M/S. KURINJI CHIT FUNDS PVT. LTD.,CHENNAI vs. ITO, CORPORATE WARD-4(3), CHENNAI

The assessee has submitted that the cash balance held as on 08.11.2016 was 3,35,483/-. Further, the assessee maintained bank accounts with Karur Vysya Bank and Central Bank of India, wherein cash deposits as a result of chit subscriptions aggregating to Rs.31,42,730/- and Rs.13,45,424/- were made during the demonetization period. All the cash deposits as a result of chit subscriptions during the demonetization period have been duly verified and the assessee has duly complied with the requirements prescribed under Instruction No. 3/2017 dated 21.02.2017 issued by the CBDT, as well as the procedure outlined under the "Operation Clean Money" initiative vide Press Release dated 31.01.2017.

However, the AO rejected the claim of the assessee and passed an Assessment Order u/s.143(3) of the IT Act dated 19.12.2019, by holding that the cash deposits in Karur Vysya Bank Ltd and Central Bank Ltd amounting to Rs. 31,42,730/- and Rs.13,45,424/- respectively during the demonetization period signals that the assessee has accepted specified bank notes which have ceased to be legal tender by virtue of the Notification No. S.O. 3407(E), dated 08.11.2016. Further, the AO expressed doubt regarding the rationale for accepting currency notes that had ceased to be legal tender towards payment of chit subscriptions in view of the Notification. Accordingly, the cash deposits exceeding the declared balance, amounting to Rs.41,52,672/- were treated by

Aggrieved by the Assessment Order of the AO, the assessee had preferred an appeal before the ld.CIT(A) on 08.01.2020.

The assessee duly filed its written submissions before the ld.CIT(A) in the appellate proceedings and the same is enclosed in Pages 803-811 of the Paperbook of Documents Volume I. The Ld.CIT(A) considered the written submissions filed by the assessee and vide Order dated 12.12.2025 ('Impugned Order') which can be found on Pages 914-924 of the Paperbook of Documents – Volume I, held that the assessee accepted demonetized notes between 09.11.2016 and 31.12.2016 without establishing their source and the explanations offered by the assessee was found to be unsubstantiated and accordingly, the addition made by the AO u/s.69A of the Act was upheld. The reasoning provided by the Ld. CIT(A) is as follows:

Mere filing of voluminous records does not establish correctness of transactions unless the assessee proves the identity and creditworthiness of contributors, genuineness of cash receipts and a reasonable justification for abnormal cash deposits during the demonetization period. The AO is not bound to accept documents at face value, particularly when the cash deposit pattern is inconsistent with past conduct or lacks independent corroboration. The AO's satisfaction can be inferred from the Assessment Order and once the AO treats deposits as unexplained, the non-satisfaction is implicit. The claim that acceptance of books u/s.145 of the Act prevents questioning of cash deposits is untenable since even where books are accepted, specific entries, especially cash receipts, may be examined u/s.68, 69 or 69A of the Act.

Furnishing names and addresses of subscribers alone does not prove genuineness. The assessee failed to produce confirmations, proof of capacity,

Aggrieved by the Impugned Order, the assessee is appeal before this Tribunal on the following grounds:

At the outset, the ld.AR submitted that the entire premise of the addition made by the AO proceeds on a presumption that the cash deposits made during the relevant period were in the nature of demonetized currency. However, the AO has failed to bring on record any material or evidence whatsoever to substantiate that the cash deposits in question comprised of Specified Bank Notes ('SBNs') which have ceased to be legal tender with effect from 09.11.2016 vide Notification of the Government of India in the Ministry of Finance, number S.O. 3407(E), dated 08.11.2016.

It is submitted that the bank statements merely reflect the aggregate cash deposits, without the mention of details regarding the denominations of the currencies. No material has been brought on record by the AO to prove that the deposited amounts involve demonetized currencies. The conclusion drawn by the AO is based solely on the timing of the deposits during the demonetization

Further the ld.AR submitted that the impugned cash deposits do not represent the income of the assessee. The amounts received by the assessee in the course of chit business are subscriptions belonging to the chit subscribers and the Appellant merely acts as a foreman or custodian of such funds in accordance with Section 21(d) of the Chit Funds Act, 1982. It is pertinent to note that the subscription amounts collected from members do not constitute income or trading receipts of the company. These subscriptions are not revenue receipts and they are credited to the personal accounts of the subscribers and not to the Profit and Loss Account of the chit fund company. Only the foreman's commission, interest, and incidental charges constitute income of the chit fund company. The subscription receipts neither constitute accrued income nor do the payments to prized subscriber constitute accrued expenditure evidenced by Section 24 r.w. Part II of The Schedule of the Chit Funds Act, 1982. Further, reliance in this regard is placed on the decision of the ITAT, Hyderabad in the case of Deputy Commissioner of Income-tax v. Mangal Dayak Chit Fund (P.) Ltd. ([2005] 92 ITD 258 (Hyderabad) dated 31-08-2004).

In the present case, the assessee has consistently demonstrated that the cash deposits in question represent collections from identified chit subscribers towards their subscription liability, and the Cash Transactions, 2016 stand testament to the same. Therefore, the amounts in question do not belong to the Appellant in the first place and subsequently, do not partake the character of income in its hands.

It is submitted that the AO and subsequently, the Ld.CIT(A) have failed to appreciate this fundamental legal and accounting principle governing chit fund business and have erroneously treated subscription amounts to form part of the assessee’s income.

Without prejudice to the above submissions, the ld.AR submitted that the impugned addition proceeds on the assumption that the assessee could not have lawfully received SBNs after 08.11.2016 and that such receipts necessarily constituted unexplained income u/s.69A of the Act. It is submitted that Notification No. 3407(E) dated 08.11.2016 merely declared that bank notes of Rs. 500/- and Rs. 1000/- denominations would cease to be legal tender with effect from 09.11.2016. The said Notification neither declared such notes to be illegal nor prohibited their receipt, transfer or possession during the transition period. Reliance in this regard is placed on the decision of the Hon'ble ITAT, Kolkata in the case of Islampur C.S. Shop 2 v. ΙΤΟ (Ι.Τ.Α. No. 2191/KOL/2024 dated 21.03.2025 (Kolkata - Trib.)).

It is submitted that through contemporaneous Notifications, including Notification No. S.O. 3408(E) dated 08.11.2016 and the subsequent amending Notifications, explicitly permitted the use of SBNs in various specified sectors such as government hospitals, pharmacies, transport services, utility payments, and public sector undertakings till 15.12.2016. This demonstrates that the legislative intent was never to render every transaction involving SBNs unlawful with immediate effect, but to permit their continued use in specified circumstances during the relevant period. It is also relevant to note that the permissible period was repeatedly extended from 11.11.2016 to 15.12.2016,

Accordingly, deposit of SBNs per se cannot render them unexplained, and such receipts stand on the same footing as those in valid currency. Reliance in this regard is placed on the following decisions:

The ld.AR contended that in the present case, the assessee has duly explained the source of the impugned receipts by submission of the following documents:

In addition to the above documents, the assessee has submitted the Auditor's Certificate confirming that the cash amounts received were from subscribers and are duly accounted for in the books of accounts under the head 'Subscription Received from Chit subscribers', disclosed in the financial statements for the year ended 31 March, 2017. The same is enclosed in Page 19 of the Paperbook of Documents - Volume II.

The above documents thereby fully substantiate the nature and source of such receipts. This genuine explanation of the assessee cannot be rejected merely for the reason that the assessee has allegedly violated the Circulars and Notifications issued by the Government of India and RBI.

Further, no such explicit statutory provision existed in the present case during the period immediately following the Notification dated 08.11.2016, pointing to a clear legal vacuum between 09.11.2016 and 31.12.2016. It is only upon the enactment of Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 and the subsequent Act of 2017, such restriction was imposed. It is submitted that the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the Ministry of Law & Justice, Government of India, in the Gazette of India vide Ordinance No. 10 of 2016 dated 30.12.2016. This Ordinance declared that SBNs were no longer the liability of RBI or Central Government and introduced the prohibition on holding and transferring, or receiving SBNs for the first time u/s 5, and formulated the penalty for contravening the same was u/s 7. In terms of Section 5, no person shall knowingly or voluntarily hold, transfer, or receive any SBNs on or from the "appointed day", which is defined under Section 2(1)(a) as 31.12.2016, subject

Hence the ld.AR submitted that the addition sustained by the Ld.CIT(A) is founded solely on the erroneous assumption that receipt of SBNs during the transition period was impermissible in law. Such a premise is contrary to the statutory scheme governing demonetization and, therefore, the impugned addition u/s 69A is liable to be deleted in entirety.

The ld.AR submitted that without prejudice to the submissions made hereinabove, it is submitted that the addition u/s.69A of the Act is unsustainable even on merits as the statutory conditions necessary for invoking the said provision are absent in the present case. It is pertinent to note that Section 69A of the Act applies only where money, bullion, jewelry or other valuable article is found to be owned by the Assessee and such money is not recorded in the books of account, if any, maintained by the Assessee and the Assessee fails to offer satisfactory explanation regarding its nature and source.

Thus, for invoking Section 69A, the Revenue must establish cumulatively that:

The ld.AR placed reliance in this regard is placed on the decision of the ITAT, Hyderabad in the case of Share Microfin Ltd v. Dy.CIT (ITA No.448/HYD/2023 dated 03.07.2025) (Hyderabad - Trib.)

The assessee has duly furnished subscriber wise details, chit group particulars, subscription amounts payable and received, dates of receipt, and corresponding entries in the books of account, all of which are reflected in the following:

It is submitted by ld.AR that these documents clearly explain the source of the receipts and demonstrate that the amounts received emanate from identified subscribers participating in the respective chit groups, thereby leaving no element of ambiguity.

Further, the ld.AR submitted that the observations of Ld.CIT(A) regarding the alleged inconsistency of the cash deposits with the assessee’s past conduct are factually untenable. The assessee is engaged in the business of conducting

The Auditor's Certificate further demonstrates that the cash subscriptions received during the year under consideration are broadly in line with the assessee’s historical business pattern and do not reflect substantial cash deposits to warrant this adverse inference. Accordingly, the very basis adopted by the ld.CIT(A) that the impugned deposits are inconsistent with the assessee’s past conduct stands disproved by the contemporaneous records maintained in the ordinary course of business.

In order to further establish that the cash deposits received during the demonetization period were not abnormal or inconsistent with the assessee’s established business conduct, a comparative analysis of the average cash subscriptions received across the financial years referencing the Auditor's Certificate enclosed at Pages 17 to 18 of the Paperbook of Documents - Volume II is undertaken. The same is set out below:

Further, the below table demonstrates that the average subscriptions received during the two months comprising the demonetization period are in fact lower than the average cash subscriptions received by the Appellant during the relevant financial year as a whole. In light of the same, the assessee has

The above comparison has further established that the impugned deposits are not consistent with the assessee’s past conduct. The assessee has submitted that in contrast to the Ld.CIT(A) and AO's submission, the assessee has received lower cash deposits in Financial Year 2016-17 when compared with Financial Year 2015-16 and the same has indicated that there has been no abnormal cash collection during the demonetization period.

Therefore, the source of the receipts is neither unknown nor unexplained. The AO has not pointed out any discrepancy in the books of account and neither has the AO established that the payments recorded therein are not genuine. Further, the past conduct of the assessee lends substantial corroboration to the explanation offered regarding the nature and source of the impugned receipts and reinforces the position that the essential conditions for invoking Section 69A are absent in the present case.

In light of the aforementioned submissions, it is prayed to set aside the Impugned Order, delete the addition made u/s.69A of the Act.

Per contra, the ld.DR for the revenue supported the orders of the authorities and submitted that the assessee has collected the SBNs after 9.11.2016 and hence prayed for confirming the order of the ld.CIT(A).

We have heard the rival submissions and perused the material available on record, including the orders of the authorities below and the documents placed in the paper books. We have also considered the judicial precedents relied upon by the ld.AR. The principal issue arising for our consideration is whether the cash deposits aggregating to Rs.41,52,672/- made during the demonetisation period, which according to the assessee represented chit subscription collections from its subscribers, could validly be treated as unexplained money u/s.69A of the Act. The assessee is a company engaged in the business of conducting chits in accordance with the provisions of the Chit Funds Act, 1982 and the Tamil Nadu Chit Funds Rules, 1984. The assessee had obtained sanction from the Registrar of Chits in respect of the chit groups conducted by it. During the course of assessment proceedings, the AO noticed cash deposits of Rs.31,42,730/- in Karur Vysya Bank and Rs.13,45,424/- in Central Bank of India during the demonetisation period. After considering the cash balance available with the assessee, the AO treated Rs.41,52,672/- as unexplained money u/s.69A of the Act, principally on the ground that the assessee had accepted specified bank notes after they had ceased to be legal tender. The ld.CIT(A) confirmed the addition, inter alia, holding that the assessee had failed to satisfactorily establish the genuineness and source of the cash receipts.

We find considerable force in the contention of the ld.AR that once the impugned cash receipts are demonstrated to have been entered in the regularly maintained books of account and are correlated with the subscription collections from the chit subscribers, the fundamental requirement for invoking section 69A requires closer examination. The case of the Revenue cannot rest merely upon the fact that cash was deposited in the bank during the demonetisation period. What is required to be examined is the nature and source of such cash and whether the explanation furnished by the assessee is supported by its contemporaneous books and records.

The ld.CIT(A) has observed that mere furnishing of names and addresses of subscribers would not establish genuineness and that the assessee had failed to furnish confirmations, evidence regarding financial capacity and bank statements of the subscribers. In our considered view, the issue has to be appreciated in the context of the nature of the assessee's business. The assessee is conducting chit groups and the impugned amounts are stated to be periodic subscription collections from members against their pre-existing subscription obligations. These receipts cannot, without examination of the underlying books and transactions, be equated with unexplained cash credits or fresh loans introduced into the books so as to mechanically require the assessee to establish the creditworthiness of every subscriber in the same manner as may be required in an appropriate case under section 68 of the Act. Further, the assessee has contended that chit subscriptions collected from members do not, by themselves, constitute the income of the foreman. The amounts are received and dealt with in accordance with the scheme of the chit and the rights and obligations arising under the Chit Funds Act. Only the income attributable to the assessee in its capacity as foreman, including the commission and other income accruing to it, assumes the character of its income. The ld.AR has relied upon the decision of the Hyderabad Bench of the

We also find merit in the assessee's contention concerning the alleged abnormality in cash collections. The assessee has placed comparative figures showing the pattern of cash subscriptions over different financial years. For F.Y. 2015-16, cash subscriptions were stated to be Rs.4,11,32,891/- out of total subscriptions of Rs.4,94,77,285/-, whereas for F.Y.2016-17, the cash subscriptions were Rs.3,42,92,115/- out of total subscriptions of Rs.7,36,67,236/-. Thus, the proportion of cash subscriptions actually declined from approximately 83% in F.Y.2015-16 to approximately 46% during F.Y. 2016-17. The assessee has further demonstrated that cash subscriptions received during November 2016 and December 2016 were Rs.40,32,540/- and Rs.12,86,127/- respectively, giving an average of Rs.26,59,333/-, as against the stated average cash subscription of Rs.28,57,676/- for F.Y. 2016-17. Therefore, the material placed on record does not support the inference that there was an extraordinary or unprecedented surge in the assessee's cash collections during the demonetisation period. Rather, the comparative data lends corroboration to the assessee's contention that receipt of chit subscriptions in cash was an established feature of its business.

We may now deal with the Revenue's contention that the assessee could not have accepted SBNs after 08.11.2016. In our considered view, even assuming that the amounts deposited by the assessee comprised specified bank notes, the question whether the assessee contravened any notification, direction or other regulatory provision concerning acceptance of such notes is distinct from the question whether the amount represents unexplained money chargeable to tax u/s.69A of the Act. A regulatory infraction, if any, in the mode

The ld.AR has also relied upon the decisions of the coordinate Benches in Tamil Nadu State Marketing Corporation Ltd. v. ACIT, Islampur C.S. Shop 2 v. ITO, Shravan Singh Parmar v. ITO, MRL Trading Company v. ITO and Share Microfin Ltd. v. DCIT. The principle emerging from the submissions based upon these decisions is that mere deposit of SBNs during the demonetisation period cannot, by itself, justify an addition under the deeming provisions where the assessee is able to demonstrate the nature and source of the receipts through regular books of account and contemporaneous records. The taxability has to be determined on the basis of the provisions of the Act and the evidence regarding the source of the money.

We further observe that the Notification dated 08.11.2016 withdrawing the legal-tender character of the specified Rs.500/- and Rs.1,000/- bank notes cannot, by itself, lead to the conclusion that every receipt or possession of such notes during the transitional period constituted unexplained income. The character of a receipt for income-tax purposes has to be determined independently. Therefore, even if there were any irregularity in accepting SBNs, the same cannot dispense with the statutory conditions prescribed u/s.69A of the Act. In the present case, the explanation furnished by the assessee is not a

We are also unable to sustain the approach of treating the absence of individual confirmations or bank statements from every chit subscriber as sufficient to reject the assessee's explanation in toto. When the assessee has maintained subscriber-wise accounts and produced the primary books showing the collection and deposit of subscriptions, the Revenue was at liberty to verify such details or identify specific transactions which were found to be non- genuine. No such specific exercise appears to have been undertaken. Suspicion arising merely because the transactions occurred during the demonetisation period, however strong, cannot substitute evidence establishing that the recorded receipts were unexplained money of the assessee. Thus, taking into consideration the totality of the facts and circumstances, we find that the assessee has satisfactorily demonstrated the nature and source of the impugned cash deposits as collections from chit subscribers made in the ordinary course of its business and duly recorded in its regular books of account. The Revenue has not pointed out any material discrepancy in such books or established that the impugned amount represented unaccounted money belonging to the assessee. Consequently, the essential conditions for invoking section 69A of the Act are not satisfied.

We accordingly hold that the mere fact that the cash was deposited during the demonetisation period, or even the assumption that the collections included specified bank notes, cannot override the documentary evidence

In the result, the appeal of the assessee is allowed.