Can Cash Sales During Demonetisation Be Accepted?
Cash sales during demonetisation, especially between 8 Nov and 30 Dec 2016, have triggered intense scrutiny by tax authorities. But in a significant ruling, the Income Tax Appellate Tribunal (ITAT) recently upheld the deletion of an ₹1.32 crore addition — giving relief to a taxpayer who could substantiate their cash deposits with proper books and sales records.
Let’s break it down.
Background of the Case
- Assessee: Engaged in trading of textiles and garments
- Year: AY 2017–18 (FY 2016–17)
- Trigger: Large cash deposits post 8 November 2016 flagged by CPC
- Action: AO made an addition of ₹1.32 crore under Section 68 of the Income-tax Act, alleging unexplained cash credits
- Defense: Assessee submitted stock registers, daily sales summary, VAT returns, and audit reports
Key Observations by ITAT
1. Cash Sales During Demonetisation Justified
The assessee maintained day-wise cash sales records and submitted monthly VAT returns that tallied with books.
“Mere suspicion or quantum of cash deposit cannot be a ground to disregard genuine sales backed by documentary evidence.” — ITAT
2. Stock and Audit Records Matched
- Closing stock reflected a proportionate reduction
- No discrepancy found in the audit report
- Statutory liabilities such as VAT were duly discharged
3. Burden of Proof Discharged
Under Section 68, the onus is on the assessee to prove the source of cash.
Here, books of account were audited under Section 44AB, and sales were traceable — satisfying the primary requirement.
Legal References
- Section 68, Income-tax Act, 1961 – Unexplained cash credits
- CBDT Instruction No. 3/2017 dated 21.02.2017 – Urged tax officers to verify stock position, turnover, past profile
- SC ruling in CIT v. P. Mohanakala – Suspicion cannot replace proof in Section 68 proceedings
- ITAT Delhi in Agson Global Pvt. Ltd. – Cash sales cannot be outright rejected if properly documented
Practical Takeaways for Businesses
- Always maintain clear day-wise sales registers
- Match sales with stock movement and bank deposits
- Ensure VAT/GST returns reflect actual turnover
- Opt for tax audit under Section 44AB if applicable – it adds credibility
- Respond promptly to notices under CASS or e-verification
Expert View: Cash Sales ≠ Bogus Sales
Not all cash deposits during demonetisation are taxable. If you can prove:
- Sales were genuine
- Books were audited
- Stock and revenue matched
Then addition under Section 68 may not hold.
Even CBDT, in its internal guidance, had instructed field officers not to make mechanical additions without verifying books and trends.
Summary (for Google Snippet):
Cash sales during demonetisation are valid if backed by records. ITAT upheld deletion of ₹1.32 crore addition after assessee proved sales through audited books, VAT returns, and stock data.
FAQs
Can IT Dept reject all cash deposits made during demonetisation?
No. Each case must be examined on merit. If the source is explained with books and audit, addition may be deleted.
Is Section 68 applicable even if books are audited?
Yes, but if the assessee can substantiate the cash credits with reliable records, the addition may not stand.
What kind of documents help defend cash sales?
- Daily sales registers
- Stock ledgers
- VAT/GST returns
- Sales invoices
- Audit report under Section 44AB
Final Note
If your books are clean and records transparent, even cash-heavy transactions during demonetisation can pass scrutiny. Don’t fear — just be prepared.