2024 (9) TMI 1740 - AT - Income Tax

Additions u/s 69A - partners introduced the capital during the demonetization period in SBN which was not a legal tender - HELD THAT - The assessee has no source of income other than Agriculture Income which is exempt from the tax. Therefore even if the explanation of the assessee in the opinion of the lower authorities was not satisfactory even then it cannot be presumed that the amount deposited in the bank account is out of the undisclosed income of the assessee without bringing on record an iota of evidence. Even otherwise to my mind there is no bar that if earlier partners have not contributed capital in cash they cannot contribute the capital subsequently in cash. The Peculiar urgency cannot be a reason to doubt the capital contributed by the partners in cash and an important fact which skipped from the attention of the revenue authorities that all the five partners who introduced the capital are regularly assessed to tax. In case of Sh. Niranjan Lal Data Sh. Saurabh Data and Sh. Vijay Data cash flow statement is submitted. The same is backed by availability of opening cash in hand disclosed in the income tax return and their bank statement. No discrepancy has been found in such cash flow statement except pointing out variation in the household withdrawals in different years. It may be noted that such withdrawal has been accepted in the hands of these persons in the assessment framed u/s 153A of the Act. Thus the capital contribution by these 3 partners is verifiable from their cash flow statement. In any case when all the 5 partners have accepted the capital contribution made by them with the assessee firm the same cannot be added u/s 68 of the Act. If the cash deposited during demonetization period is verifiable from the books of accounts and the same having been accepted no addition can be made u/s 68/69 of the Act. See OM PARKASH NAHAR 2022 (2) TMI 326 - ITAT DELHI and SMT. TRIPTA RANI 2022 (6) TMI 690 - ITAT CHANDIGARH - Appeal of assessee allowed.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the treatment of cash introduced as capital by partners during the demonetization period, specifically:

1. Whether the assessing officer erred in holding that partners could not introduce demonetized currency notes (SBN) as capital since such notes were not legal tender during the demonetization period, thereby disallowing the capital introduction on that premise.

2. Whether the addition made under Section 69A read with Section 115BBE of the Income Tax Act, 1961, on account of unexplained money deposited as capital contribution by partners during demonetization, was justified and sustainable.

These issues are interconnected, as both challenge the validity of the addition made on the ground of unexplained cash deposits during demonetization.

Issue-wise Detailed Analysis:

Issue 1: Legality of Introduction of Capital in SBN during Demonetization

Legal Framework and Precedents: The assessing officer (AO) relied on the premise that demonetized currency notes (SBN) were not legal tender post-announcement and hence could not be introduced as capital in the firm. The AO invoked Section 69A (unexplained money) and Section 115BBE (tax on unexplained cash credits) to treat the cash deposited as unexplained income.

Court's Interpretation and Reasoning: The Tribunal scrutinized the timeline and facts, noting that the capital contributions were made on 8.11.2016, prior to the demonetization announcement (which was made after 8 PM on 8.11.2016). Therefore, the AO's premise that partners introduced SBN during demonetization was factually incorrect. The partners introduced capital before the demonetization notification, and hence the currency was legal tender at the time of introduction.

Key Evidence and Findings: The Tribunal examined the cash flow statements of three partners, bank statements, and cash-in-hand figures disclosed in their returns. The partners had declared agricultural income (exempt income) and had no other taxable income sources. The AO did not discredit the books of accounts or point to any other undisclosed income source.

Application of Law to Facts: Since the capital was introduced before demonetization, the AO's assumption that the cash was demonetized currency and thus unlawful was unsustainable. The Tribunal emphasized that the AO failed to bring any evidence to contradict the genuineness of the capital introduction.

Treatment of Competing Arguments: The AO and CIT(A) argued the abnormality of cash introduction, lack of urgency, and discrepancies in cash flow statements, relying on judicial precedents to place the onus on the assessee to prove the source of funds. However, the Tribunal found these arguments unpersuasive given the factual matrix and lack of evidence of undisclosed income.

Conclusion: The Tribunal concluded that the AO erred in treating the capital introduction as unexplained money on the premise that SBN were not legal tender, as the capital was introduced prior to demonetization.

Issue 2: Justification and Sustainability of Addition under Sections 69A and 115BBE

Legal Framework and Precedents: Section 69A permits the AO to treat unexplained money as income if the assessee fails to explain the source satisfactorily. Section 115BBE imposes tax on unexplained cash credits at a specified rate. The Supreme Court in Sumati Dayal v. CIT (1995) clarified that the word "may" in Section 69 confers discretion on the AO to treat unexplained money as income; it is not mandatory. The discretion must be exercised considering human probabilities and surrounding circumstances.

Court's Interpretation and Reasoning: The Tribunal applied the principle that the AO's discretion under Section 69 is not absolute and must be exercised judiciously. It noted that the assessee had only agricultural income (exempt), and no evidence was produced to show other income sources. The Tribunal found that the AO did not discredit the books of accounts or prove the deposits were from undisclosed sources. It also observed that the partners' cash flow statements, though summary, were not contradicted by evidence.

Key Evidence and Findings: The Tribunal considered the partners' cash flow statements, bank statements, and prior assessment records. It found that the amounts introduced were within the cash available with the partners and consistent with their financial disclosures. It also referred to CBDT Instruction No. 3/2017, which provides that cash deposits up to Rs. 2.5 lakhs by individuals without business income require no further verification, and for business persons, deposits within closing cash balance as per prior returns are acceptable.

Application of Law to Facts: The Tribunal applied the discretion under Section 69 in light of the facts, concluding that the additions were not warranted. It rejected the CIT(A)'s reliance on various case laws as distinguishable and irrelevant to the present facts. The Tribunal also noted that if the partners had not introduced capital in cash, the same cash would have been deposited in their individual accounts, thus not avoiding scrutiny.

Treatment of Competing Arguments: The Revenue relied on abnormality of cash introduction, timing, and incomplete cash flow statements to sustain additions. The Tribunal rejected these arguments, emphasizing the absence of any adverse material or evidence of undisclosed income and the acceptance of agricultural income by the AO.

Conclusion: The Tribunal held that the additions under Sections 69A and 115BBE were not justified and directed their deletion, allowing the appeal.

Significant Holdings:

"The word 'may' and not 'shall' in Section 69 of the Act clearly indicates that the intention of Parliament was to confer discretion on the ITO in treating the source of investment which has not been satisfactorily explained as income, and the ITO is not obliged to treat such source as income in every case where explanation is found unsatisfactory."

"The question whether the source of investment should be treated as income has to be considered in light of the facts of each case. The discretion must be exercised keeping in view the facts and circumstances of the particular case."

"In the present case, the AO has not brought on record any evidence to demonstrate that the assessee had any other source of income except agricultural income which is exempt. The presumption that the amount deposited during demonetization period is unexplained money is not correct."

"There is no bar that if earlier partners have not contributed capital in cash, they cannot contribute capital subsequently in cash. The urgency of demonetization cannot be a reason to doubt the capital contribution."

"The cash flow statements submitted by partners, though summary, are supported by bank statements and opening cash disclosures, and no discrepancy has been found that would justify adverse inference."

"The CBDT Instruction No. 3/2017 provides that cash deposits up to Rs. 2.5 lakhs by individuals without business income require no further verification, and for business persons, deposits within closing cash balance as per prior returns are acceptable."

"Where cash deposited during demonetization is verifiable from books of accounts and accepted, no addition can be made under Sections 68/69."

"Accordingly, the additions confirmed by the CIT(A) are directed to be deleted."