Act, 1961.

The bench pointed out that the AO had made the addition based on assumptions and a statistical comparison without identifying any specific issues with the assessee’s records. The tribunal thus concluded that the addition was not supported by concrete evidence and upheld the CIT(A)’s decision to delete it.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates