ITAT Delhi deletes ₹5.60 crore Section 69A addition, holding audited business cash deposits cannot be treated as unexplained income.

June 4, 2026 : ITAT Deletes ₹5.60 Crore Addition in Demonetisation Cash Deposit Case – In a judgment delivered on June 4, 2026, the Delhi Bench “G” of the Income Tax Appellate Tribunal, comprising Vice President Mahavir Singh and Accountant Member S. Rifaur Rahman, allowed the appeal filed by Delhi-based taxpayer Rakesh Kumar against the Income Tax Officer, Ward 58(6), Delhi, for Assessment Year 2017-18.

The dispute arose from cash deposits amounting to approximately ₹5.60 crore made during the demonetisation period following the Central Government’s announcement on November 8, 2016. The assessee, who operated a jewellery and bullion business under the name M/s R.V. Gold Hallmark, claimed that the deposits represented customer advances received in cash before demonetisation for the purchase of gold bullion.

How the Dispute Began

The assessee filed his income tax return declaring income of ₹8.47 lakh. The case was selected for limited scrutiny under the Computer Assisted Scrutiny Selection (CASS) system because of substantial cash deposits during the relevant financial year. During assessment proceedings, the Assessing Officer found that the taxpayer had deposited ₹5.60 crore during the demonetisation period, compared to relatively small cash deposits before and after demonetisation.

According to the taxpayer, these deposits originated from cash advances collected from customers before November 8, 2016. He contended that the funds were subsequently deposited into bank accounts and used to purchase gold bullion from a supplier, S.S. Bullion, through RTGS transactions. The purchased bullion was then delivered to customers who had placed advance orders.

However, the Assessing Officer was unconvinced. Summons issued under Section 131 of the Income Tax Act to several customers allegedly providing advances remained uncomplied with. The officer also noted that the assessee had not filed VAT returns for the relevant period and questioned the genuineness of the claimed bullion business. Consequently, the entire cash deposit amount was treated as unexplained money under Section 69A of the Income Tax Act and taxed accordingly.

CIT(A) Upholds Addition

The Commissioner of Income Tax (Appeals) affirmed the assessment order. The appellate authority expressed doubts about the business model described by the assessee, noting the absence of regular trading activity, stock records capable of independently establishing transactions, VAT compliance, and confirmations from customers who allegedly paid advances.

The Commissioner concluded that the transactions appeared to be a “colorable device” designed to legitimise unaccounted cash during the demonetisation period. The appellate authority relied heavily on the inability of the taxpayer to produce customers who had allegedly paid advances and the fact that summons issued to certain individuals returned unserved with remarks such as “left” or “incomplete address.”

Assessee’s Defence Before ITAT

Before the Tribunal, the taxpayer argued that he had maintained audited books of account, cash books, stock records, sales registers, purchase records and banking documents. He emphasized that all bullion purchases were made from S.S. Bullion through banking channels and that the supplier had confirmed the transactions before the tax authorities.

The assessee further contended that most retail sales were below ₹2 lakh, and therefore there was no legal requirement to obtain PAN details from customers. He submitted detailed cash-flow statements showing that the cash deposited during demonetisation originated from advances received before the announcement and was duly recorded in books of account.

The taxpayer also relied upon several tribunal decisions involving jewellers and bullion traders where cash sales during the demonetisation period had been accepted when supported by books of account and other business records.

ITAT’s Analysis and Findings

After examining the record, the Tribunal acknowledged that the assessee had indeed produced evidence showing purchases from S.S. Bullion supported by invoices and payments made through banking channels. The Bench also noted that the assessee maintained audited books of account and had disclosed the relevant sales and business income in his return.

The Tribunal observed that while the taxpayer could not fully substantiate VAT-related aspects of the transactions, that issue by itself could not justify treating recorded business receipts as unexplained money under the Income Tax Act. The Bench pointed out that the Assessing Officer had accepted the business income declared by the assessee and taxed it as such, while simultaneously questioning the source of cash generated from the same business activity.

In one of its key observations, the Tribunal stated:

“One hand Assessing Officer accepts genuineness of the business income declared by the assessee and on the other hand, doubt the cash deposited by the assessee out of the same sales.”

The Tribunal further clarified that any alleged violation of VAT laws falls within the jurisdiction of VAT authorities and should not automatically determine income-tax liability.

The Bench observed:

“If at all, there is any violation of provisions of VAT, it is for the VAT authorities to look into the same and the Revenue herein need not be concerned about it for determination of total income of the assessee.”

Why Section 69A Could Not Be Invoked

Section 69A of the Income Tax Act permits taxation of unexplained money, bullion, jewellery or valuable articles where the assessee fails to satisfactorily explain their nature and source. However, the Tribunal held that the provision was inapplicable in the present case because the source of the deposits had already been disclosed in audited books of account and linked to recorded business transactions.

The Tribunal accepted the assessee’s cash-flow statement showing that cash receipts, opening cash balance, diamond sales and other recorded transactions adequately explained the deposits. Since the cash formed part of business records already subjected to audit and assessment, treating the same amount again as unexplained money would be legally unsustainable.

Accordingly, the Tribunal held:

“The assessee had already proved the source of cash and already declared in the books of account, which is already audited. Therefore, the addition under section 69A is unsustainable.”

Significance of the Ruling

The decision is likely to be relevant in a large number of pending demonetisation-related tax disputes where additions have been made solely on the basis of substantial cash deposits. The ruling reinforces the principle that once cash receipts are recorded in regularly maintained books of account and linked to disclosed business activity, tax authorities must bring stronger evidence before invoking Section 69A.

The judgment also highlights the distinction between regulatory non-compliance under indirect tax laws and unexplained income under direct tax laws. The Tribunal effectively held that shortcomings in VAT compliance cannot automatically convert disclosed business receipts into unexplained money for income-tax purposes.

For taxpayers facing scrutiny of demonetisation-era transactions, the ruling underscores the importance of maintaining contemporaneous books of account, purchase records, banking evidence and audited financial statements. At the same time, it serves as a reminder that tax authorities must examine the complete business record before invoking anti-abuse provisions such as Section 69A and Section 115BBE.

Case Reference: Rakesh Kumar v. ITO, Ward 58(6), Delhi, ITA No. 5882/Del/2025, Assessment Year 2017-18