2025 (6) TMI 294 - AT - Income Tax

Supreme Court Upholds Taxpayer's Cash Deposits as Legitimate Income, Rejects Unexplained Money Claim Under Section 69A

The Income Tax Tribunal deleted an addition of Rs. 1,50,000/- under Section 69A during the demonetization period. The SC held that when the assessee's ... Cash deposit in Bank during demonetization period u/s.69A - HELD THAT:-Department has neither disputed the business activities of the assessee i.e. trading of petroleum products nor the purchase/sales of the assessee. Further, the department had not disputed the books of account of the assessee a/w. agricultural income. When the business of the assessee was not disputed by the department, then there is no parameter by which, it can be said that the money or source of money is unexplained. Further, the department has not brought out on record any other alternative source of income by the assessee or any evidence to show that there may be possibility of earning income from other sources apart from the disclosed sources of business. In such scenario, it cannot be said that such cash deposits of Rs. 1,50,000/- is unexplained so to invoke Section 69A - Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the addition of Rs. 1,50,000/- made under Section 69A of the Income Tax Act, 1961, on account of cash deposits during the demonetization period, was justified when the assessee claimed the source of such deposits as explainable from disclosed business income and agricultural incomeRs.(b) Whether the provisions of CBDT Circular No. 03/2017, which exempts verification of cash deposits up to Rs. 2,50,000/- during demonetization period, apply to an assessee engaged in business activitiesRs.(c) Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) were correct in treating the cash deposits as unexplained money under Section 69A in the absence of any evidence disputing the assessee's declared sources of incomeRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Justification of addition under Section 69A for cash deposits during demonetization periodRelevant legal framework and precedents: Section 69A of the Income Tax Act, 1961, empowers the AO to treat any money found to be deposited in a bank account as unexplained if the assessee fails to satisfactorily explain the source of such money. The burden lies on the assessee to demonstrate that the cash deposits arise from lawful and disclosed sources. The CBDT Circular No. 03/2017 dated 21.01.2017 provides guidelines for verification of cash deposits made during the demonetization period, stating that cash deposits up to Rs. 2,50,000/- need not be subjected to further scrutiny.Court's interpretation and reasoning: The Tribunal noted that the AO made the addition of Rs. 1,50,000/- under Section 69A treating the cash deposits during demonetization period as unexplained money, as the assessee allegedly failed to explain the source. However, the assessee contended that the deposits originated from accumulated savings derived from disclosed business income (petroleum trading) and agricultural income from 8 acres of land, which had been consistently disclosed in returns since FY 2013-14.Key evidence and findings: The department did not dispute the assessee's business activities or the agricultural income source. The books of account were not challenged, nor was any alternative source of income suggested by the department. The only basis for addition was the timing of deposits during demonetization.Application of law to facts: Given that the source of deposits was from disclosed and undisputed income streams, the Tribunal held that the addition under Section 69A was not sustainable. The mere fact that deposits were made in demonetized currency does not automatically render the money unexplained if the source is satisfactorily explained.Treatment of competing arguments: The department argued that the CBDT Circular's exemption does not apply to business income earners, implying that the assessee's deposits warranted scrutiny. The assessee countered that since the source was disclosed and legitimate, the addition was unwarranted. The Tribunal gave weight to the absence of any contrary evidence from the department and the consistent disclosure of income by the assessee.Conclusions: The Tribunal concluded that the addition under Section 69A was unjustified and deleted the addition of Rs. 1,50,000/-.Issue (b): Applicability of CBDT Circular No. 03/2017 to business income earnersRelevant legal framework and precedents: The CBDT Circular No. 03/2017 exempts cash deposits up to Rs. 2,50,000/- during demonetization from verification, aimed at reducing hardship for small depositors. The Circular's applicability to business income earners was debated.Court's interpretation and reasoning: The Senior Departmental Representative contended that the Circular does not apply to persons engaged in business, implying that business income earners cannot claim the benefit of the Circular's exemption. However, the Tribunal observed that the department did not dispute the assessee's business or agricultural income and that the Circular's exemption was not the sole basis for deleting the addition but was relevant in assessing the reasonableness of the AO's action.Key evidence and findings: No direct evidence was brought to show that the assessee's deposits were from undisclosed sources or that the Circular's exemption should be denied.Application of law to facts: While the Circular may not strictly apply to business income earners, the Tribunal emphasized that the department's failure to challenge the disclosed sources meant that the addition could not be sustained merely on the basis of demonetization timing.Treatment of competing arguments: The department's narrow interpretation of the Circular was not accepted as sufficient to uphold the addition.Conclusions: The Tribunal did not rely solely on the Circular but considered the overall facts and held that the addition was unwarranted.Issue (c): Validity of addition in absence of evidence disputing disclosed sourcesRelevant legal framework and precedents: The principle that unexplained money can be added only if the assessee fails to explain the source or if the department can demonstrate alternative sources or concealment. Mere suspicion or timing of deposits is insufficient.Court's interpretation and reasoning: The Tribunal underscored that the department did not bring any evidence to disprove the assessee's declared business or agricultural income or suggest any undisclosed income. The AO's addition was based solely on the fact of deposit during demonetization.Key evidence and findings: The assessee's books and income sources were undisputed, and no contradictory evidence was presented.Application of law to facts: Without any evidence to the contrary, the addition under Section 69A could not be sustained as the money was not unexplained.Treatment of competing arguments: The department's reliance on timing and circular interpretation was insufficient to rebut the assessee's explanation.Conclusions: The addition was set aside and deleted by the Tribunal.3. SIGNIFICANT HOLDINGSThe Tribunal held: 'That when the business of the assessee was not disputed by the department, then there is no parameter by which, it can be said that the money or source of money is unexplained. Further, the department has not brought out on record any other alternative source of income by the assessee or any evidence to show that there may be possibility of earning income from other sources apart from the disclosed sources of business. In such scenario, it cannot be said that such cash deposits of Rs. 1,50,000/- is unexplained so to invoke Section 69A of the Act.'Core principles established include:- The burden of proof lies on the department to establish that cash deposits are unexplained or from undisclosed sources before making an addition under Section 69A.- Mere deposit of cash during demonetization period is not sufficient ground for addition if the source is satisfactorily explained and undisputed.- The CBDT Circular exempting verification of cash deposits up to Rs. 2,50,000/- during demonetization is a relevant but not exclusive factor in assessing unexplained money additions.- Absence of any evidence contradicting the assessee's declared income sources mandates deletion of additions under Section 69A.Final determination: The addition of Rs. 1,50,000/- under Section 69A was deleted, and the appeal was allowed in favor of the assessee.