2025 (3) TMI 78 - AT - Income Tax

Cash deposits during demonetization period accepted as legitimate business funds, Section 68 addition deleted

Genspares & Supply Corporation Versus ITO, Ward-30 (2), Kolkata

ITAT Kolkata ruled in favor of the assessee regarding cash deposits made during demonetization period. Revenue authorities accepted the assessee's regular ... Addition u/s. 68 - unexplained cash credit in the form of cash deposited during the demonetization period - AO invoked section 115BBE of the Act - HELD THAT:- Revenue authorities have not doubted the gross sales and more particularly the credit sales effected during the demonetization period and the total sales effected in the period other than the demonetization period. It establishes that the assessee has been carrying out the regular business activity and making sales during the year which has been accepted by the Revenue authorities. Merely for the reason that there is cash deposit during the demonetization period, the present issue has arisen. It is accepted that nobody was aware about the declaration of Demonetization Scheme and the moment it was announced it created panic. In this process, people tend to make some cash purchases and also to pay their outstanding debtors. Until and unless the source of cash is not explained one cannot doubt the genuineness of cash deposit. In the instant case, the assessee successfully demonstrated that it is carrying out regular business activity, making regular sales both through cash and credit and that the alleged deposit is out of the cash balances available with the assessee in its books of account and therefore find merit in the contention of assessee. This view is further fortified in the case of Vasant and Company [2024 (10) TMI 1638 - ITAT CHENNAI] wherein held 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 of the Act and taxed u/s. 115BBE of the Act towards cash deposits made to bank account of demonetized cash in SBNs’ The impugned addition made u/s. 68 of the Act is directed to deleted and the action of the AO invoking provisions of section 115BBE is also set-aside. Effective Grounds of Appeal raised by the assessee on merits are allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are: Whether the addition of Rs. 26.00 lakh under Section 68 of the Income-tax Act, 1961 for unexplained cash credit during the demonetization period is justified. Whether the invocation of Section 115BBE of the Act by the Assessing Officer (AO) is appropriate in this context.ISSUE-WISE DETAILED ANALYSIS1. Addition under Section 68 of the Income-tax Act, 1961Relevant legal framework and precedents: Section 68 of the Income-tax Act deals with unexplained cash credits, allowing the AO to add such credits to the income of the assessee if the nature and source are not satisfactorily explained. The Tribunal referenced the decision in the case of Vasant & Company, which dealt with a similar issue during the demonetization period.Court's interpretation and reasoning: The Tribunal observed that the assessee, a partnership firm, was engaged in regular business activities, with a history of filing returns and maintaining financial records. The Tribunal noted that the gross sales, including cash and credit sales, were not disputed by the Revenue authorities. The Tribunal emphasized that the demonetization period was marked by uncertainty, leading to increased cash transactions.Key evidence and findings: The assessee provided financial statements and demonstrated regular business activity. The Tribunal found that the cash deposits were part of the business's cash sales and were reflected in the firm's accounts. The Tribunal also noted the absence of any dispute regarding the assessee's registration with VAT authorities and the maintenance of regular books of account.Application of law to facts: The Tribunal applied the principles from the Vasant & Company case, where similar cash deposits during demonetization were explained as business transactions. The Tribunal found that the assessee's explanation of the cash deposits as arising from business sales was credible and supported by evidence.Treatment of competing arguments: The Tribunal considered the arguments from the Departmental Representative supporting the lower authorities' decisions but found the assessee's explanations and evidence more compelling.Conclusions: The Tribunal concluded that the addition under Section 68 was not justified, as the assessee satisfactorily explained the source of the cash deposits as part of its regular business activity.2. Invocation of Section 115BBE of the Income-tax ActRelevant legal framework and precedents: Section 115BBE deals with the taxation of income referred to in Sections 68, 69, 69A, 69B, 69C, or 69D, at a higher rate. The Tribunal referenced the decision in Tamil Nadu State Marketing Corporation Ltd, which addressed similar issues concerning demonetized currency.Court's interpretation and reasoning: The Tribunal noted that the application of Section 115BBE was contingent upon the unexplained nature of the cash deposits, which was not the case here, as the deposits were explained as business sales.Key evidence and findings: The Tribunal found that the cash deposits were accounted for in the assessee's books and were part of the declared income, negating the need for Section 115BBE's application.Application of law to facts: The Tribunal applied the reasoning from the Tamil Nadu State Marketing Corporation Ltd case, where the acceptance of demonetized currency was considered permissible under certain conditions, and the deposits were part of the business's regular transactions.Treatment of competing arguments: The Tribunal considered the Departmental Representative's support for the AO's invocation of Section 115BBE but found the assessee's explanations and supporting evidence more persuasive.Conclusions: The Tribunal concluded that the invocation of Section 115BBE was unwarranted, as the deposits were part of the business's regular income and not unexplained.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal stated, 'Merely for the reason that there is a cash deposit during the demonetization period, the present issue has arisen. It is accepted that nobody was aware about the declaration of Demonetization Scheme and the moment it was announced it created panic.'Core principles established: The Tribunal established that cash deposits during the demonetization period, if explained as part of regular business transactions and supported by evidence, do not warrant additions under Section 68 or the invocation of Section 115BBE.Final determinations on each issue: The Tribunal directed the deletion of the addition made under Section 68 and set aside the AO's action invoking Section 115BBE, allowing the assessee's appeal on these grounds.