2025 (5) TMI 1866 - AT - Income Tax

Assessee wins as cash deposits during demonetization with explained source cannot be treated as unexplained money under section 69A

ITAT Mumbai ruled in favor of the assessee regarding cash deposits made during demonetization period. The tribunal held that since the assessee adequately ... Addition u/s 69A - cash deposits in the bank account during the demonetization period - HELD THAT:- As assessee has duly explained the source of cash deposited by him in his bank account during the demonetization period, and same cannot be treated as unexplained money u/s 69A of the Act. Accordingly, the impugned addition made by the AO, being the cash deposits in the bank account during the demonetization period under section 69A of the Act, is deleted. Accordingly, the sole issue raised by the assessee in the present appeal is allowed. The core legal questions considered by the Tribunal in this appeal are:1. Whether the Assessing Officer (AO) was justified in making an addition of Rs. 12,24,500/- under section 69A of the Income Tax Act, 1961 ('the Act') by treating the cash deposits made during the demonetization period as unexplained money.2. Whether the AO erred in applying section 69A in the facts of the case, particularly considering the nature of the assessee's business and the source of the cash deposits.3. Whether the Commissioner of Income Tax (Appeals) ('CIT(A)') was justified in confirming the addition under section 69A without properly considering the submissions and evidence furnished by the assessee.4. Whether the AO was justified in levying interest under sections 234A, 234B, 234C, and 234D of the Act and initiating penalty proceedings under section 271(1)(c) of the Act.Issue-wise Detailed AnalysisIssue 1 & 2: Validity of addition under section 69A on cash deposits during demonetization periodRelevant legal framework and precedents: Section 69A of the Act deals with unexplained money found credited in the books of an assessee or deposited in a bank account. The provision deems such unexplained money as income of the assessee for the relevant financial year. The burden lies on the assessee to satisfactorily explain the source and nature of such money. The Tribunal relied on a coordinate bench decision in Tamil Nadu State Marketing Corporation Ltd. vs. ACIT, which clarified that mere violation of RBI notifications or government orders regarding specified bank notes (SBNs) during demonetization cannot, by itself, lead to rejection of a genuine explanation regarding the source of cash deposits. The CBDT circular guiding the verification of cash deposits during demonetization was also considered, emphasizing the need for a detailed analysis of business transactions, bank accounts, and stock registers before making any addition under sections 69 or 69A.Court's interpretation and reasoning: The Tribunal noted that the AO made the addition solely on the basis that the assessee deposited cash in SBNs during the demonetization period, which was prohibited after 08.11.2016 as per RBI circulars. The AO did not dispute the source of the cash deposits but relied on the prohibition to treat the deposits as unexplained income. The Tribunal found this approach flawed.Key evidence and findings: The assessee submitted detailed documentary evidence including:Bank statements from Federal Bank showing loans availed by the assessee against gold ornaments.A list of 23 customers with names, addresses, and PAN details to whom the assessee had given loans against gold ornaments.Cash book and bank account statements showing cash repayments received from these customers during the demonetization period.The Tribunal observed that these documents were never rejected by the AO nor was any verification sought from the customers. The cash deposits corresponded with repayments made by the customers as per the list and bank records.Application of law to facts: The Tribunal applied the principles from the cited coordinate bench decision, holding that the mere fact that the assessee accepted SBNs after the demonetization announcement does not automatically render the deposits unexplained money under section 69A. The assessee had satisfactorily explained the source of the deposits as legitimate repayments of loans given against gold ornaments, supported by documentary evidence.Treatment of competing arguments: The Revenue's argument was based on the violation of RBI notifications prohibiting acceptance of SBNs after 08.11.2016. The Tribunal distinguished the civil or criminal liability arising from such violation from the income tax implications under section 69A. It held that while the violation may attract penalties under other laws, it does not justify treating the deposits as unexplained income under the Income Tax Act if the source is satisfactorily explained.Conclusions: The addition of Rs. 12,24,500/- under section 69A was deleted as the assessee had furnished a genuine and verifiable explanation supported by documents. The Tribunal held that the AO's and CIT(A)'s orders confirming the addition were erroneous.Issue 3: Confirmation of addition by CIT(A)The Tribunal found that the CIT(A) upheld the AO's addition without adequately considering the written submissions and judgments cited by the assessee. The Tribunal noted that the CIT(A) failed to critically analyze the documentary evidence and the legal precedents submitted. Consequently, the Tribunal allowed the grounds challenging the CIT(A)'s confirmation of the addition.Issue 4: Levy of interest and penalty proceedingsThe Tribunal observed that the levy of interest under sections 234A, 234B, 234C, and 234D of the Act was consequential to the addition made by the AO. Since the addition was deleted, separate adjudication on interest was unnecessary. Regarding the penalty proceedings initiated under section 271(1)(c), the Tribunal held that such proceedings are premature at this stage and dismissed the challenge without detailed examination.Significant Holdings'Merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with Specified Bank Notes, the genuine explanation offered by the assessee towards the source of cash deposit cannot be rejected, unless the AO makes out the case that the assessee has deposited unaccounted cash into bank account in Specified Bank Notes.''The mandate of the provisions of Section 69 & 69A of the Act ... is that unexplained money may be deemed to be the income of the assessee only if the money is not recorded in the books of accounts, or the assessee offers no explanation about the nature and source of such money, or the explanation offered is not satisfactory.''Violation of any RBI notification, etc., can have civil or criminal liability and can be dealt with under other provisions of law, but for the purpose of bringing the amount under Income-tax, the provisions are very clear.''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's final determinations are:The addition of Rs. 12,24,500/- under section 69A on account of cash deposits during the demonetization period is deleted.The CIT(A)'s confirmation of the addition is set aside.The issue of personal hearing under section 144 is rendered academic and left open.The interest levied under sections 234A, 234B, 234C, and 234D is consequential and requires no separate adjudication.The challenge to penalty proceedings under section 271(1)(c) is dismissed as premature.