2025 (6) TMI 1303 - AT - Income Tax

Cash deposits in Specified Bank Notes during demonetization period cannot be taxed under Section 69A for accepting SBNs

ITAT Chennai held that cash deposits in Specified Bank Notes during demonetization period (24.11.2016 to 30.12.2016) cannot be taxed under Section 69A ... Addition u/s 69A - cash deposits in Specified Bank Notes (SBNs) during the demonetization period - assessee is a proprietor of “Son Fuels” and explains the source for cash deposits made out of Petroleum products during the demonetization period HELD THAT:- Government of India and RBI issued various notification and SOP to deal with specified bank notes. RBI allowed certain category of persons to accept and to deal with specified bank notes upto 31.12.2016. Specified Bank Notes (cessation of liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact specified bank notes, and appointed date has been stated as 31.12.2016. Tribunal observed that there is no clarity on how to deal with demonetized currency from the date of demonetization and up to 31.12.2016. Therefore, some persons continued to accept and transact the specified bank notes and deposited into bank accounts. In the present case, the assessee made cash deposits from 24.11.2016 to 30.12.2016. Therefore, we find the order of this Tribunal in the case of Tamil Nadu State Marketing Corporation Ltd. [2024 (10) TMI 1614 - ITAT CHENNAI] is applicable to the facts on hand of the present appeal, following the above order of this Tribunal, we hold that the source explained for cash deposits made by the assessee during the period from 24.11.2016 to 30.12.2016 cannot be rejected and brought to tax u/s 69A just because the assessee accepted SBNs in violation of notification issued by the Government of India & RBI, when the AO has not disputed that the assessee made any unaccounted cash into bank account in SBNs. Accordingly, we set aside the order of the CIT(A) and delete the addition made by the AO u/s 69A - Appeal filed by the assessee is allowed. The primary legal issue considered by the Tribunal was whether the addition made by the Assessing Officer under section 69A of the Income Tax Act, 1961, on account of cash deposits in Specified Bank Notes (SBNs) during the demonetization period, was justified.Another ancillary issue was whether the acceptance and deposit of demonetized currency notes (SBNs) in the course of business transactions during the period from 25.11.2016 to 30.12.2016, despite notifications restricting such transactions, could be treated as unexplained cash deposits attracting tax under section 69A read with section 115BBE of the Act.Further, the Tribunal examined the legal effect of various government notifications, ordinances, and the Specified Bank Notes (Cessation of Liabilities) Act, 2017, on the legality of holding, transferring, or receiving SBNs during the demonetization period.Additionally, the Tribunal considered the applicability of precedents regarding the burden of proof on the assessee to establish the source of cash deposits and the effect of violation of RBI notifications on the taxability of such deposits.Issue-wise detailed analysis:1. Legality and Taxability of Cash Deposits in Specified Bank Notes (SBNs) during the Demonetization PeriodThe Tribunal examined the statutory framework governing demonetization, including the Gazette Notifications dated 08.11.2016 and 24.11.2016, which restricted the use of SBNs for certain transactions post demonetization, and the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 (later enacted as the Act of 2017), which came into effect on 31.12.2016.The Ordinance explicitly prohibited holding, transferring, or receiving SBNs from the appointed day (31.12.2016) onwards, with certain exceptions such as holding up to ten notes after the grace period, holding for study or research, or holding by the Reserve Bank or authorized persons.The Tribunal noted that prior to 31.12.2016, there was no prohibition or illegality in holding or transacting in SBNs, even though the legal tender character of these notes was withdrawn effective 09.11.2016. The Government and RBI notifications allowed exchange and deposit of SBNs up to 30.12.2016.Therefore, the Tribunal reasoned that acceptance and deposit of SBNs by the assessee, a proprietor engaged in sale of petroleum products, during the period from 24.11.2016 to 30.12.2016, could not be treated as illegal or unexplained merely because it contravened certain notifications restricting transactions in SBNs.The Tribunal distinguished the present demonetization scheme from the earlier 1978 demonetization, where the High Denomination Bank Notes (Demonetization) Act, 1978, explicitly prohibited transfer and receipt of demonetized notes from the date of demonetization, thereby rendering such transactions illegal. In contrast, the present scheme did not criminalize holding or transacting in SBNs till the appointed day.2. Burden of Proof and Explanation of Source of Cash DepositsThe Tribunal relied on the decision of the Bombay High Court in Narendra G. Goradia (HUF) vs. CIT, which held that once an assessee satisfactorily proves the source and nature of cash deposits, the Revenue cannot demand detailed proof of acquisition of each denomination of currency notes.In the present case, the assessee explained that the cash deposits in SBNs arose from ordinary business sales of petroleum products during the demonetization period. The Assessing Officer did not dispute the genuineness of the source or allege any unaccounted cash deposits.The Tribunal emphasized that the provisions of sections 69 and 69A of the Act require that for additions to be made on account of unexplained investments or cash deposits, the assessee must fail to satisfactorily explain the source or nature of the deposits. Mere violation of RBI notifications or demonetization guidelines does not automatically render such deposits taxable as unexplained income.3. Applicability of Section 69A r.w.s. 115BBE of the Act to Cash Deposits in SBNsThe Assessing Officer had disallowed cash deposits of Rs. 6,93,000/- made in SBNs during the period 25.11.2016 to 30.12.2016, treating them as unexplained cash deposits under section 69A read with section 115BBE of the Act. The CIT(A) confirmed this addition.The Tribunal observed that since the source of deposits was not disputed and was duly recorded in the books of account, and since the deposits represented proceeds of ordinary business transactions, the addition was not justified.The Tribunal further noted that the CBDT circulars issued for guidance during demonetization emphasized verification of business records, bank accounts, cash receipts, and stock registers before making any addition on account of cash deposits.In the instant case, the assessee's books and sales records supported the explanation of cash deposits, and there was no material to indicate that the deposits were unaccounted or unexplained.4. Effect of Violation of RBI Notifications and Government OrdersThe Revenue argued that the assessee was not authorized to accept SBNs after the notification dated 24.11.2016 and hence the deposits should be treated as unexplained.The Tribunal rejected this contention, holding that violation of RBI notifications or Government orders regarding demonetized currency may attract civil or criminal liability under other laws, but such violation alone does not justify additions under sections 69 or 69A of the Income Tax Act.The Tribunal clarified that the tax provisions require examination of the nature and source of the deposits, and if satisfactorily explained, no addition can be made merely on the ground of contravention of demonetization-related notifications.5. Reliance on PrecedentThe assessee relied on a recent decision of the Tribunal in the case of Tamil Nadu State Marketing Corporation Ltd. v. ACIT, where similar facts were considered, and it was held that acceptance and deposit of SBNs during the demonetization period could not be treated as unexplained income under section 69 or 69A.The Tribunal followed the ratio of that decision, applying it to the facts of the present case and allowing the appeal.Significant holdings:'Once the receipt of SBNs by assessee is not illegal or barred by any legal provisions the receipt of SBNs cannot be put on a different footing for the purpose of Section 68 or Section 69 of the Act from other currency as the source of SBNs are same as the source of other currency.''Merely for the reason that the assessee has accepted specified bank notes in violation of circular/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected.''The mandate of the provisions of Section 69 & 69A of the Act... is that unexplained investments and unexplained money may be deemed to be the income of the assessee only if such money is not recorded in the books of accounts or the explanation offered is not satisfactory.''Violation of RBI notification 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.''When there is no significant change in cash deposits during demonetization period, then merely for the reason that the assessee has accepted specified bank notes in violation of circular/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected.''The source of deposits has not been disputed and has been created out of ordinary business sales which has been credited into books of accounts and profits has also been duly included in the return of income filed in relevant assessment year.'Final determination: The Tribunal set aside the orders of the Assessing Officer and the CIT(A) confirming additions under section 69A of the Act, holding that the cash deposits made by the assessee in SBNs during the demonetization period were not liable to be treated as unexplained cash deposits. The appeal filed by the assessee was allowed accordingly.