2025 (6) TMI 42 - AT - Income Tax

Section 69A cannot apply when cash deposits are properly documented and sources adequately explained with maintained records

VR Auto Services. Versus ACIT, Circle-1, Nashik

VR Auto Services. Versus ACIT, Circle-1, Nashik - TMI The core legal questions considered by the Tribunal in this appeal pertain to the tax treatment of cash deposits made during the demonetization period, specifically:Whether the cash deposits of Specified Bank Notes (SBNs) received by an Authorised Dealer of a private petroleum company during the demonetization period can be treated as unexplained cash under section 69A of the Income-tax Act, 1961.Whether the provisions of section 115BBE, prescribing special tax rates for unexplained cash, are applicable in the facts of the case.Whether the assessee's acceptance of SBNs during the demonetization period, despite the RBI and Government notifications restricting acceptance of SBNs to Public Sector Oil and Gas Marketing companies, justifies the addition of the cash deposits as unexplained income.Whether the assessee's books of accounts, stock registers, VAT returns, and other records sufficiently explain the source of cash receipts, thereby negating the applicability of section 69A or section 68 of the Act.The relevance and applicability of various judicial precedents on similar facts concerning acceptance of SBNs by private petrol pump dealers during demonetization and the consequent tax treatment of cash deposits.Regarding the disputed addition under section 69A for unexplained money amounting to Rs. 2,38,33,185/-, the Tribunal examined the statutory framework and judicial precedents extensively. The relevant legal provisions include:Section 69A of the Income-tax Act: Empowers the Assessing Officer (AO) to treat money found in possession of the assessee, the source of which is unexplained, as income of the assessee.Section 115BBE: Provides for special tax rates on income referred to in sections 68, 69, 69A, 69B, 69C, or 69D, typically unexplained cash credits or unexplained investments.RBI and Government Notifications dated 08.11.2016 and 13.11.2016: Allowed acceptance of SBNs only by Public Sector Oil and Gas Marketing companies for sale of petrol, diesel, and gas during the demonetization period.The AO's reasoning was that the assessee, being an Authorised Dealer of a private petroleum company (Reliance Industries Ltd.), was not authorized to accept SBNs during demonetization. Consequently, the cash deposits of SBNs, excluding the closing cash balance as on 08.11.2016, were added as unexplained money under section 69A and taxed under section 115BBE. The AO also initiated penal proceedings under section 271AAC for alleged violation of RBI guidelines.The Tribunal analyzed the facts in light of the assessee's explanation and supporting evidence. It was undisputed that the assessee maintained audited books of accounts, duly filed VAT returns, and kept updated stock registers. The source of cash deposits was explained as sales proceeds of petroleum products. No discrepancies or adverse remarks were found by the AO in the books or records. The only basis for addition was the technicality that the assessee was not authorized to accept SBNs as per the Government notifications.The Tribunal placed significant reliance on a series of judicial precedents from Coordinate Benches of the Income Tax Appellate Tribunal (ITAT) and other authorities, which dealt with similar issues:ITO vs. M/s. Ashapura Petrochem Marketing Pvt. Ltd.: The Ahmedabad Bench held that the AO's invocation of section 68 (similar to section 69A) was invalid where the cash deposits represented sales receipts duly recorded in books and VAT returns, and no defect was found in the accounts. The AO's contradictory stance of accepting the source yet treating the amount as unexplained was rejected.Shree Sanand Textiles Industries Ltd.: The Tribunal ruled that sales receipts recorded in books cannot be treated as unexplained cash under section 68 without conclusive evidence. Acceptance of purchases implies acceptance of corresponding sales.M/s. Manasa Medicals: The Bangalore Bench held that where the assessee complied with audit and record-keeping requirements, and no discrepancies were found, additions under section 68 for cash sales during demonetization were unwarranted. The AO's reliance on RBI guidelines without statutory backing was criticized.Sri Bhageeratha Pattina Sahakara Sangha Niyamitha: The Tribunal observed that violation of RBI notifications per se does not attract section 68 or 69A additions if the source of cash is satisfactorily explained and books are not rejected.The Tribunal noted that the general public and even authorized dealers were under confusion during demonetization about the acceptance of SBNs, leading many private petrol pumps to accept such notes initially. The assessee ceased acceptance upon receipt of clarifications. The Tribunal emphasized that the AO did not dispute the source of cash deposits as sales proceeds but based the addition solely on the technical non-authorization to accept SBNs.In applying the law to the facts, the Tribunal found that since the source of cash deposits was satisfactorily explained and supported by audited accounts, stock registers, and VAT returns, invoking section 69A to treat the amount as unexplained was inappropriate. The AO's reliance on RBI notifications and the technicality of authorization was insufficient to override the clear explanation and documentary evidence of sales.Competing arguments by the Revenue, which stressed violation of RBI guidelines and lack of authorization to accept SBNs, were rejected on the ground that such violations do not ipso facto render the cash deposits unexplained under the Income-tax Act. The Tribunal underscored that the AO did not discredit the books or find any inconsistency in the sales or purchases recorded.Consequently, the Tribunal reversed the finding of the CIT(A) to the extent it had upheld the addition and allowed the appeal of the assessee. The addition under section 69A and the consequential tax under section 115BBE were deleted.Significant holdings from the judgment include the following authoritative principles:'It is an admitted fact that the cash deposit is on account of sale of petrol, diesel and other petroleum products. These sales have been duly recorded in the books of accounts and appropriate VAT taxes also collected by the assessee.''The Assessing Officer following the Circular dated 08-11-2016, which is not applicable since Para (e) of the Circular deals with the cases of purchase of petrol, diesel etc., and not to sale of petrol, diesel by accepting Specified Bank Notes. Thus the invocation of Section 68 is invalid in law.''The provisions of section 68 cannot be applied in relation to the sales receipt shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income at the time of sale only.''Violation of RBI guidelines and acceptance of demonetized notes during demonetization period does not automatically attract provisions of section 68 or 69A if the source of cash is satisfactorily explained and books of accounts are not rejected.'Ultimately, the Tribunal held that the addition of Rs. 2,38,33,185/- as unexplained cash under section 69A was unsustainable. The assessee's detailed maintenance of records and explanation of the cash deposits as sales proceeds negated the applicability of section 69A and section 115BBE. The appeal was allowed accordingly.