Cash Deposits During Demonetisation Cannot Be Treated As Unexplained If Recorded In Books: ITAT Chennai

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) on 3 March 2026 held that cash deposits made during the demonetisation period cannot be treated as unexplained under Section 68 of the Income Tax Act, 1961, if corresponding sales are accepted and recorded in the books of account.

A Bench comprising Judicial Member S.S. Viswanethra Ravi and Accountant Member S.R. Raghunatha allowed an appeal by Vinayaga Fireworks, a Sivakasi-based cracker manufacturer, against an order of the Commissioner of Income Tax (Appeals), NFAC. It observed:

“Unless the sales are held to be bogus, the corresponding sales receipts cannot be treated as unexplained cash credits.”

The dispute arose from an addition of Rs. 2,79,71,000 under Section 68, which the Assessing Officer (AO) treated as unexplained cash credits because Vinayaga Fireworks had deposited cash during demonetisation, claiming the company was not authorised to accept specified bank notes (SBNs) after 8 November 2016.

The Tribunal noted that the taxpayer maintained audited books of account, and the cash deposits were duly recorded as sales realisations. The AO had neither rejected the books of account nor found the sales to be non-genuine.

It further held that the addition was based solely on suspicion arising from the timing of deposits, without any material indicating fictitious or backdated sales.

The Bench also noted that the Central Board of Direct Taxes (CBDT) had prescribed a standard operating procedure requiring comparative analysis of cash sales and identification of abnormal trends, which the Assessing Officer had not followed.

On handling specified bank notes, the Tribunal referred to precedent and observed that there was no prohibition on accepting such notes until 31 December 2016 under the Specified Bank Notes (Cessation of Liabilities) law.

The Tribunal concluded that once the source of cash is established as business receipts recorded in books, addition under Section 68 is not warranted.

Accordingly, the ITAT directed deletion of the entire addition and allowed Vinayaga Fireworks's appeal.

For the Appellants: V. Rajasekaran, CA

For the Respondents: T. Mythili, JCIT