2025 (2) TMI 1194 - AT - Income Tax

Unexplained money u/s. 69 - specified bank notes during demonetization period deposited to bank account - HELD THAT -When the sales has been reflected in the books of accounts and offered to tax adding the same again would amount to double taxation which is impermissible in law. The cash sales / collections made from debtors/retailers by the assessee have been credited in the books of accounts and the same form part of the assessee s cash book. On these facts it could be very well said that the assessee s claim was backed up by relevant evidences. Thus the assessee has discharged the burden of proving the source of the cash/SBN deposited in the bank and the AO failed to rebut the same. The allegations/statistics relied upon by AO to take an adverse view is not backed up by relevant evidence/material and therefore the impugned action of authorities below cannot be countenanced. Moreover since cash generated out of sales / collection from debtors/retailers has been recorded in the books of accounts the provisions of section 68 could not be invoked in the present case. Objection on legal tender of Specified Bank Notes on or after 08.11.2016 we find that as per the Specified Bank Notes (Cessation of Liabilities) Ordinance 2016 which came into effect from 31.12.2016 appointed date for this purpose means 31.12.2016. Further as per Section 5 of said Ordinance from the appointed date no person shall knowingly or voluntarily hold or transfer or receive any Specified Bank Notes. From the above what is clear is that up to the appointed date i.e. 31.12.2016 there is no prohibition for dealing with Specified Bank Notes. Therefore in our considered view the objection of the Ld.CIT (A) and that of AO on this issue in light of said Act is devoid of merits. For violation of any RBI notification etc. can have any civil or criminal liability and can be dealt with under any other provision of law by the concerned authority but for the purpose of bringing the amount under Income-tax the provisions are very clear i.e. 69 69A of the Act. In our considered view to bring any amount u/s. 69 or 69A of the Act the nature and source of investment needs to be examined. In case the assessee explains the nature and source of investment then the question of making addition towards unexplained investment u/s. 69 of the Act does not arise. In this case 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. Therefore we are of the considered view that additions cannot be made u/s. 69 of the Act and taxed u/s. 115BBE of the Act towards cash deposits made to bank account of demonetized cash in SBNs and hence set aside the order of the Ld.CIT (A) and allow the grounds of appeal of the assessee.

Summary

Issues presented and considered:

1. Whether the addition of Rs. 32,26,000/- made by the Assessing Officer under section 69 of the Income Tax Act, 1961 (the Act), representing cash deposits in specified bank notes (SBNs) during the demonetization period, is justified given the assessee's explanation and documentary evidence.

2. Whether the specified bank notes were valid legal tender during the period from 9th November 2016 to 31st December 2016, and the consequent impact on the treatment of cash deposits made in SBNs during this period.

3. Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) erred in disregarding the assessee's compliance with procedural requirements and the detailed submissions including sales details, party ledgers, bank statements, and cash deposit particulars.

4. Whether the burden of proof shifted to the Revenue to disprove the genuineness of the cash deposits after the assessee furnished detailed evidence of the source of funds.

Issue-wise detailed analysis:

Issue 1: Justification of addition under section 69 of the Act for cash deposits in SBNs during demonetization period

Legal framework and precedents: Section 69 of the Act deals with unexplained cash credits, permitting addition to income where the assessee fails to satisfactorily explain the nature and source of such credits. Section 115BBE provides for taxation of unexplained income at a special rate. The CBDT issued circulars guiding verification of cash deposits during demonetization, emphasizing analysis of bank accounts, cash receipts, and stock registers.

Court's interpretation and reasoning: The Tribunal noted that the assessee maintained proper books of accounts, subjected to audit under section 44AB, which were accepted by the Assessing Officer without rejection or pointing out defects. The cash sales and collections were recorded in the books and reflected in turnover, with the assessee furnishing detailed sales registers, party ledgers, bank statements, and customer PAN details. The Tribunal emphasized that adding the same cash receipts again as unexplained income would amount to double taxation, which is impermissible.

Key evidence and findings: The assessee demonstrated a cash balance of Rs. 3,26,337/- as on 9th November 2016 and explained the source of the additional Rs. 32,26,000/- deposited in SBNs as receipts from regular customers. The submissions included detailed transactional data and corroborative documents. The Assessing Officer did not dispute the genuineness of the business or the books of accounts.

Application of law to facts: Since the cash deposits were reflected in the books of accounts and formed part of the declared income, the addition under section 69 was unwarranted. The burden to disprove the source of cash deposits was not discharged by the Revenue, and statistical or circumstantial suspicion was insufficient to override the documentary evidence.

Treatment of competing arguments: The Revenue relied on the discrepancy between cash balance and deposits during demonetization and invoked section 69 and 115BBE. The Tribunal rejected this, holding that mere acceptance of SBNs during the demonetization period does not render the deposits unexplained income if adequately explained and recorded.

Conclusion: The addition of Rs. 32,26,000/- under section 69 was not justified and was set aside.

Issue 2: Validity of specified bank notes as legal tender during 9th November to 31st December 2016

Legal framework and precedents: The Specified Bank Notes (Cessation of Liabilities) Act, 2017, enacted pursuant to demonetization, defines the "appointed day" as 31st December 2016. Section 5 prohibits holding, transferring, or receiving SBNs only on and from the appointed day. Section 3 clarifies that the SBNs cease to be liabilities of the Reserve Bank and lose Central Government guarantee from the appointed day.

Court's interpretation and reasoning: The Tribunal held that the use of SBNs was lawful and permitted up to 31st December 2016, and the legislative intent was not to prohibit transactions in SBNs during the interim period from 9th November to 31st December 2016. The Tribunal relied on precedents where similar issues were adjudicated in favour of the assessee, affirming that SBNs retained legal tender status until the appointed day.

Key evidence and findings: The statutory provisions of the Specified Bank Notes (Cessation of Liabilities) Act, 2017, and the Government of India notifications were pivotal. The Tribunal also referred to decisions of other benches of the Tribunal supporting this interpretation.

Application of law to facts: Since the deposits were made within the period when SBNs were valid legal tender, the deposits in SBNs could not be treated as illegal or unexplained merely on that basis.

Treatment of competing arguments: The Revenue argued that the SBNs were no longer valid tender during the demonetization period, justifying additions. The Tribunal rejected this argument as contrary to statutory provisions.

Conclusion: The SBNs were valid legal tender until 31st December 2016, and deposits made in that period could not be disallowed on the ground of invalidity of currency.

Issue 3: Compliance with procedural requirements and adequacy of evidence furnished by the assessee

Legal framework and precedents: The CBDT's instructions for scrutiny of demonetization-related cases require detailed analysis of sales, collections, and cash deposits, including verification of party details and bank statements. The burden of proof lies initially with the assessee to explain cash deposits, but once explained with credible evidence, the burden shifts to the Revenue to disprove.

Court's interpretation and reasoning: The Tribunal found that the assessee complied fully with the procedural requirements by submitting sales transaction details, party ledgers, bank statements, cash deposit particulars, and customer PANs and addresses. The Tribunal noted that the Assessing Officer failed to point out any defect or falsity in the documents submitted, nor did the Revenue discharge its burden to prove the cash deposits as unexplained.

Key evidence and findings: The submissions of the assessee included detailed month-wise turnover analysis, cash collections, and bank deposits, showing consistency and correlation between collections and deposits. The Tribunal also noted acceptance of books of accounts and audit reports by the Assessing Officer.

Application of law to facts: Given the comprehensive evidence, the Assessing Officer's addition was not sustainable. The Tribunal emphasized the principle that unexplained cash credits require the Revenue to disprove the explanation satisfactorily once the assessee discharges its initial burden.

Treatment of competing arguments: The Revenue relied on statistical suspicion and procedural circulars to justify addition, but the Tribunal held that suspicion alone cannot override credible documentary evidence.

Conclusion: The assessee complied with all procedural requirements and discharged the burden of proof; hence, the additions were unwarranted.

Issue 4: Burden of proof and evidentiary standard for additions under sections 69 and 69A

Legal framework and precedents: The provisions of sections 69 and 69A require that unexplained investments or money be added to income only if the assessee fails to satisfactorily explain the source. The CBDT circulars and judicial precedents clarify that mere violation of RBI notifications or demonetization guidelines may attract civil or criminal liability but do not ipso facto justify additions under the Income Tax Act.

Court's interpretation and reasoning: The Tribunal underscored that the provisions of sections 69 and 69A are triggered only when the source is not explained or the explanation is unsatisfactory. The Tribunal reiterated that the assessee's explanation was supported by books of accounts and corroborative evidence, and the Revenue failed to rebut the same.

Key evidence and findings: The Tribunal relied on the absence of any rejection of books of accounts or identification of defects by the Assessing Officer, and the acceptance of audit reports and tax audit compliance.

Application of law to facts: The Tribunal applied the legal standard strictly, holding that since the source was satisfactorily explained and recorded, the additions under sections 69 and 69A were not sustainable.

Treatment of competing arguments: The Revenue's reliance on procedural violations and statistical data was held insufficient to override the evidentiary standard required for additions.

Conclusion: The burden of proof lies with the Revenue once the assessee furnishes credible explanation; additions under sections 69 and 69A are not justified in this case.

Significant holdings:

"When the sales has been reflected in the books of accounts and offered to tax, adding the same again would amount to double taxation, which is impermissible in law."

"The cash sales / collections made from debtors/retailers by the assessee have been credited in the books of accounts and the same form part of the assessee's cash book. On these facts, it could be very well said that the assessee's claim was backed up by relevant evidences."

"Up to the appointed date i.e. 31.12.2016, there is no prohibition for dealing with Specified Bank Notes. Therefore, in our considered view, the objection of the Ld.CIT (A) and that of AO on this issue in light of said Act is devoid of merits."

"Simplistic violation of certain notification issued by RBI or demonetization scheme announced by Government of India on 08.11.2016 will not entitle the Revenue to make addition u/s. 69 or 69A of the Act."

"The provisions of Section 69 & 69A of the Act... may be deemed to be the income of the assessee... if such money... are not recorded in the books of accounts... and the assessee offers no explanation... or the explanation offered... is not satisfactory."

"In this case, 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 determinations:

1. The addition of Rs. 32,26,000/- under section 69 of the Act as unexplained cash credit was set aside.

2. The specified bank notes were valid legal tender until 31st December 2016, and deposits made during the demonetization period in SBNs could not be disallowed on the ground of invalidity of currency.

3. The assessee complied with all procedural requirements and discharged the burden of proof by furnishing detailed evidence regarding cash deposits.

4. The Revenue failed to rebut the assessee's explanation and evidence; therefore, the additions under sections 69 and 69A were not sustainable.

5. The appeal filed by the assessee was allowed, and the orders of the lower authorities confirming the addition were set aside.