Tribunal deletes unexplained money addition under section 69A for demonetization deposits with proper source explanation

ITAT Chennai allowed the assessee's appeal regarding unexplained money under section 69A during demonetization. The assessee deposited cash in SBN and explained the source as funds received from relatives and friends, providing their names, identity, address, PAN, and confirmation letters. The ITAT found that AO and CIT(A) erred in treating these deposits as unexplained money under sections 69A and 115BBE. Following tribunal precedents, the order directed deletion of the entire addition, setting aside the CIT(A)'s decision.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the addition of Rs. 50,33,000/- as unexplained money under Section 69A of the Income Tax Act, read with Section 115BBE, on account of cash deposits in Specified Bank Notes (SBNs) during the demonetisation period, was justified.
• Whether the Assessing Officer (AO) was correct in treating borrowings deposited in the bank account, amounting to Rs. 1,78,17,654/-, as turnover and estimating income at 8% of such deposits.
• Whether taxing the addition under Section 115BBE of the Act was legal and appropriate.
• Whether the levy of interest under Sections 234A and 234B of the Act was justified.
• Whether the explanation and evidences submitted by the assessee regarding the source of cash deposits and borrowings were adequately considered.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of addition of Rs. 50,33,000/- as unexplained money under Section 69A r.w.s. 115BBE for cash deposits in SBNs during demonetisation period

Legal Framework and Precedents: Section 69A of the Income Tax Act deals with unexplained money, specifically cash found during the demonetisation period in the form of Specified Bank Notes (SBNs). Section 115BBE prescribes a special tax rate on such unexplained income. The Specified Bank Notes (Cessation of Liabilities) Act, 2017, sets the appointed date for cessation of legal tender status of SBNs as 31.12.2016, implying that transactions in SBNs were legally permissible up to that date.

Precedents relied upon include decisions of various benches of the Tribunal, notably:

• Karnam Rudrapillai Gunseharan Vs. ITO;
• Spectra Equipment (P) Ltd Vs. ITO;
• Raju Ravichandran Vs. ITO;
• Maruthi Babu Rao Jadav Vs. ACIT (Kerala High Court);
• Shri Raju Dinesh Kumar vs DCIT;
• M/s. Micky Fireworks Industries Vs. ACIT;
• Mrs. Umamaheshwari Vs. ITO;
• Amar Sparklers Factory Vs. ITO.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had deposited Rs. 50,33,000/- in SBNs during the demonetisation period but had provided detailed evidence including confirmation letters, PAN details, and identities of lenders from whom the cash was borrowed. The assessee's business had not commenced due to non-supply of vehicles by the manufacturer, and the cash deposits represented loans from relatives and friends to repay a bank loan.

The Tribunal emphasized that the Specified Bank Notes (Cessation of Liabilities) Act, 2017, designated 31.12.2016 as the appointed date after which transactions in SBNs were prohibited. Therefore, deposits made before or on this date were not illegal per se. The AO and CIT(A)'s reliance on the fact that deposits were made during the demonetisation period without considering the source was found to be erroneous.

Key Evidence and Findings: The assessee submitted loan agreements, confirmations from lenders, identity proofs, and details of criminal proceedings against the manufacturer. The assessee also demonstrated that the business was not operational, and the deposits were loans collected to repay bank dues.

Application of Law to Facts: Since the source of the cash deposits was satisfactorily explained and supported by documentary evidence, the addition under Section 69A and tax under Section 115BBE were not sustainable.

Treatment of Competing Arguments: The AO and CIT(A) held that deposits in SBNs during demonetisation were suspect. However, the Tribunal found this argument untenable in light of the statutory appointed date and the detailed evidence provided by the assessee.

Conclusion: The addition of Rs. 50,33,000/- as unexplained cash under Section 69A r.w.s. 115BBE was deleted.

Issue 2: Treatment of borrowings of Rs. 1,78,17,654/- as turnover and estimation of income at 8%

Legal Framework and Precedents: Section 69A also applies to unexplained money, and Section 68 relates to unexplained cash credits. The AO estimated income at 8% of the total deposits treating them as turnover, despite the business not having commenced.

Relevant precedents include the Tribunal's decisions in cases such as M/s. Micky Fireworks Industries Vs. ACIT, Mrs. Umamaheshwari Vs. ITO, and Amar Sparklers Factory Vs. ITO, which held that if the source of cash deposits is satisfactorily explained with supporting evidence, additions under Sections 68 or 69A are not justified.

Court's Interpretation and Reasoning: The Tribunal observed that the AO erred in treating borrowings as turnover and estimating profits thereon. The assessee had demonstrated that Rs. 1,17,00,000/- related to dishonoured cheques from the manufacturer (which were reversed entries) and Rs. 61,17,654/- were loans from friends and relatives, supported by confirmations and identity proofs.

Key Evidence and Findings: The assessee provided bank statements, confirmation letters, loan agreements, and copies of criminal complaints against the manufacturer. The cash flow statements and books of accounts showed no abnormal variation in sales or cash deposits.

Application of Law to Facts: Since the deposits were loans and not business income, and the business had not commenced, treating these deposits as turnover and estimating income was incorrect.

Treatment of Competing Arguments: The AO's approach was based on assumption without considering the detailed evidence. The Tribunal relied on precedents where similar facts led to deletion of additions.

Conclusion: The addition of Rs. 14,25,412/- on an estimated basis was rightly deleted by the CIT(A), and the Tribunal upheld this deletion.

Issue 3: Legality of taxing addition under Section 115BBE

The Tribunal found this issue moot since the addition under Section 69A itself was deleted. Therefore, the question of taxability under Section 115BBE did not arise.

Issue 4: Levy of interest under Sections 234A and 234B

Since the additions were deleted, the grounds relating to interest levied under Sections 234A and 234B became infructuous and were accordingly dismissed.

3. SIGNIFICANT HOLDINGS

The Tribunal held as follows:

"The cash deposit in SBN made by the assessee was Rs. 50,33,000/- during the demonetisation period and the source for the same is explained as received from the relatives and friends by providing the name, identity, address, PAN and confirmation letters. Therefore, we are of the considered view that the AO and ld.CIT(A) erred in confirming the addition of cash deposits as unexplained money u/s. 69A of the Act r.w.s.115BBE of the Act."

"The Specified Bank Notes (Cessation of Liabilities) Act, 2017, appointed date for 'not transacting in SBNs' is 31.12.2016. Hence, deposits made in SBNs during the demonetisation period up to the appointed date are not illegal per se."

"The AO and the Ld.CIT(A) without considering the relevant submissions of the assessee simply made addition towards cash deposits u/s. 69A r.w.s.115BBE of the Act. Thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete the addition made towards cash deposits u/s. 69A r.w.s.115BBE of the Act."

Core principles established include:

• The burden to explain the source of cash deposits in SBNs during demonetisation period lies on the assessee, and if satisfactorily discharged with documentary evidence, additions under Section 69A cannot be sustained.
• The appointed date under the Specified Bank Notes (Cessation of Liabilities) Act, 2017, is critical in determining the legality of transactions in SBNs.
• Borrowings deposited in bank accounts cannot be treated as business turnover if the business has not commenced and proper evidence is furnished.
• Interest levied on additions that are deleted becomes infructuous.

Final determinations:

• The addition of Rs. 50,33,000/- under Section 69A r.w.s. 115BBE was deleted.
• The addition of Rs. 14,25,412/- estimated as business income was deleted.
• The levy of interest under Sections 234A and 234B was set aside as the additions were deleted.
• The appeal of the assessee was allowed.

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