Demonetisation cash deposits explained as business receipts cannot be treated as unexplained money merely because they were in specified bank notes.

Cash deposits made during the demonetisation period may be assessed as unexplained money only if the assessee fails to explain the source satisfactorily under section 69A. Where the deposits are supported by a plausible business explanation, such as cash receipts from a predominantly cash-based wholesale trade with a consistent deposit pattern in earlier years, the addition should not be made merely because the cash consisted of demonetised notes. The cessation law is relevant because the prohibition on holding or receiving specified bank notes operated from the appointed date under the statute, so the mere receipt of such notes before that date does not by itself invalidate the source explanation. Consequential taxation under section 115BBE follows only if the primary addition is sustainable.

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Issues: Whether cash deposits made during the demonetisation period could be assessed as unexplained money under section 69A of the Income-tax Act, 1961 and taxed under section 115BBE of the Income-tax Act, 1961 when the assessee explained them as business receipts.

Analysis: The assessee was engaged in wholesale fruit with predominantly cash transactions and had shown a consistent pattern of substantial cash deposits in earlier years. The deposits during the relevant period did not show any unexplained abnormal spike. The explanation that cash was received in the course of a perishable-goods business was found to be plausible. The Tribunal further held that, though legal-tender status of specified bank notes ceased from 08.11.2016, the Specified Bank Notes (Cessation of Liabilities) Act, 2017 provided that prohibition on holding, transferring or receiving specified bank notes operated on and from the appointed date, 31.12.2016. In the absence of a blanket prohibition on receiving such notes up to that date, the source of the cash deposits could not be rejected merely because they comprised demonetised currency. Since the source was explained as business receipts, the addition could not be sustained.

Conclusion: The addition under section 69A and the consequential levy under section 115BBE were not sustainable and were directed to be deleted.

Ratio Decidendi: Where cash deposits during demonetisation are explained as genuine business receipts and the statutory prohibition on holding or receiving specified bank notes operates only from the appointed date under the relevant cessation law, the deposits cannot be treated as unexplained money merely because they were in demonetised currency.

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