Can cash deposited during the 2016 demonetisation period be treated as unexplained income simply because it was deposited in old currency notes?
The Income Tax Appellate Tribunal (ITAT), Bangalore, has answered this question in favour of a Karnataka trader. In a recent ruling, the Tribunal held that merely depositing Specified Bank Notes (SBNs) during demonetisation does not automatically make the money unexplained. If the taxpayer provides a reasonable explanation backed by evidence, the Income Tax Department must examine it before invoking Section 69A of the Income-tax Act.
The case involved Ramzan Mulla, a small businessman from Vijayapura, Karnataka, whose appeal was allowed by the Tribunal on March 3, 2026.
A small trader caught in demonetisation scrutiny
Ramzan Mulla runs New Charandas Electricals & Engineers, an electrical and electronics shop in Vijayapura.
For Assessment Year 2017-18, he filed his income tax return under the presumptive taxation scheme of Section 44AD, under which eligible small businesses are not required to maintain detailed books of accounts. His case was later selected for scrutiny to verify cash deposits made during the demonetisation period.
During the demonetisation window, Ramzan deposited Rs 20.99 lakh into his bank accounts.
According to him, the deposits comprised two components:
-Rs 8.73 lakh received from cash sales in his business.
-Rs 12.26 lakh received from five elderly relatives who had handed over their old currency notes for deposit because they either did not have bank accounts or were unable to visit the bank themselves.
To support his claim, he produced VAT returns, sales records, bank statements and affidavits from his relatives.
Why did the tax department reject his explanation?
The Assessing Officer (AO) was not convinced.
The officer held that Ramzan could not have deposited old currency belonging to his relatives into his own bank account. The AO also took the view that old currency notes could not have been accepted from customers during the demonetisation period.
Based on these findings, the entire Rs 20.99 lakh was treated as unexplained money under Section 69A of the Income-tax Act.
On appeal, the National Faceless Appeal Centre (NFAC), acting as CIT(A), granted only partial relief. It accepted 50% of the business deposits as genuine but confirmed the remaining business deposits as unexplained. It also upheld the addition relating to the deposits made on behalf of the relatives.
Ramzan’s case before the ITAT
Before the Tribunal, Ramzan argued that he was a small trader operating in a mofussil town where cash transactions were common.
He submitted that his sales had already been disclosed in the VAT returns accepted by the State Government. He also pointed out that the cash deposited on behalf of his elderly relatives was supported by sworn affidavits explaining why they had entrusted him with the money.
He further argued that since he had opted for taxation under Section 44AD, he was not required to maintain detailed books of accounts, although he had produced all available supporting records to explain the deposits.
What did the ITAT find?
The Tribunal examined the VAT returns, sales register, bank statements and affidavits filed by the taxpayer.
It found that the business sales had been properly reported in the VAT returns and the sales register matched the cash deposits. The Revenue had not pointed out any discrepancy in these documents.
The Tribunal also questioned the logic adopted by the CIT(A) in treating only 50% of the business deposits as genuine.
“There is no logic in adopting 50%” when the assessee had established the genuineness of the business receipts, the Tribunal observed while deleting the addition relating to the business deposits.
What about the money deposited for relatives?
The Tribunal also accepted Ramzan’s explanation regarding the Rs 12.26 lakh deposited on behalf of his elderly relatives.
It noted that affidavits from the relatives had been placed on record explaining that they were elderly, did not have bank accounts and therefore requested Ramzan to deposit their old currency notes.
Significantly, neither the Assessing Officer nor the CIT(A) conducted any investigation to disprove these affidavits or bring any contrary evidence on record.
The Tribunal observed that the explanation could not simply be brushed aside in the absence of evidence contradicting the taxpayer’s claim.
Mere demonetisation deposits cannot become unexplained income
One of the most important observations made by the Tribunal was that depositing old currency notes during demonetisation does not automatically make the money unexplained.
The Tribunal observed that if the taxpayer is able to correlate cash deposits with business sales and satisfactorily explain the source of the remaining deposits, the burden shifts to the tax department to disprove those claims.
It further held that the additions made by the lower authorities were based merely on assumptions and not on material evidence. Accordingly, it deleted the entire addition of Rs 20.99 lakh and allowed Ramzan’s appeal.
Experts: Evidence matters more than old currency notes
Tax experts say the ruling is consistent with the settled legal position.
Rajiv Thakkar, Partner – Direct Tax, Bhuta Shah & Co. LLP, says the tax department cannot treat demonetisation deposits as unexplained income solely because they were made in old currency notes.
“The Assessing Officer must first examine the taxpayer’s explanation and supporting evidence,” he says. According to him, once a taxpayer demonstrates that the deposits came from genuine business receipts, earlier cash balances or other verifiable sources, “the burden shifts to the Tax Department to disprove the same with contrary material.”
Thakkar also points out that although taxpayers opting for Section 44AD are exempt from maintaining formal books of accounts, they should still preserve basic records such as bank statements, sales registers, VAT returns, income tax returns and affidavits wherever necessary. Reconciling turnover with bank deposits can play a crucial role during scrutiny.
Echoing a similar view, Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, says cash deposits made during demonetisation cannot be treated as unexplained income merely because they involved old currency notes.
He says that before invoking Section 69A, the tax department must examine the taxpayer’s explanation and supporting records. “Any addition under Section 69A must be based on evidence and clear inconsistencies, not merely on the fact that the deposits were made during the demonetisation period.”
Why this ruling matters
The decision reinforces an important legal principle for taxpayers, especially small businesses opting for presumptive taxation.
It makes it clear that while the Income Tax Department is free to scrutinise cash deposits made during demonetisation, additions under Section 69A cannot rest merely on suspicion or the fact that the deposits involved old currency notes. Where taxpayers produce credible evidence explaining the source of cash, the department must bring contrary material on record before treating those deposits as unexplained income.
Disclaimer: This article is based on an order of the Income Tax Appellate Tribunal (ITAT), Bangalore, and the expert opinions cited. The ruling relates to the specific facts of this case and may be subject to further appeal. Tax treatment of cash deposits depends on the facts, evidence and circumstances of each individual case. Readers should consult a qualified tax professional for advice applicable to their situation.
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