Demonetization Cash Deposits – Source cannot be considered as unexplained u/s 69 even when deposit is in Violation of RBI guidelines

Demonetization cases are now at various appellate stages as after having been adjudicated and the jurisprudence is now being developed. The question in many cases where B2C/ B2B Sales are involved is whether Income Tax penalties can be invoked u/s 115BBE in case demonetized bank notes have been received by assesses even after the demonetization date declared by RBI, i.e., 8th Nov 2016. The questions to be answered are -

A. Are collection of demonetized notes after the specified date void as per Sec 22 of Contract Act and non-Est, even after VAT/Service Tax Authorities have accepted the transaction?

B. In case so, then should the transaction be considered as unaccounted and thus the source ‘unexplained’ u/s 69?

To answer these, few points need to be seen –

A. Whether there is no a sudden hike in cash sales in current year w.r.t. earlier year.

B. Whether the VAT/Service Tax has been duly paid on these transactions.

C. Whether cash sales are common to the business of the assessee and in addition to demonetized notes, other notes have also been deposited.

D. Whether the customers are identified and hence source is explained.

E. Whether there were ‘dire circumstances’ under which the assessee had to accept the notes after demonetization.

In case the answer to the above are in the affirmative, then it cannot be disputed that the source of investments are unexplained and Section 69 read with Section 115BBE cannot be invoked as envisaged under CBDT Circular No. F No. 225/145/2019 – ITA-II dated 09.08.2019. Order of Chennai Tribunal in MRS. UMA MAHESWARI VERSUS THE INCOME TAX OFFICER, NON-CORPORATE WARD-4 (2) , COIMBATORE - 2022 (11) TMI 618 - ITAT CHENNAI. Under the said Circular the CBDT had also specified that examination of business model is very important before adjudicating. The Delhi High Court in the case of PR. COMMISSIONER OF INCOME TAX (CENTRAL) - 3, NEW DELHI VERSUS M/S. AGSON GLOBAL PVT. LTD. - 2022 (1) TMI 848 - DELHI HIGH COURT also held that additions made on the sole ground of deviation in the ratio of cash sales and cash deposits during the demonetization period with that of earlier period, is improper and unlawful.

On the same lines it was held in the case of M/S. PURANI HOSPITAL SUPPLIES PRIVATE LIMITED VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -2, COIMBATORE - 2023 (7) TMI 227 - ITAT CHENNAI that in order to invoke provisions of section 69 of the Act, two conditions must be satisfied. First and fore-most condition is there should be an investment and second condition is the assessee could not explain source for said investment. Merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with specified bank notes, the genuine explanation offered by the assessee towards source for cash deposit cannot be rejected, unless the Assessing Officer makes out a case that the assessee has deposited unaccounted cash into bank account in specified bank notes.