Rs.2 lakh cash deposit from relative converted to FDR covered by CBDT SOP Instruction No.03/2017; addition deleted

ITAT held that cash deposit of Rs.2 lakh by a student, received from a relative and converted into an FDR, fell within the CBDT SOP (Instruction No.03/2017) exempting individuals without business income from further verification for deposits up to Rs.2.5 lakh; the AO's addition (confirmed by CIT-A) under the Operation Clean Money exercise exceeded the authorised scope and contradicted the CBDT instruction. The addition was deleted and the assessee's appeal was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a cash deposit of Rs. 2,00,000 made by an individual (non-business, student) during the demonetisation period can be subjected to addition as unexplained investment under section 69 of the Income-tax Act where the total cash deposit is below Rs. 2,50,000 specified in CBDT Instruction No. 03/2017 (Operation Clean Money SOP)?

2. Whether issuance of notices and framing of assessment under section 144 of the Act in respect of such cash deposits is permissible when the cash deposit threshold in the CBDT SOP is not exceeded?

3. Whether adherence to the Central Board of Direct Taxes' Standard Operating Procedure (Instruction No. 03/2017) is mandatory in the facts of the case and, if so, whether departure from that instruction vitiates the addition?

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Legality of addition under section 69 for cash deposit below Rs. 2,50,000

Legal framework: Section 69 treats unexplained investments as income of the assessee if the assessee is unable to satisfactorily account for such investments. CBDT Instruction No. 03/2017 (Operation Clean Money SOP), dated 21/2/2017, provides administrative guidance that for individuals not having business income, no further verification is required if total cash deposit is up to Rs. 2,50,000.

Precedent treatment: The Tribunal noted reliance placed by the assessee on a coordinate bench decision (ITA No. 953/Bang/2024 dated 20/6/2024), which was invoked in support of the proposition that additions are not maintainable where the CBDT threshold is not exceeded. The Court treated that coordinate bench decision as relevant and consistent with the CBDT instruction.

Interpretation and reasoning: The Court examined the undisputed facts - individual assessee (student), cash deposit of Rs. 2,00,000 received as a gift from grandmother, conversion into a fixed deposit, and absence of business income. Applying the CBDT SOP Annexure, the Tribunal held that where total cash deposit by a non-business individual is less than Rs. 2,50,000, no further verification is required and initiation of assessment proceedings on such deposits is beyond the scope of Operation Clean Money. The Tribunal recognized the administrative instruction as setting a clear threshold limiting scrutiny and keyed its reasoning to the plain application of that administrative direction to the facts.

Ratio vs. Obiter: Ratio - The Court's decision that additions under section 69 cannot be sustained where a non-business individual's total cash deposits during the relevant period are below Rs. 2,50,000 as per CBDT Instruction No. 03/2017 and that such deposits are not liable to be treated as unexplained investments without further verification.

Conclusions: Addition of Rs. 2,00,000 as unexplained investment was deleted because the deposit fell below the Rs. 2,50,000 threshold in the CBDT SOP applicable to non-business individuals; therefore, the addition was contrary to the instruction and not maintainable.

Issue 2 - Validity of notices and assessment under section 144 given the CBDT SOP threshold

Legal framework: Section 144 empowers the assessing officer to make best judgment assessment where the assessee fails to comply with statutory notices. CBDT Instruction No. 03/2017 provides operation-level constraints on carrying out assessments arising from demonetisation-related cash deposits for certain categories and thresholds.

Precedent treatment: The Tribunal referenced the lower authorities' reliance on the assessing officer's adherence to the SOP but found that the lower authorities erroneously treated the SOP as permitting the assessment rather than constraining it when the threshold was not crossed.

Interpretation and reasoning: The Court held that issuance of notices and framing of assessment under section 144 in respect of deposits below the Rs. 2,50,000 threshold was beyond the intended scope of the Operation Clean Money exercise. Where the procedural prerequisite (threshold exemption for individuals without business income) is met, further verification and consequent coercive assessment measures are not warranted. The Court emphasized that the AO proceeded without a response from the assessee to notices, but the lack of response did not permit bypassing the administrative exemption spelled out in the CBDT instruction.

Ratio vs. Obiter: Ratio - Notices and consequential assessment in relation to cash deposits falling under the CBDT-specified exemption are impermissible for the purposes of Operation Clean Money and cannot validate additions under section 69 in such cases.

Conclusions: Notices and assessment proceedings under section 144 were not sustainable in respect of the Rs. 2,00,000 deposit because the CBDT SOP categorically limited scrutiny for such deposits; hence the assessment was beyond the permissible scope and the addition was invalid.

Issue 3 - Mandatory effect of CBDT Instruction No. 03/2017 and consequence of departure

Legal framework: CBDT instructions and SOPs govern administrative processing of assessments in specific operational contexts (here, demonetisation/Operation Clean Money). While not a substantive statutory provision, such instructions direct the manner of enforcement and selection/verification thresholds.

Precedent treatment: The Tribunal accepted the Instruction as operative guidance for the AO's conduct during the demonetisation exercise and treated compliance with the Instruction as determinative of the limits of permissible inquiry in cases falling within its scope.

Interpretation and reasoning: The Court treated Instruction No. 03/2017 as prescribing a clear threshold and procedure: for individuals without business income, cash deposits up to Rs. 2,50,000 do not warrant further verification. The assessing officer's departure from that Instruction by issuing show-cause notice and making additions was found to be contrary to the prescribed procedure. The Court reasoned that administrative instructions, when setting out scope and limits of a special compliance drive, must be followed and that failure to do so renders resultant assessments unsustainable.

Ratio vs. Obiter: Ratio - Where a CBDT instruction plainly exempts a class of deposits from further verification, AOs must comply and any addition made contrary to that instruction is liable to be set aside.

Conclusions: The CBDT SOP was held to be binding for the conduct of Operation Clean Money checks; departure by the AO led to an invalid assessment and required deletion of the addition.

Cross-references

Refer to Issue 1 for the outcome on the substantive addition under section 69 and to Issue 2 and Issue 3 for the related procedural infirmities (issuance of notices/section 144 assessment and non-compliance with CBDT Instruction No. 03/2017) which collectively supported deletion of the addition.

Disposition

On application of the CBDT Instruction No. 03/2017 to the undisputed facts (individual, non-business, cash deposit Rs. 2,00,000 received as gift), the addition under section 69 and the assessment framed under section 144 were set aside; the appeal was allowed.

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