2025 (5) TMI 111 - AT - Income Tax

ITAT Chennai deletes additions for unexplained cash deposits and fixed assets after assessee provides adequate documentation

The ITAT Chennai ruled in favor of the assessee on two key issues. First, regarding unexplained cash deposits during demonetization, the tribunal found ... Addition u/s 69A - unexplained cash deposits in SBN during the demonetisation period - taxation u/s 115BEE - HELD THAT:- Assessee is running a coaching centre for aspirants for recruitment done by State Public Service Commission. The assessee’s business involves cash collection from the trainees. During the assessment proceedings the assessee have furnished the books of accounts, cash book, Service tax returns in support of the turnover along with reconciliation, bank statements and sales records. Assessee has explained the source of cash deposit was from the business, collected on account of fees collected from the trainees and the entire list of candidates to show the nature and source of the cash deposit were furnished before the AO. AO and CIT(A) have not pointed out any defects or irregularities in the books of accounts of the assessee and further the same have not been rejected. In this scenario making an addition as unexplained money on account of the cash deposit made in SBN during the demonetisation period is not sustainable in law. Therefore, we do not countenance the action of the ld.CIT(A) in confirming the addition made by the AO for the reason that the assessee was not authorised to accept the SBN during the demonetisation period. In the present case the assessee though the assessee has collected the SBN during the demonetisation period, the same was not prohibited as per the specified bank notes (Cessation of Liability) Act, 2017. Further, we find that the assessee has explained the source of the cash deposit also. Hence, as relying on M/S. SURABII GOLD [2024 (4) TMI 1241 - ITAT CHENNAI] CIT(A) has erred in confirming addition u/s. 69A for the reason that the assessee was prohibited to accept the same. Difference between opening WDV of Fixed assets as per ITR and closing WDV of Fixed assets as per ITR - AO has made the addition u/s. 69 as an unexplained investment stating that the assessee has made addition to the assets which were not disclosed, instead of crediting to P & L Account as income, has credited to the capital account. - HELD THAT:- We find that the assessee has duly submitted the particulars pertaining to the loans obtained for the purpose of acquiring the assets in question and has substantiated the sources of funds utilized for such acquisitions during the relevant assessment years, in addition to the income declared in those respective years. Furthermore, it is observed that the immovable properties in question, acquired during the period from Year 2006 to 2012, are supported by registered sale deeds executed in favour of the assessee. CIT (A) has erred in upholding the additions in the assessment year under consideration, without duly appreciating the fact that the said assets had been acquired in earlier years from borrowed funds and disclosed sources of income. Accordingly, the order of the CIT(A) is set aside, and the AO is directed to delete the impugned additions by allowing the grounds raised by the assessee. The core legal questions considered in this appeal pertain to the validity of additions made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)) under the Income Tax Act, specifically:1. Whether the addition of Rs. 24,00,000 as unexplained cash deposits under section 69A read with section 115BBE, representing demonetized currency notes (SBNs) collected as fees during the demonetization period, was justified.2. Whether the addition of Rs. 48,17,383 as unexplained investments under section 69 read with section 115BBE, representing immovable properties purchased in earlier years but brought into the books of account in the impugned assessment year by crediting the capital account, was justified.Issue 1: Legality of Addition of Rs. 24,00,000 as Unexplained Cash Deposits (Demonetized Notes)Relevant Legal Framework and Precedents: The addition was made under section 69A of the Income Tax Act, which deals with unexplained cash credits, and taxed under section 115BBE, which imposes a higher tax rate on unexplained income. The demonetization scheme announced by the Government of India on 8th November 2016 rendered specified bank notes (SBNs) invalid after a certain date, with the Specified Bank Notes (Cessation of Liability) Act, 2017 prescribing 31st December 2016 as the appointed date for cessation of liability. The assessee relied on several judicial pronouncements, including decisions of coordinate benches of the Tribunal and the Hon'ble Delhi High Court, which held that acceptance of SBNs during the period from 8th November 2016 to 31st December 2016 was not prohibited.Court's Interpretation and Reasoning: The AO had made the addition on the ground that the assessee accepted demonetized notes after 8th November 2016, which was not permissible. The CIT(A) confirmed this addition, holding that the nature of the assessee's business did not fall under exempted categories and thus the cash deposits in SBNs were unexplained. However, the Tribunal examined the Specified Bank Notes (Cessation of Liability) Act, 2017 and relevant case law, particularly the decision in ITO vs. M/s. Surabhi Gold, which held that acceptance of SBNs was not prohibited until 31st December 2016. The Tribunal noted that the assessee had maintained proper books of accounts, duly audited under section 44AB, furnished complete cash books, and explained the source of cash deposits as fees collected from students, supported by detailed lists of payers. The Tribunal observed that neither the AO nor CIT(A) had pointed out any defects or irregularities in the books of account.Key Evidence and Findings: The assessee produced an 885-page paper book containing cash books, fee receipts including those in SBNs, bank statements, and reconciliations. The assessee also relied on the Specified Bank Notes (Cessation of Liability) Act, 2017, which allowed acceptance of SBNs until 31st December 2016. The Tribunal found that the source of cash deposits was satisfactorily explained and corroborated by documentary evidence.Application of Law to Facts: Given the statutory provisions and the evidence, the Tribunal held that the addition under section 69A was not sustainable. It found that the CIT(A) erred in confirming the addition on the basis that the assessee was prohibited from accepting SBNs during the demonetization period. The Tribunal emphasized that the assessee had explained the source of deposits, and the acceptance of SBNs was lawful until the appointed date.Treatment of Competing Arguments: The Revenue argued that acceptance of SBNs post-announcement was prohibited and thus the addition was justified. The Tribunal rejected this, relying on the Specified Bank Notes (Cessation of Liability) Act, 2017, and relevant judicial decisions. It also distinguished case law cited by the Revenue that focused on the legal tender status of SBNs without considering the source explanation.Conclusion: The Tribunal set aside the addition of Rs. 24,00,000 under section 69A read with section 115BBE and directed the AO to delete the addition and recompute the income accordingly.Issue 2: Legality of Addition of Rs. 48,17,383 as Unexplained Investments (Fixed Assets)Relevant Legal Framework and Precedents: The addition was made under section 69 of the Income Tax Act, which deals with unexplained investments, and taxed under section 115BBE. The AO observed a substantial increase in the written down value (WDV) of fixed assets in the impugned assessment year compared to the previous year. The assessee contended that these immovable properties were purchased in earlier years (2006 to 2012) in the personal capacity, out of declared sources, and brought into the books of account in the impugned year by crediting the capital account to give a better view of financial affairs. The Tribunal considered the registered sale deeds, bank loan details, and cash flow statements submitted by the assessee.Court's Interpretation and Reasoning: The AO and CIT(A) treated the addition as unexplained investment because the assets were not disclosed in earlier years and were brought into the books in the impugned year. However, the Tribunal found that the properties were acquired in earlier years, supported by registered sale deeds and loan documents. The assessee had borrowed funds from banks and financial institutions for these acquisitions, and the source of funds was declared in the respective years. The Tribunal noted that the assessee had furnished a cash flow statement from 2002 to 2013 showing the purchase of these assets by debiting the capital account. The Tribunal held that the addition amounted to double taxation since these assets were acquired and declared in earlier years.Key Evidence and Findings: The assessee submitted registered sale deeds for eight properties purchased between 2006 and 2012, loan documents evidencing borrowings from PNB Housing Finance, TNSC Bank, and Dhanam Agency totaling Rs. 46,44,900, and a cash flow statement showing the acquisition of assets by debiting capital account. The Tribunal found this evidence credible and sufficient to establish the source and timing of acquisition.Application of Law to Facts: The Tribunal applied the principles under section 69 and 115BBE, which require unexplained investments to be additions to income if the source is not satisfactorily explained. Since the assessee satisfactorily explained the source and timing of acquisition, the addition was not justified.Treatment of Competing Arguments: The Revenue argued that the assets were disclosed for the first time in the impugned year and thus represented unexplained investments. The Tribunal rejected this, emphasizing the documentary evidence of prior acquisition and source of funds, and held that the addition was unjustified.Conclusion: The Tribunal set aside the addition of Rs. 48,17,383 under section 69 read with section 115BBE and directed the AO to delete the addition.Significant Holdings and Core Principles Established:1. 'The acceptance of specified bank notes (SBNs) during the demonetization period from 08.11.2016 up to 31.12.2016 was not prohibited as per the Specified Bank Notes (Cessation of Liability) Act, 2017.'2. 'Where the assessee maintains proper books of accounts, duly audited, and satisfactorily explains the source of cash deposits, additions under section 69A for unexplained cash credits in demonetized notes are not sustainable.'3. 'Additions under section 69 for unexplained investments cannot be sustained where the assessee proves that the assets were acquired in earlier years from declared sources, supported by registered sale deeds and loan documents, and the present addition amounts to double taxation.'4. 'The mere fact that assets are brought into the books of account in a later year by crediting the capital account does not justify treating them as unexplained investments if the acquisition and source of funds were disclosed in earlier years.'5. 'The burden of proof lies on the Revenue to establish that the additions are unexplained and the assessee's explanation is not satisfactory; where the assessee provides credible documentary evidence, additions are liable to be deleted.'The Tribunal, after careful consideration of the facts, evidence, legal provisions, and precedents, allowed the appeal by setting aside the additions of Rs. 24,00,000 under section 69A read with section 115BBE and Rs. 48,17,383 under section 69 read with section 115BBE, directing the Assessing Officer to delete these additions and recompute the income accordingly.