2025 (8) TMI 694 - HC - Income Tax

Section 69A addition of Rs. 7.5 lakh set aside for lack of proper verification per CBDT Circular SOP

Sunita Sherwani Versus The Income Tax Officer – 4 (1), Raipur, Chhattisgarh.

Sunita Sherwani Versus The Income Tax Officer – 4 (1), Raipur, Chhattisgarh. - 2025:CGHC:39403 - DB 1. ISSUES PRESENTED and CONSIDERED Whether the Income Tax Appellate Tribunal (ITAT) was justified in sustaining an addition of Rs. 7,50,000 under Section 69A of the Income Tax Act, 1961, treating the amount as unexplained money despite the appellant/assessee's submission of bank statements and income tax returns for multiple years. Whether the Standard Operating Procedure (SOP) prescribed in the CBDT Circular No. 3/2017 dated 21/02/2017, specifically Clauses 1.1 and 1.3 relating to Source Specific General Verification Guidelines for cash deposits, was properly followed by the Assessing Officer and the ITAT. Whether the failure to conduct verification as per the CBDT Circular renders the addition under Section 69A unsustainable and liable to be set aside. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification of addition under Section 69A of the Income Tax Act for unexplained cash deposits Relevant legal framework and precedents: Section 69A of the Income Tax Act permits the Assessing Officer to treat any sum found credited in the books of an assessee for which no satisfactory explanation is offered as income of the assessee. The burden lies on the assessee to explain the source and nature of the cash deposits. Court's interpretation and reasoning: The Assessing Officer observed cash deposits of Rs. 11,00,000 during the demonetization period and found the explanation offered by the assessee unsatisfactory. Consequently, the entire amount was added as unexplained money under Section 69A. This addition was affirmed by the Commissioner of Income Tax (Appeals) and partly sustained by the ITAT, which reduced the addition by Rs. 3,50,000 based on CBDT Instruction No. 3/2017. Key evidence and findings: The appellant/assessee had deposited Rs. 11,00,000 in cash during the demonetization period. Bank account statements for three financial years and income tax returns for six financial years were submitted by the assessee to explain the source of the deposits. Application of law to facts: While the Assessing Officer and CIT(A) did not accept the explanation and added the entire amount, the ITAT recognized the applicability of the CBDT Circular and allowed a partial deduction of Rs. 3,50,000, treating it as cash in hand at the relevant time. Treatment of competing arguments: The appellant contended that the addition was unjustified as the source was explained by documentary evidence and the SOP under the CBDT Circular was not followed. The Revenue supported the addition on the ground of inadequate explanation. Conclusions: The addition under Section 69A cannot be sustained without following the prescribed verification procedure as per the CBDT Circular. The partial allowance by the ITAT was a recognition of this principle but insufficient without full compliance with the SOP. Issue 2: Compliance with CBDT Circular No. 3/2017 (Clauses 1.1 and 1.3) regarding verification of cash deposits Relevant legal framework and precedents: The CBDT Circular No. 3/2017 dated 21/02/2017 provides Source Specific General Verification Guidelines for unexplained cash deposits during demonetization. Clause 1.1 exempts verification for cash deposits up to Rs. 2.5 lakh for individuals without business income (Rs. 5 lakh for senior citizens). Clause 1.3 mandates detailed verification if deposits exceed these thresholds, including consideration of bank statements, past income, returns filed, and cash withdrawals before quantifying undisclosed amounts. Court's interpretation and reasoning: The Court noted that the appellant/assessee had submitted bank statements for three years and income tax returns for six years, which were not considered by the Assessing Officer or CIT(A). The ITAT partially allowed the appeal relying on the Circular but did not ensure full compliance with Clauses 1.1 and 1.3. Key evidence and findings: The appellant's submission of detailed bank statements and income tax returns was a crucial factor under the Circular's guidelines. The authorities failed to conduct the requisite verification as mandated. Application of law to facts: The failure to verify the source of cash deposits in accordance with the Circular's SOP meant that the addition of Rs. 7,50,000 as unexplained money was premature and legally unsustainable. Treatment of competing arguments: The appellant argued for remand to allow proper verification as per the Circular. The Revenue opposed setting aside the addition. The Court emphasized adherence to the Circular's verification process as mandatory. Conclusions: Non-compliance with the CBDT Circular's verification procedure invalidates the addition under Section 69A. The matter requires remand to the Assessing Officer for verification and fresh adjudication in line with Clauses 1.1 and 1.3 of the Circular. Issue 3: Effect of non-compliance with SOP on the validity of additions under Section 69A Relevant legal framework and precedents: The CBDT Circular is binding on income tax authorities and prescribes a mandatory procedure for verifying cash deposits during demonetization. Non-compliance may render the assessment order unsustainable. Court's interpretation and reasoning: The Court held that since the SOP was not followed, the addition of Rs. 7,50,000 was bad in law. The impugned orders by the ITAT, CIT(A), and Assessing Officer were set aside to the extent of the addition, and the matter was remitted for fresh verification. Key evidence and findings: The absence of verification under the Circular despite submission of relevant documents by the assessee was a critical defect. Application of law to facts: The addition was quashed not on merits but due to procedural lapses in verification, requiring reassessment. Treatment of competing arguments: The Revenue's insistence on sustaining the addition despite procedural non-compliance was rejected. Conclusions: Additions under Section 69A must comply with the CBDT Circular's SOP. Non-compliance mandates setting aside the addition and remand for fresh verification.