2025 (9) TMI 305 - HC - Income Tax

No unexplained income under s.69A where demonetisation cash traced to disclosed bank withdrawals repaid and declared in return

Nanakchand Agrawal Versus The Income-tax Officer, Harna.

Nanakchand Agrawal Versus The Income-tax Officer, Harna. - 2025:CGHC:43944 - DB ISSUES PRESENTED AND CONSIDERED 1. Whether cash shown as closing cash-in-hand in the balance-sheet of a preceding financial year and carried as opening balance in the succeeding financial year can be treated as 'unexplained money' under Section 69A of the Income Tax Act in the succeeding year and taxed under Section 115BBE of the Income Tax Act. 2. Whether the Assessing Officer may invoke the deeming fiction of Section 69A in a subsequent assessment year when the assessee has declared the cash balance in an earlier year's return and the earlier return was processed/accepted under Section 143(1) without issue of mandatory scrutiny notice under Section 143(2) within stipulated time. 3. The extent of the burden on the assessee to prove nature and source of cash (availability, corroborative evidence, cash flow/recovery details) and the limits on the Assessing Officer's power to make additions based on conjecture, suspicion or surmise. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 69A to cash carried forward from preceding year Legal framework: Section 69A is a deeming provision: 'Where in any financial year the assessee is found to be the owner of any money ... and such money ... is not recorded in the books of account ... and the assessee offers no explanation about the nature and source ... or the explanation is not, in the opinion of the Assessing Officer, satisfactory, the money ... may be deemed to be the income of the assessee for such financial year.' Section 115BBE prescribes special rates for unexplained income. Precedent treatment: The Court relied upon the Supreme Court exposition in D.N. Singh which breaks down the essential parts of Section 69A and emphasizes that the money must be 'found to be the owner' in the financial year in question and that a satisfactory explanation negates the deeming fiction. Interpretation and reasoning: The Court held that Section 69A can operate only in the financial year in which the assessee is found to be owner of the money. If the assessee has declared the cash as closing balance in the earlier financial year and offered a plausible explanation tracing the deposit to that earlier year's cash-in-hand (including liquidation/refund of short-term loans and advances), the correctness of that explanation and invocation of the deeming fiction ought to have been examined in that earlier year. The Assessing Officer cannot, by invoking Section 69A in a later assessment year, tax an amount that pertains to ownership findings demonstrably referable to the preceding financial year. Ratio vs. Obiter: Ratio - Section 69A applies to the financial year in which the assessee is found to be owner; where ownership and recorded balance were before the Department in the preceding year, invocation in a subsequent year is impermissible. Obiter - contextual observations on demonetization objectives and policy background (cited for context, not essential to the legal holding). Conclusion: The addition under Section 69A/Section 115BBE in the succeeding year was impermissible for amounts that were declared and shown as cash-in-hand in the preceding financial year; such amounts cannot be held as unexplained money in the later year where ownership was demonstrably shown earlier. Issue 2 - Finality of earlier year's return, timing of scrutiny, and AO's power Legal framework: Section 139(4) (time for filing returns), Section 143(1)(a) (processing/acceptance), Section 143(2) (scrutiny notice) and Sections 147/148/149 (reassessment limits) frame when an earlier return attains finality and when reassessment may be initiated. Precedent treatment: The Court examined High Court and Supreme Court authorities (e.g., Chintels India Ltd.; Principal Commissioner v. Abhisar Buildwell Pvt. Ltd.) which hold that a return unselected for scrutiny within the statutory period attains finality but that the Assessing Officer retains statutory reassessment powers (subject to conditions and time-limits) under Sections 147/148/149. Interpretation and reasoning: The Court noted that the assessee filed and declared the cash balance within the outer time-limit and the return was processed under Section 143(1)(a). The Assessing Officer did not issue mandatory scrutiny notice under Section 143(2) within the stipulated time, so the declared figures attained finality in the absence of reassessment proceedings initiated in accordance with statutory requirements. Even though reassessment powers exist, they must be invoked in accordance with the law; here the AO proceeded in the regular assessment for a later year to treat previously declared funds as unexplained rather than addressing the matter in the year to which the declared balance related. Ratio vs. Obiter: Ratio - Where a declared cash balance is filed and processed for an earlier year and no scrutiny notice is issued within the prescribed time, the earlier return attains finality for that year; the AO cannot bypass that finality by invoking Section 69A in a subsequent year without following reassessment provisions. Obiter - remarks on reassessment powers being available subject to fulfillment of statutory conditions. Conclusion: The Assessing Officer should have examined the source and nature of the cash in the relevant preceding financial year or initiated reassessment in accordance with Sections 147/148/149; proceeding to invoke Section 69A in the subsequent year was legally unsound where the earlier return had been processed and attained finality absent proper reassessment steps. Issue 3 - Burden of proof, evidentiary requirement and prohibition against conjectural additions Legal framework: Under Section 69A, the primary onus lies on the assessee to explain nature and source; however, the Assessing Officer cannot make additions on mere conjecture, suspicion or surmise and must base findings on material and evidence (principles from Dhakeswari Cotton Mills and Lalchand Bhagat Ambica Ram). Precedent treatment: The Court applied earlier authorities condemning findings based on speculation and emphasized that entries in books and consistent accountal, if not successfully rebutted, cannot be partially accepted and partially rejected without cogent evidence. Interpretation and reasoning: The Court found that the Assessing Officer discounted the declared closing balance and the assessee's explanation linking deposits during demonetization to prior withdrawals and subsequent repayments without adequate documentary contrary material. The AO's reasons (length of time cash held, lack of lists, differing treatment of interest receipts) did not justify treating a large portion of the declared cash as unexplained when the assessee had produced balance sheets, bank statements and declared the amount in the earlier year's return. The Tribunal's partial acceptance (granting Rs.2.5 lakh relief) did not cure the fundamental infirmity of treating the balance as unexplained absent cogent proof. Ratio vs. Obiter: Ratio - Additions under Section 69A cannot be sustained on conjecture; where the assessee produces credible ledger/balance-sheet entries and plausible explanation for the presence of cash, AO must have material to displace that explanation. Obiter - specific criticisms of the AO/Tribunal's fact-appreciation. Conclusion: The Assessing Officer's addition was based on impermissible conjecture; the assessee had discharged enough of the evidentiary onus to preclude deeming of the declared cash as unexplained in the subsequent year. Overall Conclusion and Disposition The Court answered the substantial question in favour of the assessee and against the Revenue: the impugned addition treating Rs.20,50,000 as unexplained money under Section 69A and taxing it under Section 115BBE in the subsequent assessment year was set aside. The Court held that Section 69A applies to the financial year in which the assessee is found to be owner, that the earlier year's accepted declaration and supporting documents required assessment (or reassessment) in that year, and that the AO cannot, in the absence of cogent contrary evidence or proper reassessment procedure, make additions founded on suspicion or conjecture.