Cash deposits in old notes during demonetization period cannot be treated as unexplained money under section 69A

ITAT Chennai held that cash deposits made in Specified Bank Notes (SBNs) during demonetization period from 24.11.2016 to 30.12.2016 cannot be treated as unexplained money under section 69A. The Tribunal noted lack of clarity in government notifications regarding SBN transactions during this period, as RBI permitted certain categories to deal with SBNs until 31.12.2016. Since the AO did not dispute that the assessee made unaccounted cash deposits, the addition under section 69A was deleted, following precedent in Tamil Nadu State Marketing Corporation Ltd case.

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The core legal question considered by the Tribunal is whether the addition made under section 69A of the Income Tax Act, 1961, on account of cash deposits in Specified Bank Notes (SBNs) during the demonetization period, can be sustained when the assessee has explained the source of such deposits as legitimate business sales.

In addressing this issue, the Tribunal examined the relevant statutory provisions, government notifications, and judicial precedents concerning the status and treatment of demonetized currency notes during the specified period.

The legal framework includes section 69A of the Income Tax Act, which deals with unexplained money found with the assessee, and the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 (later enacted as an Act in 2017), which governs the legal tender status and handling of demonetized currency notes. The Ordinance explicitly prohibits holding, transferring, or receiving SBNs from the appointed day, 31.12.2016, onwards, with specified exceptions and penalties for contraventions.

The Tribunal also referenced RBI circulars and government notifications issued during and after the demonetization announcement on 8.11.2016, which clarified the withdrawal of legal tender character of Rs. 500 and Rs. 1000 notes and permitted their deposit or exchange up to 31.12.2016. The circulars underscored the government's objective to curb fake currency and black money circulation, while also outlining the permissible window for handling SBNs.

Judicial precedent relied upon includes a recent decision of the Tribunal in a similar matter involving Tamil Nadu State Marketing Corporation Ltd., where it was held that receipt and deposit of SBNs during the demonetization period, even if in violation of certain notifications, does not ipso facto render the amounts taxable under section 69 or 69A if the source is satisfactorily explained. The Tribunal also cited a Bombay High Court decision which emphasized that once the source of money is satisfactorily proven, the assessee cannot be compelled to prove the acquisition of each individual note or denomination to justify the deposit.

The Tribunal's reasoning focused on the distinction between violation of RBI or government notifications and the taxability of amounts under the Income Tax Act. It observed that while the Specified Bank Notes ceased to be legal tender from 9.11.2016, the legal prohibition on holding or transacting in such notes only came into effect from 31.12.2016. During the interim period, the public was allowed to exchange or deposit these notes, and the mere acceptance or deposit of SBNs during this time was not illegal or punishable under the Income Tax Act.

Further, the Tribunal noted that the Assessing Officer did not dispute the source of deposits as proceeds from ordinary business sales, nor did he allege that the assessee deposited unaccounted cash disguised as SBNs. The addition under section 69A was thus based solely on the fact of deposit of demonetized currency, without any adverse finding on the genuineness or source of the money.

The Tribunal emphasized the guidance from the CBDT circular on verification of cash deposits during demonetization, which mandates a detailed analysis of business transactions, bank accounts, and stock registers to ascertain the legitimacy of cash receipts. In the present case, the cash deposits during the demonetization period did not show any abnormal increase or discrepancy, supporting the assessee's explanation.

Regarding competing arguments, the Revenue contended that acceptance of SBNs by the assessee was barred by government notifications and thus the deposits should be treated as unexplained money. The Tribunal rejected this contention, clarifying that violation of RBI notifications may attract civil or criminal liability but does not automatically translate into taxable income under section 69 or 69A. The Tribunal underscored that the Income Tax Act requires the source of money to be unexplained or unsatisfactory for additions to be made under these provisions.

In conclusion, the Tribunal held that the addition under section 69A of the Act was not justified in the facts and circumstances of the case. The assessee had satisfactorily explained the source of the cash deposits made in SBNs during the demonetization period as legitimate business proceeds. The mere fact that these deposits were in demonetized currency, and possibly in violation of certain government notifications, was insufficient to treat the amounts as unexplained money for tax purposes.

Significant holdings include the following verbatim excerpt encapsulating the Tribunal's core legal reasoning:

"Merely for the reason that the assessee has accepted specified bank notes in violation of circular/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected. Simpliciter violation of certain notification issued by RBI or demonetization scheme announced by Government of India on 08.11.2016 will not entitle the Revenue to make addition u/s. 69 or 69A of the Act. Because, the mandate of the provisions of Section 69 & 69A of the Act... is that unexplained investments and unexplained money may be deemed to be income only if the assessee offers no explanation about the nature and source... For violation of any RBI notification, etc., can have civil or criminal liability and can be dealt with under any other provision of law but for the purpose of bringing the amount under Income-tax, the provisions are very clear... In our considered view, to bring any amount u/s. 69 or 69A of the Act, the nature and source of investment needs to be examined. In case the assessee explains the nature and source of investment, then the question of making addition towards unexplained investment u/s. 69 of the Act does not arise."

The Tribunal thus established the principle that the taxability under sections 69 or 69A requires the source of the money to be unexplained or unsatisfactory, and mere possession or deposit of demonetized currency during the permissible period does not constitute unexplained money if the source is duly accounted for.

Accordingly, the Tribunal set aside the orders of the lower authorities and allowed the appeal, deleting the addition under section 69A of the Income Tax Act in respect of cash deposits made in Specified Bank Notes during the demonetization period.

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