Explained cash deposits during demonetisation cannot be treated as unexplained income when the business source is established.

Cash deposits made during the demonetisation transition period were held not to justify an addition under section 69A where the assessee's turnover, cash sales and cash-in-hand history were not disputed and the source was otherwise explained. The lower authorities' view that receipt of Specified Bank Notes after 08.11.2016 was impermissible was tested against the Specified Bank Notes (Cessation of Liabilities) Act, 2017, under which the relevant prohibition on holding, transferring or receiving such notes operated from the appointed day, 31.12.2016. On that basis, mere receipt and deposit of the notes before the appointed day did not make the deposits unexplained, and the addition was directed to be deleted.

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Issues: Whether the addition made under section 69A of the Income-tax Act, 1961 in respect of cash deposits received during the demonetisation period, on the ground that the assessee had received and deposited Specified Bank Notes, was sustainable.

Analysis: The assessee's turnover and cash-sales history were not disputed, and the source of the impugned deposits was explained as cash sales and cash in hand. The reasoning of the lower authorities rested mainly on the view that receiving Specified Bank Notes after 08.11.2016 was impermissible. The statutory scheme of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 was examined, particularly the appointed day being 31.12.2016 and the prohibition on holding, transferring or receiving specified bank notes operating from that date. In that framework, mere receipt and deposit of such notes before the appointed day did not, by itself, justify treating the deposits as unexplained when the business source was otherwise established and not disputed.

Conclusion: The addition under section 69A was not sustainable and was directed to be deleted.

Final Conclusion: The assessee succeeded in challenging the disallowance on the cash-deposit issue, and the assessment addition did not survive.

Ratio Decidendi: Where the source of cash deposits is satisfactorily explained and the statutory prohibition on holding or receiving specified bank notes has not yet become operative, an addition as unexplained income cannot be sustained merely because the deposits consist of specified bank notes received during the demonetisation transition period.

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