2025 (5) TMI 2050 - AT - Income Tax

Cash deposit during demonetization period - Addition u/s 68 - HELD THAT - We find that the assessee has attempted to prove the entire source of cash deposit during demonetization as cash withdrawals from bank as well as sales due to a government directive requiring sugar mills to liquidate stock by 31.10.2016. Although the assessee prima facie appears to have discharged its onus of explaining source of cash deposit it s contentions to prove the source hardly deserves to be accepted in entirety especially when the AO s notice u/s 133(6) to the Buyers who purchased sugar in cash all but one did not respond. There is some element of failure to explain some of the cash deposit cannot be ruled out. Be that as it may it is deemed appropriate in larger interest of justice that a lump-sum addition of Rs. 5 lakh only would be just and proper with a rider that the same shall not be treated as a precedent so as to cover all loopholes. The ground of appeal no 1 to 2 are partly allowed. Higher rate u/s 115BBE - We find that in the case of S.M.I.L.E. Microfinance Ltd. 2024 (11) TMI 1444 - MADRAS HIGH COURT has held that the impugned statutory provision would come into effect on the transaction done on or after 01.04.2017 only. Accordingly we direct the AO to tax the addition under normal provisions of tax and not under the provisions of 115BBE.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs. 91,77,000/- on account of unexplained cash deposits during the demonetization period, made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961, was justified.

(b) Whether the deletion of the said addition by the Commissioner of Income Tax (Appeals) [CIT(A)] was legally correct, particularly in light of the fact that the parties to whom cash sales were allegedly made did not respond to notices issued under Section 133(6) of the Act during assessment proceedings.

(c) Whether the addition should be taxed under the higher rate provisions of Section 115BBE or under the normal provisions of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Legitimacy of Addition of Rs. 91,77,000/- under Section 68 for Unexplained Cash Deposits During Demonetization Period

Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act deals with unexplained cash credits. When an assessee receives any sum as cash credit, the AO may treat it as income if the assessee fails to satisfactorily explain the nature and source of such credit. Section 133(6) empowers the AO to issue summons to third parties to verify transactions.

Court's Interpretation and Reasoning: The AO observed a sudden spike in cash sales and disproportionate cash deposits in FY 2016-17 compared to the previous year, coinciding with the demonetization period. The AO issued notices under Section 133(6) to eight buyers of sugar for verification; only one responded, and that response contradicted the assessee's claim regarding the quantum of cash sales. Based on this, the AO made an addition of Rs. 91.77 lakhs under Section 68.

The assessee contended that the cash deposits were explained by cash withdrawals from banks and sales pursuant to a Government directive dated 08.09.2016 mandating sugar stock liquidation by 31.10.2016, which was accepted by the CIT(A). The assessee argued that comparing cash sales of FY 2016-17 with FY 2015-16 was flawed since the directive applied only to FY 2016-17. The assessee also pointed out that VAT returns reconciled with financials, stock records were consistent, and there was no adverse remark in the tax audit report. The assessee further submitted that the cash sales formed a minuscule portion of total sales, and the addition would amount to double taxation.

The CIT(A) accepted the assessee's explanation, noting reconciliation of VAT returns and stock records, and set aside the addition. The Revenue challenged this before the Tribunal.

Key Evidence and Findings: The AO's reliance on non-response from buyers under Section 133(6) notices was a significant factor. However, the assessee's submission of government directives, reconciliation of VAT returns, and stock records supported the legitimacy of cash sales and deposits. The contradictory response from one buyer (confirming only Rs. 750/- cash purchase against Rs. 11.58 lakh claimed) weakened the assessee's position.

Application of Law to Facts: The Tribunal acknowledged that while the assessee had prima facie explained the source of cash deposits, the failure of most buyers to respond to Section 133(6) notices and the contradictory response from one buyer raised doubts about the full legitimacy of the deposits. The Tribunal found that the AO's complete disbelief was not fully justified, especially since the comparative cash deposit analysis was not conclusive due to the government directive affecting sales in FY 2016-17 only.

Treatment of Competing Arguments: The Tribunal balanced the assessee's detailed explanation and documentary evidence against the AO's findings based on buyer non-responses and contradictory evidence. It recognized the assessee's explanation but also noted some unexplained elements in the cash deposits.

Conclusions: The Tribunal partly accepted the assessee's contention but found it appropriate in the interest of justice to make a lump-sum addition of Rs. 5 lakhs to cover any unexplained portion of the cash deposits. This addition was directed to be made without creating a precedent for other cases.

Issue (c): Applicability of Higher Tax Rate under Section 115BBE

Relevant Legal Framework and Precedents: Section 115BBE imposes a higher tax rate on income declared or assessed as unexplained cash credits or unexplained investments. However, its applicability is limited to transactions occurring on or after 01.04.2017, as held by the Madras High Court in a relevant writ petition.

Court's Interpretation and Reasoning: The Tribunal relied on the Madras High Court's ruling that Section 115BBE applies only to transactions on or after 01.04.2017. Since the cash deposits pertain to the demonetization period prior to this date, the higher tax rate under Section 115BBE was not applicable.

Application of Law to Facts: The Tribunal directed the AO to tax the addition under normal provisions rather than under Section 115BBE.

Conclusions: The addition of Rs. 5 lakhs shall be taxed under normal provisions of the Income-tax Act and not under Section 115BBE.

3. SIGNIFICANT HOLDINGS

"Although the assessee, prima facie, appears to have discharged its onus of explaining source of cash deposit, it's contentions to prove the source, hardly deserves to be accepted in entirety especially when the AO's notice u/s 133(6) to the Buyers who purchased sugar in cash, all but one, did not respond."

"On the other hand, the Revenue's endeavour to disbelieve the assessee's contention that cash deposits have been made out of cash withdrawals from bank as well as sales due to a government directive, cannot be fully justified on the basis of comparative cash deposits of previous year."

"In this factual matrix, there is some element of failure to explain some of the cash deposit, cannot be ruled out. Be that as it may, it is deemed appropriate, in larger interest of justice, that a lump-sum addition of Rs. 5 lakh only would be just and proper with a rider that the same shall not be treated as a precedent, so as to cover all loopholes."

"The impugned statutory provision [Section 115BBE] would come into effect on the transaction done on or after 01.04.2017 only."

Core principles established include the requirement for the assessee to satisfactorily explain unexplained cash credits under Section 68, the evidentiary value of third-party responses under Section 133(6), and the limited retrospective application of Section 115BBE.

Final determinations:

(i) The addition of Rs. 91.77 lakhs was not fully justified; however, a lump-sum addition of Rs. 5 lakhs is warranted to cover unexplained portions.

(ii) The deletion of the addition by the CIT(A) was partly set aside.

(iii) The addition shall be taxed under normal provisions, not under Section 115BBE.