ITAT Ahmedabad Grants Partial Relief To Arrow Clothing In Demonetisation Cash Deposit Addition Case

The Income Tax Appellate Tribunal (ITAT) at Ahmedabad partly allowed an appeal of Arrow Clothing Pvt. Ltd, holding that addition for unexplained cash deposits during demonetisation was justified, but the taxpayer was entitled to credit for opening cash balance and prior bank withdrawals.

A coram of Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta held that anomalies were found only in the explanation relating to cash sales and not in the opening cash balance or bank withdrawals of Rs 11.38 lakh.

The tribunal observed, “Since anomalies have been found only in the explanation of the cash deposits vis-à-vis the cash sales made by the assessee, and no anomalies have been recorded vis-à-vis opening cash balance as on 01.10.2016 as also cash withdrawals from the bank during the demonetization period of Rs. 11.38 lakh, the assessee we hold is entitled to benefit of the said two amounts, approximating Rs. 12.70 lakhs, for the source of cash deposited in the bank account during the demonetization period.”

The clothing company, engaged in industrial washing of garments on job-work basis, claimed that the deposits were sourced from opening cash balance, earlier bank withdrawals and cash sales recorded in audited books. The Assessing Officer rejected the explanation citing abnormal increase in cash sales and deposits before demonetisation and inadequate supporting invoices.

The Assessing Officer rejected the books under Section 145(3) and added Rs 30.84 lakh as unexplained cash deposits under Section 68 of the Income Tax Act, 1961. The Commissioner (Appeals) upheld the rejection of books and the addition, while ensuring the same income was not taxed twice.

Before the tribunal, the taxpayer challenged the rejection of books, the addition, and the levy of tax under Section 115BBE.

The tribunal upheld the rejection of books, noting abnormal increases in cash sales, cash in hand, and deposits and lack of proper evidence.

However, it held that credit must be given for explained sources and ruled, “The remaining amount of cash deposited in the bank account, we hold, remains unexplained and, to the said extent is confirmed by us.”

The tribunal also upheld the applicability of tax under Section 115BBE for Assessment Year 2017-18 and partly allowed the appeal.