SMT. MALAPUR MOUNIKA,CHITRADURGA vs. INCOME-TAX OFFICER, WARD-1, CHITRADURGA

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 28.07.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.

2. The grounds raised by the assessee read as follows:

2. The appellant denies herself liable to be assessed on a total income of Rs. 26.46,700/-against the returned income of Rs. 9,18,700/-for the year under appeal, under the facts and in the circumstances of the appellant's case.

3. The learned CIT[A]/NFAC is not justified in upholding the addition of Rs. 17.28,000/- as unexplained cash deposited in the bank account u/s.69A of the Act. rejecting the bonafide explanation tendered under the facts and in the circumstances of the appellant's case. 3.1 The addition made by the learned A.O. u/s.69A of the Act is opposed to law and facts of the appellant's case in as much as, the cash deposits were made by the appellant's trade debtors directly to the appellant's Bank accounts during the demonetization period for which the appellant had also procured and filed confirmation letters from the trade debtors before the learned CIT[A] during the course of appellate proceedings and thus, these cash deposits were made out of known and explainable sources of funds. 3.2 The learned CIT[A]/NFAC is not justified in upholding the tax imposed under the provisions of section 115BBE at the rate of 60% under the facts and in the circumstances of the appellant's case.

Assessee is an individual. For the Assessment Year 2017-18, the return of income was filed declaring income of Rs.9,18,700/-. The assessee is running a poultry farm. The return of income was selected for scrutiny to verify the cash deposit made during the demonetization period. It was noticed that assessee had deposited a sum of Rs.34,55,000/- in her bank account in Canara Bank, Chitradurga. Out of the total sum deposited of Rs.34,55,000/- into the account during the aforesaid period, the demonetized notes were Rs.25,41,000/- and Rs.9,14,000/- in new currency. The assessee, in her books of accounts, had cash in hand as on 08.11.2016 at Rs.8,13,384/-. After giving credit of cash in hand as on 08.11.2016, the assessee was directed to substantiate the source of deposits to the extent of Rs.17,28,000/- (Rs.25,41,000 – Rs.8,13,384/-). The assessee, in response to the same, filed a letter stating that sales during the months of November, 2016 and December, 2016, were Rs.45,30,847/- and Rs.71,22,301/- respectively. Further, assessee filed copies of the VAT returns for the months November and December, 2016. It was stated that cash deposits are realization of sundry debtors. The AO, however, by referring to the Govt. of India’s Notification S.O.3408(E) dated 08.11.2016, issued by the RBI, held that old bank notes in the denominations of Rs.500/- and Rs.1000/- were withdrawn w.e.f. 08.11.2016 and assessee was not one of the specified persons for accepting these notes. Therefore, AO held that transacting in these old bank notes viz, specified bank notes (SBN) is not authorized. Hence, it was concluded by the AO that the deposit of old bank notes amounting to Rs.17,28,000/- is to be added under section 69A of the Act. The AO also applied the rates of taxation for the aforesaid amount under section 15BBE of the Act. The relevant finding of the AO reads as funder:

“6. The demonetised currency was not having a value when you have accepted such payments after 08-11-2016. Ordinary public were only allowed to use the old notes they had in exceptional circumstances for payment of central/state government school/college fee. payment of utility bills, purchase of medicines, milk, fuel & LPG as per the directions of the Government of India. They were allowed to deposit currency accumulated upto 08-11-2016 into their bank accounts to convert into legal tender. Accordingly, if the old currency was used in places other than the exceptions provided by the Govt. of India, such notes does not have any value. The assessee has claimed that she has received the demonetised currency in the denomination of Rs.500/- and Rs.1000/- from sale of poultry products and realisation of sundry debtors. Since the assesses was not authorised by the Government of India to collect such old notes, all such old notes deposited by the asses see does not have any value to it when the assessee accepted such payments/receipts. In view of the above, the said sum of Rs.17,28,000/- is treated as unexplained money credit into their bank accounts u/s 69A of the Income Tax Act, 1961 and taxed as per the provisions of section 15BBE of the Income Tax Act 1961.”

4. Aggrieved by the order of the AO, assessee filed appeal before the First Appellate Authority (FAA). Before the FAA, it was reiterated that the aforesaid sum of Rs.17,28,000/- was realized from debtors who had directly deposited in the bank account of the assessee towards the sales of poultry. It was further submitted that the AO has not rendered any finding on the veracity of the assessee’s submissions but merely held SBN deposited in the bank account of the assessee is unexplained only since the same ceased to be a valid legal tender after the demonetization. Further, before the CIT(A), the assessee had also filed confirmation of debtors and the address of debtors. However, the CIT(A) dismissed the appeal and confirmed the view taken by AO. The CIT(A) also held that after 08.11.2016, demonetized notes were not legal tender and assessee was not entitled to receive the same. The relevant finding of the CIT(A) reads as follows:

“6.14 In view of the above, I have perused the various Gazette Notifications issued by the Government of India i.e., Ministry of Finance permitting cash purchases/sales in SBNs i.e., in the denomination of Rs. 1000/- and Rs. 500/- in respect of certain categories of transactions during demonetization period. While doing so, it is observed that the line of business activity carried on by the assessee i.e., poultry business, is not covered by the specified business transactions/activities wherein the Government has allowed to transact in demonetized currency. In the regard, the relevant portion of Notification in S.O. 3408(E) dated 08.11.2016 is reproduced below for ready reference. "Now, therefore, in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934), the Central Government hereby declares that the specified bank notes shall not be ceased to be legal tender, with effect from the 9th November, 2016 until the 11th November, 2016, to the extent of transactions specified below, namely:— (a) for making payments in Government hospitals for medical treatment and pharmacies in Government hospitals for buying medicines with doctor's prescription; (b) at railway ticketing counters, ticket counters of Government or Public Sector Undertakings buses and airline ticketing counters at airports for purchase of tickets; (c) for purchases at consumer cooperative stores operated under authorisation of Central or State Governments; (d) for purchase at milk booths operating under authorisation of the Central or State Governments; (e) for purchase of petrol, diesel and gas at the stations operating under the authorisation of Public Sector Oil Marketing Companies; (f) for payments at crematoria and burial grounds; (g) at international airports, for arriving and departing passengers, who possess specified bank notes, the value of which does not exceed five thousand rupees to exchange them for notes having legal tender character; (h) for foreign tourists to exchange foreign currency or specified bank notes, the value of which does not exceed five thousand rupees to exchange them for notes having legal tender character.

6.15 As seen from the above, it is quite clear that the assessee was prohibited from making cash sales in the demonetized currency i.e., SBNs of Rs.1000/- and Rs.500/-. Also, as a natural corollary, the assessee was not permitted even to collect the debtors in the SBNs during the demonetization period. 6.16 Accordingly, I am of the considered opinion that the assessee has violated the notifications issued by the Government of India in regard to conducting business activities/transactions through SBNs in the denomination of Rs.1000/- and Rs.500/- from 09.11.2016 to 30.12.2016. In view of this, I do not find fault with the AO in treating Rs.17,28,000/-, being SBNs in the denomination of Rs.1000/- and Rs.500/-deposited in the bank accounts during the demonetization period i.e., from 09.11.2016 to 30.12.2016 as unexplained money of the assessee u/s.69A of the Act. Thus, the grounds of appeal raised by the assessee on this issue are dismissed.”

5. Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. The learned Counsel for the assessee has filed a Paper Book enclosing therein written submissions, notifications issued by the RBI, the case laws relied on, the audited financial statements of the assessee, copy of the notices issued under sections 143(2)/142(1) of the Act, etc. The learned AR reiterated the submissions made before the AO and the CIT(A) and relied on the case laws cited.

6. The learned Standing Counsel supported the order of the Income Tax Authorities.

“5. On and from the appointed day, no person shall, knowingly or voluntarily, hold, transfer or receive any specified bank note: Provided that nothing contained in this section shall prohibit the holding of specified bank notes— (a) by any person— (i) up to the expiry of the grace period; or (ii) after the expiry of the grace period,— (A) not more than ten notes in total, irrespective of the denomination; or (B) not more than twenty-five notes for the purposes of study, research or numismatics; (b) by the Reserve Bank or its agencies, or any other person authorised by the Reserve Bank; (c) by any person on the direction of a court in relation to any case pending in the court.”

10. On perusal of Circular F.No.225/145/2017-ITA 11 dated 09.08.2019 (enclosed as Annexure – 6 to the written submission), it is evident that AO has to examine the cash deposits made during the demonetization period in the case of businesses in accordance with the SOP laid down in the aforesaid circular. Only in cases where the assessee is unable to explain the source of the cash deposits made, can the said sum be treated as unexplained. In the instant case, it was claimed by the assessee that the entire sales made by her are recorded in the books of accounts and offered to tax. The sole reason for both AO and CIT(A) for making / sustaining the addition under section 69A of the Act was that subsequent to 08.11.2016, the SBNs were not legal tender and assessee was not person authorized to collect SBNs. The AO and the CIT(A) has not examined the veracity of source of cash deposits.

11. The Bangalore Bench of the Tribunal in the case of Anantpur Kalpana in held that accepting SBNs subsequent to 08.11.2016 cannot be sole reason for making addition under section 69A of the Act. The relevant arguments raised before the Bangalore Bench of the Tribunal and the findings read as follows:

“4. Aggrieved by the aforesaid addition, assessee preferred appeal before the CIT(A) and submitted that the cash deposits of Rs. 4,50,500/- in question was the cash collection from the small and medium class traders collected on various dates out of the business of the Assessee which were deposited in the bank account of the Assessee between 10/11/2016 and 19/12/2016 in CBS Bank and Axis Bank. Since the deposit of Rs. 4,50,500/- in her bank account are from the sale proceeds from distribution of FMCG goods relating to her business concern 'M/s. Mahalakshmi Enterprise' from small and medium class traders collected on various dates in discharge of their liability in 1000 rupee and 500 rupee notes. It was submitted that old demonetized notes could be accepted till 30-12-2016 and a payee can continue to accept old demonetized notes of Rs 500 or Rs 1000 since those notes can be accepted as valid tender and there is no prohibition or lawful direction not to pay or accept old notes. The old notes still continue to be convertible into money since any person who is validly in possession of the old notes can get them converted into egal tender from banks or can tender it for payment to specified transactions. There are no rules forbidding the payments in old notes. Therefore it is not correct to say that the old notes do not carry any value. It was submitted that the Assessee’s nature of business involves dealing with small and medium class traders and is predominantly cash oriented. The Assessee is maintaining regular books of accounts and the said books are subject to compulsory audit under the provisions of section 44AB of the Act. The Assessee is also filing its VAT Returns in connection to the purchases and sales made by it to the concerned authority. It was submitted that the impugned addition made is nothing but the sales made by the Assessee. The Assessee relied on decision of ITAT Indore Bench in the case of DEWAS SOYA LTD, UJJAIN v/s Income Tax (Appeal No 336/Ind/2012 wherein on identical facts of the case it was held that the claim of the assessee that such addition resulted into double taxation of the same income in the same year because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit & loss account) and on the other hand amounts received from above parties has also been added u/s. 68 of the Act.

7. Further reliance is placed on the decision of the Hon'ble Vishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in wherein, the Hon'ble Tribunal while considering the issue of implication of Sec. 68 of the Act during demonetization held as under: 9. In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case, we have no hesitation to hold that the cash receipts represent the sales which the assessee has rightly offered for taxation. We have gone through the trading account and find that there was sufficient stock to effect the sales and we do not find any defect in the stock as well as the sales. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. This view is also supported by the decision of Hon'ble Delhi High Court in the case of Kailash Jewellery House (Supra) and the Hon'ble Gujarat High Court in the case of Vishal Exports Overseas Ltd.

(supra),Hence, we do not see any reason to interfere with the order of the Ld.CIT(A) and the same is upheld.

10. The assessee filed cross objections supporting the order of the Id. CIT(A). Since, the appeal of the revenue is dismissed, the cross objection filed by the assessee becomes infructuous, hence, dismissed.

8. Learned DR reiterated the stand of the Revenue as reflected in the order of the CIT(A).

9. I have carefully considered the rival submissions. Both the AO and CIT(A) accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. The addition has been made only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender. Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation. It is also on record that the assessee was having only one source of income from trading in beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources. Hon'ble Kolkata Tribunal in the case of CIT Vs. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the view that when cash sales are admitted and income from sales are declared as income, wherein the Hon'ble Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources. The Hon'ble Vishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in on identical facts held that when cash receipts represent the sales which the assessee has offered for taxation and when trading account shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assessee already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. I am of the view that in the light of the facts and circumstances of the present case, the addition made is not sustainable and the same is directed to be deleted.”

12. The Chennai Bench of the Tribunal in the case of M/s. Purani Hospital Supplies Pvt. Ltd., in had also taken a similar view. The relevant finding of the Chennai Bench of the Tribunal reads as follows:

“8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts borne out from records indicates that the assessee is in the business of distribution of pharmaceutical goods, surgical and diagnostics goods, which is considered to be essential goods. The assessee has deposited a sum of Rs. 1,82,37,000/- during demonetization period in specified bank notes to various bank accounts. The assessee claims that source for cash deposit is out of realization of cash sales made before demonetization period. The assessee has filed necessary details including copies of sales bills made in cash before demonetization period and also list of parties from whom cash collected after demonetization period and deposited into bank account. The assessee had also filed necessary details of information furnished to department immediately after demonetization period towards cash collected from third party in response data. The Assessing Officer is not disputing all these claims of the assessee including evidence filed in support of justification for source for cash deposit. But, the Assessing Officer has made additions towards cash deposit in specified bank notes after demonetization period only for the reason that the assessee is not eligible to transact or receive any specified bank notes after demonetization as per notification/GO issued by RBI and Government of India. The Assessing Officer, had discussed the issue with reference to GO issued by RBI and Government of India and concluded that since the assessee has accepted demonetized currency in violation of circular/notification issued by the Government of India, the source explained by the assessee cannot be accepted. In other words, the Assessing Officer never disputed fact that the assessee has made sales in cash before demonetization period and also realized cash from debtors against cash sales made before demonetization period. Therefore, to decide the issue whether the assessee can accept specified bank notes even after it was banned for legal tender after 09th November, 2016 and further, the same can be added u/s. 69 of the Act as unexplained investment and also can be taxed u/s. 115BBE of the Act, it is necessary to examine the case in light of business model of the assessee, and evidence filed during the course of assessment proceedings.

9. The provisions of section 69 of the Act, deals with unexplained investment, where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of accounts, if any, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by the assessee is not in the opinion of the Assessing Officer, satisfactory, then the value of the investments may be deemed to be the income of the assessee of such financial year. In order to invoke provisions of section 69 of the Act, two conditions must be satisfied. First and foremost condition is there should be an investment and second condition is the assessee could not explain source for said investment. In this case, if you go through evidence filed by the assessee including comparative details of amount collected out of sales for financial year 2015-16 & 2016-17 and details of cash deposit into bank for above financial years, we find that there is no abnormal deviations from its normal course of business. Further, on verification of analysis of cash sales and cash deposits to bank account there is no deviation of cash sales and cash deposits when compared to earlier financial year and demonetization period. Further, the assessee is dealing in essential commodities like medicines, surgical and diagnostics equipment through medical shops, hospital, doctors etc. The agents of the assessee come and collect cash from parties and directly deposit to bank account of the assessee. It is also not in dispute, in this line of business the majority of sales is in cash, because doctors, hospitals and medical shops mainly deals with cash. Therefore, from the business model of the assessee and trade practice there is no doubt of what so ever with regard to the explanation offered by the assessee that it has collected cash from debtors towards sales made in cash before demonetization period. Further, the appellant has also regularly availing GST/VAT returns and there is also being no change or deviation in the VAT returns field for the earlier months i.e., before the announcement of demonetization. The assessee had also declared sales made in cash in their books of accounts and filed necessary return of income and paid taxes on said income. The appellant has also made cash deposits regularly before and during that period including thenotes which are not banned and therefore, it is not a case of amount of deposit in specified bank notes has came out of undisclosed source or under any circumstances only to change the colour of the money. From the details filed by the assessee, it is evident that during the month of November and December, the assessee has made almost more than 5 crores cash deposit which includes various demonetized currency and regular notes. Further, the Assessing Officer has accepted fact that out of total cash deposits, only a sum of Rs. 1,82,37,000/- is in specified bank notes. From the above, it is very clear that there is no significant change in the pattern of cash sales, cash collection and cash deposit during demonetization period, when compared to earlier period in the same financial year and also during immediate preceding financial year. Therefore, we are of the considered view that the assessee has satisfactorily explained source for cash deposit made during demonetization period in specified bank notes and thus, the Assessing Officer is completely erred in making additions u/s. 69 of the Act.

11. We further, noted that the Central Board of Direct Taxes had issued a circular for the guidance of the Assessing Officer to verify cash deposits during demonetization period in various categories of explanation offered by the assessee and as per the circular of the CBDT, examination of business cases, very important points needs to be considered is analysis of bank accounts, analysis of cash receipts and analysis of stock registers. From the circular issued by the CBDT, it is very clear that, in a case where cash deposit found in business cases, the Assessing Officer needs to verify the explanation offered by the assessee with regard to realization of debtors where said debtors were outstanding in the previous year or credited during the year etc. Therefore, from the circularissued by the CBDT, it is very clear that, while making additions towards cash deposits in demonetized currency, the Assessing Officer needs to analyze the business model of the assessee, its books of account and analysis of sales etc. In this case, if you go through analysis furnished by the assessee in respect of total sales, cash sales realisation from debtors and cash deposits during financial year 2015-16 & 2016-17, there is no significant change in cash deposits during demonetization period. Therefore, we are of the considered view that when there is no significant change in cash deposits during demonetization period, then merely for the reason that the assessee has accepted specified bank notes in violation of circulation/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected. In our considered view, to bring any amount u/s. 69 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 beenduly 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.

13. The assessee had also relied upon the decision of ITAT Indore Bench in the case of Dewas Soya Ltd, Ujjain vs ITO in where it has been held as under: The Hon'ble Indore ITAT Bench in the case of DEWAS SOYA LTD, UJJAIN vs. Income Tax (Appeal No. 336/lnd /2012 has held that," the claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit 8: loss account) and on the other hand amounts received from above parties has also been added u/s 68 of the Act. This view has been held by the Hon'ble Supreme Court in the case of CIT vs. Devi Prasad Vishwnath Prasad (1969) 72 ITR 194(SC) that "It is for the assessee to prove that even if the cash credit represents income, it is income from as source, which has already been taxed." The assessee has already offered the sales for taxation hence the onus has been discharged by it and the same income cannot be taxed again."

15. In this view of the matter and by considering facts and circumstances of this case, we are of the considered view that the Assessing Officer erred in making additions towards cash deposits during demonetization period u/s. 69 of the Act. The ld. CIT(A), without appreciating relevant facts simply sustained additions made by the Assessing Officer. Thus, we set aside the order passed by the CIT(A) and direct the Assessing Officer to delete additions made towards cash deposits u/s. 69 r.w.s. 115BBE of the Act.”

“9. We have heard both the parties and perused all the documents on record. We find that there was sufficient cash balance with the assessee as detailed in page No.30 of the paper book. The Specified Bank Notes (Cessation of Liabilities) Act, 2017, defines "appointed day" vide Section 2(1)(a). As per Section 2(1)(a), "appointed day" means the 31st Day of December 2016. Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 also deals with prohibition on holding, transferring or receiving specified bank notes. Section 5 states that "On and from the appointed day, no person shall knowingly or voluntarily, hold, transfer or receive any specified bank note". We therefore, find that the specified bank notes can be measured in monetary terms since the guarantee of the Central Government and the liability of Reserve Bank of India does not cease to exist till 31.12.2016. In view of the above, the contention of the Ld.DR, treating the receipt of SBNs from cash sales as illegal and thereby invoking the provisions of section 69A is not valid in law. Therefore, we dismiss this ground of the Revenue.”

14. In view of the aforesaid reasoning and judicial pronouncements cited supra, we hold that both the AO and the CIT(A) have erred in holding that assessee, prior to the appointed day i.e., 31.12.2016, was prohibited from accepting the SBNs and addition of the same under section 69A of the Act is warranted.