2024 (10) TMI 1638 - AT - Income Tax

ITAT rules cash deposits during demonetization period were legitimate business transactions, no Section 69A addition warranted

Vasanth & Co. Versus The Income Tax Officer, Ward 1 (2), Tirupur.

ITAT Chennai ruled in favor of the assessee regarding cash deposits made during demonetization period. The tribunal found that the assessee legitimately ... Addition of cash deposits - unexplained money u/s.69A - cash deposited in bank during demonetization period in Specified Bank Notes (SBNs) - HELD THAT:- When demonetization was announced there was a scarcity of Quid cash in non-demonetised currencies. Smaller traders had to accept payments from their customers in demonetised and non-demonetised currencies as well because of the fact that non acceptance will lead to fall in sales and put their customers into hardship. The traders in turn started making payments in demonetised currencies to assessee which forced them to accept in order to maintain a smooth working capital cycle. Assessee also enquired with their bankers regarding the same, who in turn advised that they will be accepting payments up to 30th December, 2016. Based on this, assessee was under the bonafide belief that acceptance of cash in demonetised form from identifiable customers is permitted and therefore assessee were accepting from such customers for a few days. As soon as assessee came to know that only specified persons can accept demonetised currency they stopped receiving the same. The amount received during the initial few days were remitted to the bank account. This was the reason for acceptance of the demonetized currency from their customers, which were remitted in to account then and there. Going by the explanation of the assessee that the cash deposited in SBNs during demonetization period is out of sale proceeds and this issue stands covered in favour of the assessee by the decision of Tamil Nadu State Marketing Corporation Ltd.[2024 (10) TMI 1614 - ITAT CHENNAI] as held to bring any amount u/s. 69 or 69A of the Act, the nature and source of investment, needs to be examined. In case the assessee explains the nature and source of investment, then the question of making addition towards unexplained investment u/s. 69 of the Act does not arise. In this case, the source of deposits has not been disputed and has been created out of ordinary business sales which has been credited into books of accounts and profits has also been duly included in the return of income filed in relevant assessment year. Therefore, we are of the considered view that, additions cannot be made u/s. 69 - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits of Specified Bank Notes (SBNs) made into bank accounts during the demonetisation period can be treated as 'unexplained money' under section 69A when the assessee explains such deposits as business sale proceeds/realisation of debtors and records them in books of account. 2. Whether mere violation of RBI/Government notifications or SOPs relating to acceptance/transaction of SBNs during the demonetisation window permits rejection of a bona fide explanation and consequent addition under sections 69/69A (and taxation under section 115BBE) in absence of independent material showing deposits to be unaccounted. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Treatment of cash deposits in SBNs as unexplained money under section 69A Legal framework: Section 69A deals with unexplained money found during the year and may be deemed to be the assessee's income where the assessee offers no explanation or the explanation is unsatisfactory. Sections 69 and 69A require examination of nature and source of the deposits; if satisfactorily explained and recorded in books, additions should not follow. Precedent treatment: The Tribunal applied a coordinate-bench decision addressing identical facts and legal questions, which held that where deposits are explained as business receipts/realisation of debtors and reflected in books and returns, additions under sections 69/69A are not warranted; that decision was followed. Interpretation and reasoning: The Court examined the business model, turnover, pattern of cash sales, bank-account analysis and the CBDT circular advising verification of bank accounts, cash receipts and stock. It found that the deposits were consistent with the assessee's established cash sales/collections (small retailers paying cash; large customers by cheque/transfer), that there was no material change in cash-deposit pattern during demonetisation, and that the amounts were recorded and profits included in the return. The Tribunal emphasized that sections 69/69A address unexplained money; if the nature and source are satisfactorily explained and corroborated by books/accounts, the statutory deeming cannot be invoked. Ratio vs. Obiter: Ratio - where cash deposits in SBNs are satisfactorily explained as business receipts, recorded in books and reflected in returned income, additions under sections 69/69A (and tax under section 115BBE) cannot be made merely because the currency deposited was SBNs during demonetisation. Observations about the need to analyse business model and follow CBDT guidance function as supporting ratio (practical methodology), not obiter. Conclusions: The Tribunal allowed the appeal and deleted the addition; cash deposits in SBNs accepted as sale proceeds/realisation of debtors and evidenced in accounts are not liable to be treated as unexplained money under section 69A. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of violation of RBI/Government notifications on taxability under sections 69/69A Legal framework: Compliance with RBI/Government notifications and the Specified Bank Notes (Cessation of Liability) Act governs civil/criminal consequences for dealing in SBNs, but tax provisions (sections 69/69A) require independent satisfaction as to whether money is unexplained; contravention of regulatory notifications alone does not automatically render money taxable as undisclosed income. Precedent treatment: The Tribunal relied on coordinate-bench reasoning that mere non-compliance with RBI/Government directions during the ambiguous demonetisation window does not, by itself, permit disallowance under the income-tax provisions; that approach was expressly followed. Interpretation and reasoning: The Tribunal noted absence of clarity in the immediate post-notification window (09.11.2016-31.12.2016) due to multiple notifications and limited categories authorized to accept SBNs. It observed the CBDT circular that required AO to analyse bank accounts, cash receipts and stock to verify explanations in business cases. The Tribunal held that contravention of RBI notifications may attract separate civil or criminal liability but cannot automatically convert otherwise explained business receipts into unexplained money for income-tax purposes without AO making out affirmative case of unaccounted cash. Ratio vs. Obiter: Ratio - contravention of RBI/Government notifications during demonetisation, in the absence of independent material showing deposits to be unaccounted, is not a sufficient basis for additions under sections 69/69A. Observations distinguishing regulatory versus tax consequences are part of the operative ratio. Conclusions: The Tribunal concluded that violation of notifications alone is insufficient to reject a bona fide, documented explanation of source; additions under sections 69/69A cannot be sustained on that ground alone. APPLICATION OF CBDT GUIDANCE AND STANDARD OF ENQUIRY Legal framework and guidance: The CBDT circular instructed revenue officers to evaluate business-specific factors - bank-account analysis, cash receipts analysis, and stock registers - when scrutinising demonetisation-period cash deposits. Interpretation and reasoning: The Tribunal applied the CBDT-guided analytical approach and required the AO to examine whether deposits were consistent with business turnover and sales pattern. In the present case the Tribunal found consistency between explained source and documentary/ledger evidence, and no quantitative spike warranting inference of unaccounted income. Conclusion: The appropriate standard is case-specific forensic analysis per CBDT directions; absent adverse findings from such analysis, additions under sections 69/69A are unwarranted. OVERALL CONCLUSION The Court allowed the appeal, following the coordinate-bench precedent and CBDT guidance, holding that cash deposits of SBNs during the demonetisation window that are satisfactorily explained as business sale proceeds/realisation of debtors and recorded in books cannot be treated as unexplained money under sections 69/69A merely because they involve demonetised currency or violation of RBI/Government notifications; any regulatory breach may attract separate proceedings but does not, without more, justify income-tax additions.