2025 (6) TMI 2065 - AT - Income Tax

Addition of Rs 20 lakh deposits held not sale proceeds under s.69A; tax to be computed at 30% under s.115BBE

Sathi Mangayamma, G. Mamidada Versus The Income Tax Officer, Ward – 2, Kakinada

ITAT upheld the AO's finding that Rs. 20 lakh cash deposits during the demonetization period were not business sale proceeds and rejected the assessee's ... Addition of cash deposits made in bank account during the demonetization period - HELD THAT:- Although, the Government did provide very limited exceptions for a short period (initially 72 hours, later extended for some services) where the demonetised currency would be accepted but these were primarily for essential services like government hospitals, railway bookings, air bookings, government bus stands, chemists, and certain public utilities, but the general businesses did not fall under these exemptions for their routine sales. We thus, are of the firm conviction that as the assessee before us was not carrying on a business which was covered under the exceptions provided by the Government, therefore, the claim of the Ld. AR that the subject cash deposits (in SBN’s) made in the assessee’s bank account during the demonetization period were sourced out of the sale proceeds of her business that she had collected during the demonetization period being devoid and bereft of any substance does not merit acceptance. We thus, are unable to subscribe to the aforesaid incomprehensible claim of the assessee that the cash deposits of Rs. 20 lacs (supra) made in SBN’s in her bank account were sourced out of the business sale proceeds that were collected by her during the demonetization period itself. No infirmity in the view taken by the A.O. who by rightly not treating the cash deposits of Rs. 20 lacs (SBNs) made by the assessee in her bank account during the demonetization period as the sale proceeds of her business, had rightly refrained from confining the addition at 8% of the said amount unlike the balance credits in the bank account for the remaining year. Levying tax as per the special rates contemplated u/s 115BBE of the Act i.e. @60% - We are guided by the judgment of K. Subramanian & Ors. Vs. Siemens India Ltd. & Anr. [1983 (4) TMI 3 - BOMBAY HIGH COURT] that in case of conflicting views of the non-jurisdictional High Courts the view that was favorable to the assessee and not against him is to be adopted. We thus, based on the aforesaid position of law respectfully follow the view taken in the case of S.M.I.L.E Microfinance Limited [2024 (11) TMI 1444 - MADRAS HIGH COURT] and direct the AO to determine the tax liability on the addition of Rs. 20 lac (supra) made in the hands of the assessee u/s 69A of the Act by applying the tax rate of 30% as was contemplated in the pre-amended Section 115BBE of the Act. The additional ground of appeal is allowed in terms of our aforesaid observations. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits of specified banknotes (SBNs) made during the demonetization period, when unexplained by the assessee, can be treated as unexplained money under section 69A and taxed as income, rather than being treated as business receipts subject to estimation of profit. 2. Whether the enhanced rate of tax prescribed by amended section 115BBE(1) (sixty per cent) as substituted w.e.f. 01.04.2017 applies to additions made for Assessment Year 2017-18, or whether the pre-amendment rate (thirty per cent) applies to such additions for that assessment year. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Treatment of SBN cash deposits during demonetization (section 69A) Legal framework: Section 69A (unexplained cash credits) permits treating unexplained cash deposits as income of the assessee where the assessee fails to satisfactorily explain the source. Where business receipts are established, ordinary principles of computation apply (e.g., estimating profit). Precedent treatment: The Tribunal applied ordinary principles requiring the assessee to lead evidence to substantiate the source of cash deposits. No contrary precedent was invoked by the assessee that would permit treating SBN deposits as regular business receipts absent explanation. Interpretation and reasoning: The Tribunal examined three pleaded sources for the SBN deposits: (a) cash-in-hand as of 08.11.2016 (pre-demonetization), (b) sale proceeds collected during the demonetization period, and (c) inconsistency in treating pre/post-demonetization bank credits as business receipts but SBN deposits as unexplained. The Tribunal rejected (a) because no evidence was produced to prove cash-in-hand on the critical pre-demonetization date. The Tribunal rejected (b) on the basis that demonetised currency ceased to be legal tender from midnight of 08.11.2016 and ordinary business sales could not lawfully be conducted in SBNs after that date; limited exemptions for specified essential services did not cover the assessee's business. Consequently, SBNs deposited in the bank during the demonetization window, unexplained by documentary proof, could not be accepted as lawful business receipts. The Tribunal found no inconsistency in the AO treating non-SBN bank credits as business receipts while treating unexplained SBN deposits as unexplained money under section 69A, given absence of explanation for the latter. Ratio vs. Obiter: Ratio - where SBN cash deposits during demonetization are unexplained and no evidence of lawful source (pre-demonetization cash or covered-exception sales) is produced, AO may treat such deposits as unexplained money under section 69A and include them in income. Obiter - observations on the general governmental scheme for exchange/deposit of demonetised notes and limited exemptions for certain services are contextual but support the ratio. Conclusion: The Tribunal upheld the AO's classification of the Rs. 20 lakh (approx.) SBN deposits as unexplained money under section 69A and dismissed the ground challenging that addition. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability of amended section 115BBE(1) (rate of tax) to AY 2017-18 Legal framework: Section 115BBE(1) prescribes special rates of tax for income referred to in sections 68, 69, 69A-69D. The provision was substituted by the Taxation Laws (Second Amendment) Act, 2016, with the substitution effective w.e.f. 01.04.2017; the substituted text increased the rate in clause (i) from thirty per cent to sixty per cent. Precedent treatment (conflicting): Non-jurisdictional High Courts have taken differing views on whether the enhanced sixty per cent rate applies to Assessment Year 2017-18: one High Court held the post-amendment rate applicable to AY 2017-18; another (Madras) held that the revenue could impose 60% only for transactions from 01.04.2017 onwards and that pre-amendment transactions should be taxed at 30%. Tribunal-level orders also exist taking differing views. Interpretation and reasoning: The Tribunal recognized the conflict among non-jurisdictional High Courts and invoked the principle, as articulated by higher authority, that where non-jurisdictional High Courts conflict, the view favorable to the assessee should be followed. Applying that principle, the Tribunal followed the High Court view favorable to the assessee (holding that the thirty per cent rate applies) and directed recalculation of tax liability on the section 69A addition at thirty per cent rather than sixty per cent. Ratio vs. Obiter: Ratio - in the presence of conflicting non-jurisdictional High Court decisions on the temporal applicability of amended section 115BBE(1), the tribunal will follow the decision favorable to the assessee and apply the lower rate (30%) to the addition for AY 2017-18. Obiter - discussion of legislative chronology and the substituted statutory text is explanatory of the legal context but the practical holding is guided by the choice among conflicting precedents. Conclusion: The Tribunal allowed the additional ground directing the AO to compute tax on the unexplained SBN addition under section 115BBE at thirty per cent for AY 2017-18, reversing the application of the sixty per cent rate. ADDITIONAL PROCESSUAL/DECISIONAL POINTS Evidence burden and consequence: The Tribunal reaffirmed that the assessee bears the evidentiary burden to prove the lawful source of cash deposits; absence of documentary evidence or relevant material before the AO or appellate forums justifies treatment of deposits as unexplained under section 69A. Consistency of treatment: The Tribunal held that treating non-SBN bank credits as business receipts and unexplained SBN deposits as income under section 69A is not inherently inconsistent where the assessee fails to explain the latter; differential treatment is permissible where lawful source is shown for some credits but not for others. Disposition: Appeal partly allowed - the section 69A addition stands but tax thereon to be computed at thirty per cent; other challenged grounds which were not pressed were dismissed as not pressed.