A retail dealer in consumer durables with a turnover of Rs 6.2 crore for AY 2017-18 deposited Rs 1.85 crore of demonetised notes between 10 and 30 November 2016. Cash sales for October and the first eight days of November are 2.4 times the corresponding figure of the previous year, and the AO's show cause treats the whole deposit as an unexplained cash credit taxable at the special rate. The books are complete - cash book, sales register, stock register and purchase invoices - the sales were recorded, disclosed in the VAT returns filed with the state authorities, and offered as income in the return. The AO has not rejected the books, has not disturbed a single purchase, has not questioned the closing stock, and has not proposed any change to the gross profit rate, which is in line with earlier years. Many invoices are for small amounts and do not carry customer names or addresses, so buyer-wise confirmation is not possible. Three counter sales in October exceeded Rs 2 lakh each and were received in cash.
Look first at whether the assessment record contains any rejection of the books of account, and if there is none, put that on the record in the very first paragraph of the reply. An addition of recorded cash sales while the same books stand accepted for purchases, stock, gross profit and turnover is internally inconsistent, and pinning the AO to that inconsistency before the order is passed is far more effective than arguing it afterwards. If the AO then moves to reject the books, he has to record why they are incorrect or incomplete, which is a burden with its own requirements and gives the assessee a second line of defence.
An estimate is only as good as the rejection that precedes it - the officer must first record why the accounts are incorrect, incomplete or not drawn on a proper method, and only then may he estimate. Where the books had never been rejected, cash sales recorded on the day of demonetisation have been accepted as genuine and the whole addition deleted. Accepting the purchases, the stock and the gross profit while adding the sales proceeds is the contradiction to expose early.
Sales already recorded in the books and offered as income cannot be taxed a second time as unexplained cash credits. The provision on cash credits catches sums credited in the books whose nature and source is not explained; where the source is a sale that is itself in the books and in the return, the explanation is on the face of the accounts. Quantify this - set out the sales figure offered, the tax paid on it, and the overlap with the deposit.
An officer is not entitled to assess on pure guess without reference to evidence; he must act on material and must disclose to the assessee the material on which he proposes to act. A month-wise reconciliation of opening stock, purchases, quantity sold and closing stock, matched to the cash book balance on each deposit date, converts the defence from an assertion into material. If a best judgment estimate is threatened, the estimate itself must be honest, fair and grounded in relevant material rather than in the spike alone.
The apparent nature of a transaction is tested against surrounding circumstances and the test of human probabilities, and documentary form alone is not conclusive; taxing authorities are entitled to look behind self-serving recitals. A spike explained by festival demand, a specific promotional scheme, comparable spikes in earlier festival months, and a matching fall in stock is far stronger than an unsupported assertion that trade was brisk. Put the comparative data in the reply rather than waiting to be asked.
Additions on cash deposits have been defeated on the footing that the assessee kept no books and that a bank passbook is not the assessee's books, but that route is not available where books are in fact maintained, and it does not answer a charge framed on unexplained money, which carries no books precondition. Since the same money can be re-charged under the other provision at the same special rate, the substantive defence has to be that the source is proved, not merely that the wrong section was chosen.
The ceiling on receiving Rs 2,00,000 or more in cash from a person in a day, in a single transaction, or in respect of one event carries its own penalty that is independent of whether the sale is accepted as genuine, and it is a separate proceeding from the addition. Check the date before answering it, because the library records that the ceiling was inserted with effect from 1 April 2017: counter sales received in cash in October 2016 are outside it altogether, so there is no exposure on these facts and the point becomes live for this dealer only from the following year. On aggregation the library sets out the three limbs as independent of one another, so splitting a receipt across days does not escape the single-transaction limb or the one-occasion limb; the only clarification it holds on instalments is confined to loan repayments received by non-banking finance companies and housing finance companies and does not travel beyond those lenders.
Where the books are complete, unrejected, and the stock and purchase side corroborate the sales, deletions of this kind are common at the first appellate stage or before the Tribunal. Where the stock register cannot support the volume of sales claimed, or the spike is confined to the days immediately before the announcement with no comparable pattern, part of the deposit is frequently sustained. Outcomes on demonetisation deposits vary widely on facts, and the difference is usually the quality of the quantitative reconciliation rather than the legal argument.