2025 (1) TMI 1723 - AT - Income Tax

Cash deposits from demonetised notes received on retail sales-whether taxable as unexplained money under s. 69; addition deleted.

Whether cash deposits during the demonetization period, sourced from specified banknotes (SBN) received on retail sales, could be treated as unexplained ... Addition u/s 69 - cash deposited in the bank during demonetization period under SBN - HELD THAT:- From the perusal of the order, it is seen that the AO nowhere held that the SBN accepted by the assessee during the demonetization is unauthorized and he himself had accepted the sales as well as stock declared by the assessee. It is not a case where provisions of Section 145(3) of the Act are invoked and income is estimated. The assessee is dealing in IMFL and had made retail sales of liquor wherein many cases customers took the goods and opened up the cap. Once the liquor bottle is opened, it cannot be returned to the seller as it cannot be accepted by any other customer and is a total loss to seller. Due to this compulsion and exceptional circumstances, the assessee had to accept the SBN in those cases. Though we are of the view that SBN cannot be accepted during demonetization except authorized by the RBI, however, as the circumstances narrated above are beyond the control of the assessee, therefore, it is a reasonable cause where to protect the interest of business and to avoid total loss, SBN were accepted from such customers. AO has already allowed Rs. 6,00,000/- as unexplained out of such sales in SBN and also accepted the trading results declared by the assessee wherein such cash sales in SBN was included in total sales by the assessee. Thus, addition made by the AO and confirmed by CIT(A) should be deleted as the assessee has demonstrated the exceptional circumstances under which such cash was accepted under SBN. In view of these facts, the addition made by the AO is hereby deleted. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether cash deposits in Specified Bank Notes (SBN) during the demonetization period, treated as unexplained under Section 69, were liable to addition where the assessee explained the deposits as arising from cash sales and the Assessing Officer had accepted the declared sales, stock, and trading results without invoking Section 145(3). (ii) Whether, on the facts found, the assessee had demonstrated a satisfactory source and a reasonable cause/exceptional circumstances for receipt of SBN from retail customers, warranting deletion of the addition confirmed by the first appellate authority. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Sustainability of addition under Section 69 for SBN cash deposits when sales/stock/books were not rejected Legal framework: The Court examined the addition made under Section 69 on account of cash deposited in bank during demonetization. It also noted, as a relevant factual/legal context, that this was not a case where Section 145(3) was invoked or income was estimated. Interpretation and reasoning: The Court found that the Assessing Officer accepted the assessee's declared sales and did not disturb the declared stock or reject the books of accounts. The Assessing Officer also did not record a finding that receipt of SBN by the assessee was 'unauthorized' in the assessment reasoning, even though the deposit was during demonetization. The addition was made after giving credit of an average sales figure and treating the balance as unexplained; however, the trading results already incorporated such cash sales, and those results stood accepted. In this factual setting, the Court treated the source explanation as intrinsically linked to accepted sales and trading results, undermining the basis for sustaining an unexplained investment/asset addition on the same receipts. Conclusion: On the admitted acceptance of sales/stock/trading results and absence of rejection of accounts or estimation of income, the cash deposit explanation could not be discarded merely by adopting an 'average sales' credit and treating the remainder as unexplained. The addition of Rs. 10,98,000/- under Section 69 was held unsustainable and ordered to be deleted. Issue (ii): Whether exceptional circumstances constituted a satisfactory explanation for receipt of SBN from customers and consequent bank deposits Legal framework: The Court considered whether the assessee's explanation regarding circumstances of receipt of SBN during demonetization satisfactorily explained the nature and source of the cash deposited, for purposes of Section 69 treatment. Interpretation and reasoning: The Court accepted the factual explanation that the assessee was engaged in retail sale of liquor, that sales were in cash, and that customers, after taking the liquor and opening the bottle, compelled acceptance of the sale consideration in SBN. The Court specifically reasoned that once a liquor bottle is opened, it cannot be taken back as a sales return and would cause a total loss to the seller; therefore, in such cases the assessee had no real alternative but to accept the currency tendered to protect business interests and avoid loss. The Court simultaneously observed that SBN should not be accepted during demonetization except when authorized, but held that the narrated circumstances were beyond the assessee's control and constituted a reasonable cause/exceptional circumstance. It also noted that the Assessing Officer had already allowed credit of Rs. 6,00,000/- and nevertheless had accepted the overall trading results where such SBN cash sales formed part of total sales. Conclusion: The Court held that the assessee had demonstrated exceptional circumstances under which SBN were accepted, and that the source stood explained as arising from retail cash sales already reflected in accepted trading results. Consequently, the addition of Rs. 10,98,000/- confirmed by the first appellate authority was deleted and the appeal was allowed.