ITAT allows appeal deleting Rs. 2,50,000 addition on demonetization cash deposit under Income Tax Act exemption

The ITAT Rajkot allowed the appeal by deleting the addition of Rs. 2,50,000/- made by the AO on cash deposited during the demonetization period. The tribunal held that the amount falls within the exempted slab limit under the Income Tax Act and CBDT Instruction No. 3/2017, which grants a blanket exemption of Rs. 2,50,000/- per person. The decision relied on precedent from ITAT Surat, confirming that such deposits up to the specified limit are not chargeable to tax.

---

---

1. ISSUES PRESENTED and CONSIDERED

• Whether addition of Rs. 2,50,000/- made under section 144 of the Income Tax Act on account of cash deposit during demonetisation period is justified when the cash deposited belongs to a different assessee with a different PAN.
• Whether the addition of Rs. 2,50,000/- falls within the exempted slab limit under the Income Tax Act and CBDT instructions, thereby not chargeable to tax.
• Whether the assessing officer's rejection of the assessee's explanation and addition of cash deposit without adequate verification is sustainable in law.
• Whether the CBDT instructions and relevant judicial precedents provide a blanket exemption for cash deposits up to Rs. 2,50,000/- per person during demonetisation period, and how they apply to the facts of the case.
• Whether the assessing officer's invocation of section 144 and addition on the basis of surmises and conjectures without proper evidence is legally valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Addition of Rs. 2,50,000/- on Account of Cash Deposit Belonging to Another Assessee

- Legal Framework and Precedents: The assessment was framed under section 144 of the Income Tax Act, which allows the assessing officer to make best judgment assessment when the assessee fails to comply with notices or furnish evidence. However, the assessee had submitted written explanations and evidence during assessment proceedings.

- Court's Interpretation and Reasoning: The assessing officer made an addition of Rs. 2,50,000/- on the ground that the cash deposited during demonetisation period was unexplained. The assessee contended that the cash belonged to another entity with a different PAN and thus the addition in his hands was unjustified. The Tribunal noted that addition was made despite the assessee's compliance and submission of explanation.

- Key Evidence and Findings: The assessee submitted that the cash deposited belonged to Shri Bapodara Mokar Krushi Audhyogik, S.S.M.L (different PAN), and the assessing officer failed to rebut this explanation with any concrete evidence.

- Application of Law to Facts: The addition was made without establishing that the cash belonged to the assessee or that the assessee had any unaccounted income. The Tribunal found no justification for making the addition in the hands of the assessee for cash belonging to a different PAN.

- Treatment of Competing Arguments: The Revenue argued that the amount was unaccounted money deposited during demonetisation and hence taxable. The Tribunal rejected this contention due to lack of evidence and proper verification.

- Conclusion: The addition of Rs. 2,50,000/- on account of cash deposit belonging to another assessee was not justified and was liable to be deleted.

Issue 2: Applicability of CBDT Instructions and Exemption Limits on Cash Deposits During Demonetisation

- Legal Framework and Precedents: The Tribunal relied on CBDT Instruction No. 3/2017 dated 21.02.2017 and Press Release dated 18.11.2016 issued under section 119 of the Income Tax Act, which provide guidelines for verification of cash deposits during demonetisation. These instructions grant a blanket exemption of Rs. 2,50,000/- per person (Rs. 5,00,000/- for taxpayers above 70 years) for cash deposits made during demonetisation period.

- Court's Interpretation and Reasoning: The Tribunal emphasized that the CBDT instructions are binding on the Revenue and provide a clear exemption threshold. The instructions specify that amounts up to Rs. 2,50,000/- per person require no further verification, and only amounts above this limit may be scrutinized.

- Key Evidence and Findings: The assessee's submissions and evidence showed that the cash deposit was within the exempted limit and/or was explained as household savings or past income. The Tribunal also noted that the assessee and his wife jointly used the same bank account, entitling them to a combined exemption of Rs. 5,00,000/-.

- Application of Law to Facts: The Tribunal applied the CBDT instructions to the facts, holding that the addition of Rs. 2,50,000/- was within the exempted slab and hence not taxable. The assessee's explanation that the cash belonged to another entity and/or was household savings was accepted.

- Treatment of Competing Arguments: The Revenue's argument that the amount was unaccounted money was rejected due to the binding nature of CBDT instructions and lack of contrary evidence.

- Conclusion: The addition of Rs. 2,50,000/- was within the exempted slab limit under CBDT instructions and was not chargeable to tax; hence, the addition was deleted.

Issue 3: Legality and Reasonableness of Addition Made Under Section 144 Without Adequate Verification

- Legal Framework and Precedents: Section 144 allows best judgment assessment but requires that the assessing officer form a reasonable opinion based on evidence. The Apex Court has held that the AO's powers under section 68 (and by analogy section 144) are not unfettered and cannot be exercised based on surmises or conjectures.

- Court's Interpretation and Reasoning: The Tribunal observed that the assessing officer rejected the assessee's explanations and evidence without adequate reason or rebuttal. The AO merely observed that cash withdrawals were for household expenses but did not challenge the genuineness or sufficiency of such expenses.

- Key Evidence and Findings: The assessee filed financial statements, returns of income for nine years, bank statements, cash books, and cash flow statements to show sufficient cash balance to justify deposits. The AO did not produce any contradictory evidence.

- Application of Law to Facts: The Tribunal found that the AO acted unreasonably and capriciously by making additions without proper verification or evidence. The Tribunal relied on precedent holding that additions made solely on surmises and conjectures are unsustainable.

- Treatment of Competing Arguments: The Revenue's reliance on demonetisation period as justification for addition was rejected as insufficient without proper evidence.

- Conclusion: The addition made under section 144 without adequate verification and on surmises was illegal and liable to be quashed.

Issue 4: Application of Judicial Precedents on Cash Deposits During Demonetisation

- Legal Framework and Precedents: The Tribunal relied on a coordinate bench decision which held that genuine cash deposits during demonetisation up to Rs. 2,50,000/- per person are exempted and that the AO cannot reject genuine explanations without sufficient evidence. The decision emphasized the binding nature of CBDT instructions and the requirement of reasonableness in AO's satisfaction.

- Court's Interpretation and Reasoning: The Tribunal adopted the reasoning that demonetisation was a compulsion event and cash deposits made in compliance with government instructions should not be treated as unexplained income. It also noted that the AO must consider past income, filing of returns, and cash withdrawals to verify deposits.

- Key Evidence and Findings: The assessee satisfied all criteria including regular filing of returns, showing cash withdrawals exceeding deposits, and furnishing detailed accounts.

- Application of Law to Facts: The Tribunal applied the precedent to hold that the addition was not sustainable and should be deleted.

- Treatment of Competing Arguments: The Revenue's attempt to treat deposits as unaccounted income was rejected in light of the precedent and instructions.

- Conclusion: The precedent supports deletion of addition for cash deposits up to exemption limit when adequately explained.

Issue 5: Treatment of Cash Deposits Made by Assessee and His Wife in Joint Bank Account

- Legal Framework and Precedents: CBDT instructions provide exemption limits per person and recognize that deposits made by spouses in a joint account can be aggregated for exemption purposes.

- Court's Interpretation and Reasoning: The Tribunal noted that the assessee and his wife jointly used the bank account, with the wife having no other savings account. The wife's deposits included savings, gifts, and estreedhan, which are legitimate sources.

- Key Evidence and Findings: The bank passbook showed the wife as nominee and evidence was submitted regarding the nature of deposits.

- Application of Law to Facts: The Tribunal allowed a combined exemption of Rs. 5,00,000/- (Rs. 2,50,000/- each) for the joint deposits.

- Treatment of Competing Arguments: The Revenue did not provide evidence to dispute the wife's deposits or the joint nature of the account.

- Conclusion: The assessee was entitled to a combined exemption of Rs. 5,00,000/- for cash deposits made in the joint account by him and his wife.

---