2024 (10) TMI 1614 - AT - Income Tax

Cash deposits of demonetized currency during transition period cannot be treated as unexplained investment under Section 69

Tamil Nadu State Marketing Corporation Ltd., Versus The Assistant Commissioner of Income Tax, Corporate Circle 3 (1), Chennai

Tamil Nadu State Marketing Corporation Ltd., Versus The Assistant Commissioner of Income Tax, Corporate Circle 3 (1), Chennai - TMI Issues Involved:1. Legality of accepting Specified Bank Notes (SBNs) during the demonetization period.2. Applicability of Section 69 of the Income Tax Act for cash deposits made in SBNs.3. Validity of the explanation provided by the assessee for the source of cash deposits.4. The role of RBI and Government notifications in determining the legality of transactions in SBNs.5. The implications of CBDT guidelines on assessing cash deposits during the demonetization period.Issue-wise Detailed Analysis:1. Legality of Accepting SBNs During Demonetization:The primary issue revolves around whether the assessee, a government-owned entity, could legally accept SBNs during the demonetization period. The Revenue argued that the acceptance of SBNs was prohibited by law as they ceased to be legal tender from November 9, 2016. The assessee contended that the acceptance of SBNs was under duress due to customer pressure and that the transactions were accounted for in their books. The Tribunal noted that the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, did not make holding or transacting in SBNs illegal until December 31, 2016, and thus, the acceptance of SBNs by the assessee was not barred by any legal provision.2. Applicability of Section 69 of the Income Tax Act:Section 69 pertains to unexplained investments not recorded in the books of accounts. The Revenue added Rs.57.29 crores as unexplained investment under this section, arguing that the assessee failed to provide verifiable evidence of sales made in exchange for SBNs. The Tribunal found that the assessee had accounted for these transactions in their books and provided detailed records of sales and cash deposits, thus negating the applicability of Section 69. The Tribunal emphasized that the source of the deposits was not disputed and was part of the regular business transactions.3. Validity of the Explanation Provided by the Assessee:The assessee explained that the cash deposits were from sales proceeds during the demonetization period, and the acceptance of SBNs was due to customer pressure. The Tribunal accepted this explanation, noting that the assessee's business model involved cash transactions, and the deposits were consistent with past sales patterns. The Tribunal highlighted that the Revenue did not produce contrary evidence to dispute the assessee's claims and that the explanation was substantiated with detailed records.4. Role of RBI and Government Notifications:The Tribunal examined the notifications issued by the RBI and the Government of India, which declared SBNs as non-legal tender but did not prohibit transactions involving SBNs until December 31, 2016. The Tribunal concluded that these notifications did not render the transactions illegal during the specified period and that the assessee's acceptance of SBNs was within the legal framework until the appointed date.5. Implications of CBDT Guidelines:The Tribunal referred to CBDT guidelines, which emphasized analyzing business models, cash flows, and stock registers to assess cash deposits during demonetization. It noted that the assessee's deposits were consistent with historical patterns and that there was no unexplained spike in cash deposits. The Tribunal concluded that the Revenue's reliance on mere assumptions without concrete evidence was insufficient to justify the addition under Section 69.Conclusion:The Tribunal allowed the appeal, holding that the assessee's explanation for the cash deposits in SBNs was valid and substantiated. It ruled that the additions made under Section 69 were unwarranted, as the transactions were part of the regular business operations and were duly accounted for in the books. The Tribunal emphasized the importance of concrete evidence over assumptions in tax assessments.