Assessee wins as no restriction on holding Specified Bank Notes until 31.12.2016 despite demonetization from 08.11.2016

ITAT Kolkata held that no restriction existed on holding or receiving Specified Bank Notes until the appointed date of 31.12.2016, despite legal tender being banned from 08.11.2016. The assessee had explained the source of cash deposits, which revenue authorities did not dispute. The AO and CIT(A) erred in sustaining additions under section 69A and levying tax under section 115BB when the assessee provided adequate explanation for accepting Specified Bank Notes after 08.11.2016. The tribunal decided in favor of the assessee.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

- Whether the delay of 123 days in filing the appeal before the Tribunal can be condoned on grounds of sufficient cause.

- Whether the addition of Rs. 29,76,105/- to the total income of the assessee under section 69A of the Income Tax Act, on account of unexplained cash deposits of Specified Bank Notes during the demonetization period, was justified.

- Whether the assessee had a legal right to receive and deposit Specified Bank Notes (old Rs. 500 and Rs. 1,000 currency notes) during the demonetization period prior to 31st December 2016.

- Whether the invocation of section 69A of the Income Tax Act and levy of tax under section 115BB on the said cash deposits was legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Delay in Filing Appeal:

The assessee filed the appeal before the Tribunal after a delay of 123 days. The partner of the assessee-company submitted an affidavit stating that the assessee was unaware of the order passed by the Commissioner of Income Tax (Appeals) due to being bed-ridden with chronic sciatica pain. Upon becoming aware, the assessee promptly approached the authorized representative to file the appeal. The Tribunal considered these facts and held that the delay was not due to negligence but due to sufficient cause. The Tribunal relied on the principle that delay caused by genuine reasons such as illness and unawareness of order merits condonation. Consequently, the delay was condoned.

Addition under Section 69A of the Income Tax Act for Cash Deposits of Specified Bank Notes:

The assessee was engaged in wholesale trade of handloom products and declared income of Rs. 7,86,260/-. During assessment, cash deposits totaling Rs. 39,48,500/- made during the demonetization period were scrutinized. The Assessing Officer (AO) disallowed Rs. 29,76,105/- as unexplained cash deposits under section 69A, alleging that the assessee failed to satisfactorily explain the source of these deposits, which consisted of Specified Bank Notes (SBNs) received during demonetization. The Commissioner of Income Tax (Appeals) partly upheld this addition.

The assessee contended that the cash deposits represented genuine sale proceeds from its handloom business, supported by sale registers and ledger accounts. It was submitted that the turnover was over Rs. 10 crore, and only a portion was deposited as cash during demonetization. The assessee argued that there was no prohibition on receiving SBNs until 31st December 2016, the 'appointed day' as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, and that the deposits were made prior to this date. The assessee relied on a Coordinate Bench decision which held that receipt of SBNs before the appointed day cannot be treated as illegal or unexplained income under section 69A.

The Revenue's counter-argument was that acceptance and deposit of SBNs during demonetization was illegal and therefore the addition under section 69A was justified. The Revenue emphasized that the demonetization notification dated 8th November 2016 banned dealings in SBNs.

The Tribunal examined the relevant legal framework, particularly the Specified Bank Notes (Cessation of Liabilities) Act, 2017, which defines the 'appointed day' as 31st December 2016. Section 5 of the Act prohibits holding, transferring, or receiving SBNs only on and from the appointed day. The Tribunal noted that although SBNs ceased to be legal tender from 8th November 2016, the RBI and Government issued guidelines allowing dealings with SBNs up to 31st December 2016. The cessation of liability and guarantee by the Central Government only took effect from the appointed day.

The Tribunal found that the AO and CIT(A) erred in treating the receipt of SBNs before 31st December 2016 as illegal or unexplained. Since the assessee had explained the source of cash deposits and the nature of business, and the Revenue did not dispute the genuineness of sales, the addition under section 69A was not sustainable. The Tribunal relied on precedents from Coordinate Benches, including a decision from the Visakhapatnam Bench, which held that receipt of SBNs before the appointed day cannot be treated as unexplained cash under section 69A.

The Tribunal applied the law to the facts and concluded that the assessee's acceptance and deposit of SBNs during demonetization was lawful and supported by business records. The invocation of section 69A was therefore incorrect. The Tribunal rejected the Revenue's contention that the deposits were illegal and upheld the assessee's explanation.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"On and from the appointed day, no person shall knowingly or voluntarily, hold, transfer or receive any specified bank note." (Section 5, Specified Bank Notes (Cessation of Liabilities) Act, 2017)

"The specified bank notes can be measured in monetary terms since the guarantee of the Central Government and the liability of Reserve Bank of India does not cease to exist till 31.12.2016."

"In view of the above, the contention of the Ld. DR, treating the receipt of SB Ns from cash sales as illegal and thereby invoking the Provisions of section 69A is not valid in law."

"When the assessee has explained the reasons for accepting these Specified Bank Notes, even after 08.11.2016, and the nature of business and source for cash deposits are not disputed, the Assessing Officer ought to have accepted the explanation furnished by the assessee."

Accordingly, the Tribunal concluded that the addition under section 69A of the Income Tax Act and levy of tax under section 115BB on the cash deposits of Specified Bank Notes during demonetization period was unsustainable and directed deletion of such addition.

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