Demonetisation deposits not treated as unexplained income where source was satisfactorily explained and regulatory breach was separate.

Cash deposits in specified bank notes collected from members during demonetisation were not, on these facts, unexplained income under section 68 of the Income-tax Act, 1961 because the assessee furnished a satisfactory source explanation and the Revenue did not show it to be unsubstantiated. Any alleged breach of the RBI notification on acceptance of specified bank notes after they ceased to be legal tender was treated as a separate regulatory issue for the competent authority and did not, by itself, convert the deposits into taxable unexplained income under sections 68 or 69. The addition was therefore deleted.

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Issues: Whether cash deposits in specified bank notes collected from members during the demonetisation period could be treated as unexplained income under section 68 of the Income-tax Act, 1961.

Analysis: The assessee explained that the deposits represented collections from members and were deposited within the first three days of demonetisation. The source of the deposits was furnished before the Assessing Officer and was not found to be unsubstantiated. The objection of the Revenue rested on the alleged violation of the notification under sub-section (2) of section 26 of the Reserve Bank of India Act, 1934, by accepting specified bank notes after they ceased to be legal tender. Such a regulatory violation, if any, was held to be a matter for the competent authority under the relevant law and did not by itself establish that the deposits were unexplained income for the purposes of section 68 or section 69 of the Income-tax Act, 1961.

Conclusion: The addition was not sustainable and was deleted; the issue was decided in favour of the assessee.

Ratio Decidendi: A deposit cannot be treated as unexplained income under section 68 of the Income-tax Act, 1961 merely because it consists of demonetised currency accepted in breach of a regulatory notification, if the source of the deposit is satisfactorily explained.

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