2025 (6) TMI 1700 - AT - Income Tax

Addition u/s 69A - Unexplained source of cash deposited in the bank accounts - only reason for making the addition given by the AO is that the assessee should not have accepted the SBNs after 08/11/2016 being not legal tenders - HELD THAT - We are of the considered view that after assuming that it was not a legal tender for the assessee then the same was also not legal tender for the banks but the banks have accepted the deposit. Therefore we do not find any merit in the accusation of the AO. Though the decision of Raju Ravichandran 2023 (6) TMI 1448 - ITAT CHENNAI is in favour of the revenue but the same author sitting in Division Bench in the case of Tamil Nadu State Marketing Corporation Ltd. 2024 (10) TMI 1614 - ITAT CHENNAI has decided the impugned issue in favour of the assessee as held 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 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. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal pertain to:

1. Whether the addition of Rs. 44,61,000/- as unexplained receipts/investment/asset under section 69A of the Income Tax Act is justified, given the assessee's explanation regarding the source of cash deposits in demonetized Specified Bank Notes (SBNs).

2. Whether the acceptance and deposit of demonetized currency (SBNs) by the assessee after 08/11/2016, when such notes ceased to be legal tender, can be treated as unexplained income under the Act.

3. Whether the impugned order passed without providing personal hearing to the assessee violates principles of natural justice.

Issue-wise Detailed Analysis:

1. Legitimacy of Addition under Section 69A for Cash Deposits in Demonetized Currency

Legal Framework and Precedents: Section 69A of the Income Tax Act deals with unexplained investments, allowing the Assessing Officer (AO) to deem such unexplained investments as income of the assessee. The burden lies on the assessee to satisfactorily explain the source of such investments. Precedents such as the Division Bench decision in Tamil Nadu State Marketing Corporation Ltd. vs. ACIT have emphasized that if the assessee satisfactorily proves the source and nature of the amounts, additions under these sections are unwarranted. The Supreme Court decision in A. Govindarajulu Mudaliar v. CIT was distinguished on facts, as it dealt with failure to prove the source, unlike the present case.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee furnished detailed particulars of the debtors from whom the cash was realized during the demonetization period. These details were acknowledged by the AO in the assessment order. The assessee's books of account were audited and reflected these transactions. The AO's sole reason for addition was that the assessee could not legally accept SBNs post 08/11/2016. However, the Tribunal reasoned that if the notes were not legal tender for the assessee, they were similarly not legal tender for banks, yet banks accepted the deposits. This undermined the AO's premise for addition.

Key Evidence and Findings: The assessee's detailed list of debtors, audited books of accounts, and documentary evidence were accepted by the AO initially. The Tribunal also considered the government notifications and RBI circulars regarding demonetization, noting that possession of SBNs was not illegal until 31/12/2016, and that the cessation of liability by RBI only took effect from that date. The assessee's cash deposits were consistent with its business sales, and there was no significant unexplained increase in cash deposits during the demonetization period.

Application of Law to Facts: The Tribunal applied the principle that violation of RBI notifications or government orders regarding demonetized currency does not ipso facto translate into unexplained income under Sections 69 or 69A. The provisions require that the source and nature of the investment or cash be unexplained or unsatisfactory. Since the assessee explained the source, and the amounts were reflected in books and returns, the addition was not justified.

Treatment of Competing Arguments: The Revenue relied on an SMC Bench decision favoring addition, but the Tribunal preferred the subsequent Division Bench ruling which was more favorable to the assessee and aligned with the statutory scheme. The Revenue's argument that the assessee was not eligible to accept SBNs was addressed by the Tribunal's analysis of the legal tender status and the government's notifications, concluding that the mere acceptance of SBNs during the permissible period could not be penalized under income tax provisions.

Conclusion: The addition under Section 69A was deleted as the assessee satisfactorily explained the source of the cash deposits and the acceptance of SBNs was not illegal or barred for the purpose of income tax.

2. Legal Tender Status of Specified Bank Notes and Its Impact on Taxability

Legal Framework and Precedents: The Specified Bank Notes (Cessation of Liabilities) Ordinance 2016 and subsequent Act, along with Ministry of Finance notifications, declared that SBNs ceased to be legal tender from 09/11/2016. However, possession and exchange of SBNs were permitted until 31/12/2016. The CBDT circulars provided guidelines for verification of cash deposits during demonetization.

Court's Interpretation and Reasoning: The Tribunal observed that although SBNs ceased to be legal tender from 09/11/2016, possession and transactions in SBNs were not illegal until 31/12/2016. The cessation of RBI's liability to honor SBNs was effective only from 31/12/2016. Therefore, transactions involving SBNs between 09/11/2016 and 31/12/2016 were not prohibited by law. The Tribunal further reasoned that if both parties agree to a transaction involving SBNs, it cannot be deemed illegal merely because the notes were not legal tender.

Key Evidence and Findings: The Tribunal reviewed the government notifications, RBI circulars, and CBDT instructions. It found no requirement for persons to disclose the source of SBNs during the demonetization period. The assessee's deposits were consistent with business sales, and the Revenue failed to prove any substitution of unaccounted money with demonetized currency.

Application of Law to Facts: The Tribunal applied the principle that non-legal tender status does not equate to illegality of possession or transaction during the specified period. Consequently, the acceptance of SBNs by the assessee was lawful, and the source of such currency could not be treated as unexplained income.

Treatment of Competing Arguments: The Revenue's argument that the assessee was not an eligible person to accept SBNs was rejected on the basis that the law did not prohibit such transactions before 31/12/2016. The Tribunal distinguished the civil or criminal consequences of violating RBI notifications from the tax consequences under the Income Tax Act.

Conclusion: The Tribunal concluded that the non-legal tender status of SBNs post 08/11/2016 does not justify treating the acceptance and deposit of such currency as unexplained income under the Income Tax Act.

3. Alleged Violation of Principles of Natural Justice by Passing Order Without Personal Hearing

The assessee contended that the impugned order was passed without affording a personal hearing, thereby violating natural justice. The Tribunal noted the issue but did not find any merit in this contention as the appeal was heard with due opportunity given to the parties. The records indicate that representatives were heard at length, and the Tribunal considered all documentary evidence and submissions before passing the order. Hence, no violation of natural justice was found.

Significant Holdings:

"Though the decision of the SMC Bench of ITAT Chennai is in favour of the Revenue, the same author sitting in Division Bench in the case of TamilNadu State Marketing Corporation Ltd. vs. ACIT has decided the impugned issue in favour of the assessee."

"The Government of India and RBI has issued various notifications and SOP to deal with specified bank notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes up to 31.12.2016. ... Therefore, there is no clarity on how to deal with demonetized currency from the date of demonetization and up to 31.12.2016. ... Therefore, merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with specified bank notes, the genuine explanation offered by the assessee towards source for cash deposit cannot be rejected."

"Simplifier 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 mandate of the provisions of Section 69 & 69A of the Act ... is that unexplained investments or money may be deemed to be income of the assessee if such money is not recorded in the books of accounts and the explanation offered is not satisfactory. Violation of any RBI notification can have civil or criminal liability but for the purpose of bringing the amount under Income-tax, the provisions are very clear."

"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."

"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."

The Tribunal ultimately allowed the assessee's appeal, directing the AO to delete the addition made under section 69A, as the assessee satisfactorily explained the source of cash deposits and the acceptance of demonetized currency did not constitute unexplained income under the Income Tax Act.