RANJANA SANJAY TIWARI ,MUMBAI vs. INCOME TAX OFFICER -(3), PALGHAR

As per the assessee, the cash deposited in her bank accounts was out of the dairy business and the sale of buffaloes/live stocks. In support of the aforesaid submission, the assessee submitted a confirmation letter of sale of livestock. It was further noticed that all the accounts are loan accounts in which cash was deposited as loan repayment during the demonetisation period. During the assessment proceedings, the assessee also submitted the loan sanction letter issued by the Dena Bank, wherein it has been mentioned that the loan was sanctioned for dairy farming and live-stock, i.e. cows and buffaloes, purchased through bank finance and other materials were hypothecated as primary security for availing the term loan. Accordingly, notice under section 133(6) of the Act was also issued to the bank requesting to furnish all the details/permission granted regarding the sale of live-stock by the assessee, which were under hypothecation. In response, the bank submitted that during the hypothecation, it never permits the sale of the primary collateral security. One more opportunity was granted to the assessee, during the assessment proceedings, to explain the source of cash deposits in her accounts during the demonetisation period. In response, the assessee again reiterated that the cash was deposited from the sale proceeds of the milk business and the sale of cattle/live-stock.

The Assessing Officer (“AO”), vide order dated 28/12/2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee on the basis that the assessee’s contentions are not substantiated with any documents. The AO further held that there is no document regarding the creditworthiness of the live-stock purchasers. The AO also placed reliance on the bank's submission that it had never allowed the assessee to sell the collateral security, which was under hypothecation. Further, no document was placed on record by the assessee to substantiate the permission taken from the bank regarding the sale of live-stock under hypothecation. Accordingly, the AO made the addition of the entire cash of INR 27,70,985 deposited by the assessee during the demonetisation. By treating the same as unexplained money under section 69A of the Act.

The learned CIT(A), vide impugned order, granted partial relief to the assessee and restricted the addition to 75% of the cash deposits made during the demonetisation period on the basis that data availability of cash from the sale of milk cannot be ruled out despite several inconsistencies in the assessee’s submissions. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorised Representative (“learned AR”) reiterated the submissions made by the assessee before the lower authorities and submitted that the source of cash deposited during the demonetisation period is from the sale proceeds of the milk business and the sale of cattle. The learned AR submitted that, although the live-stock was hypothecated with the bank, the assessee sold it to repay the loans. The learned AR, during the hearing, also referred to the confirmations issued by the parties who had purchased the livestock from the assessee.

On the contrary, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities and submitted that no document was furnished by the assessee to prove the creditworthiness of the purchases.

We have considered the submissions of both sides and perused the material available on record. In the present case, due to an abnormal increase in the cash deposits made by the assessee in her bank accounts during the demonetisation period, the return was selected for scrutiny. During the assessment proceedings, upon reviewing the details filed by the assessee, it was noted that the assessee deposited a total cash of INR 27,70,985 into her bank account during the demonetisation period. To explain the source of cash deposits, the assessee submitted that the funds originated from the sale proceeds of the milk business and the sale of cattle. However, the AO disagreed with the assessee's submissions, as the live-stock sold by the assessee was under hypothecation with the bank in respect of loans taken by the assessee for its business purposes. In order to substantiate its submission that the cash deposited during the demonetisation period was partly from the sale of live-stock, the assessee has placed on record the confirmation letters issued by the purchasers along with their Aadhaar and PAN card. Further, the assessee has also placed on record the following statement of cash inflow from trading activity during the year under consideration: –

In the present case, we find that the learned CIT(A), agreeing with the submissions of the assessee, noted that the cash flow from the trading activity of milk shows gross receipts of INR 28,53,221, against which a total of INR 14,27,205 was incurred by the assessee towards various cash expenses. Thus, the learned CIT(A) noted that the net cash inflow of the assessee was INR 23,26,016 during the year under consideration, resulting in net profit from the sale of milk of INR 3,41,202. Furthermore, the learned CIT(A) noted that the assessee's cash book shows a periodical outflow of expenses for milk sales and periodical deposits of milk sales income. Further, it is noted on page 6 of the impugned order that there are significant inflows in the second half of October and the first week of November 2016. However, despite recording the aforesaid facts, the learned CIT(A) found favour with the conclusion of the AO that, as the live-stock were under hypothecation with the bank, the sale of the same by the assessee is a make-believe story with the purpose of explaining the huge unexplained cash deposits during the demonetisation period.

In this regard, it is pertinent to note that even though the live-stock were under the hypothecation of the bank, they were still in the possession of the assessee. Thus, the assessee, even though, may have kept the live-stock as collateral in respect of the loan taken from the bank, the same does not impede the assessee from selling the same. It is worth noting that, unlike hypothecation of any immovable property, such as a factory or a house, or any movable property, like a car or a two-wheeler, the livestock hypothecated had no specific identity separate from other live-stock that the assessee already had for its dairy business. This fact is evident from the Sr. No.8 of the loan sanction letter issued by the bank, which is reproduced by the AO in para-9 of its order, which reads as under: - “8) Security 1. Primary Security – Hypothecation of Live Stock i.e. Cow and Buffaloes purchased through bank finance and other materials for maintenance of Cattle.”

Therefore, in such a scenario, the banks, in case of a loan default, can only have the right over the number of live-stock which were purchased by the assessee from the said loan, without any specific relevance as to their identity. It is the plea of the assessee that the assessee sold the live-stock and repaid the loan taken from the bank. We find that this submission is duly supported by the AO’s own finding in para-8 of the assessment order that all the accounts in which cash was deposited by the assessee were loan accounts and the cash was deposited as loan repayment during the demonetisation period. Once the AO has recorded the aforesaid facts, we do not find any merit in the emphasis laid on hypothecation of live-stock for availing the loan, which, as noted above, was repaid by the assessee. Therefore, after repayment of the loan, the hypothecation has no relevance. Even in the event of a breach of the hypothecation condition, the bank may not have any grievance against the assessee, since the loan itself has been repaid.

As regards the livestock purchases, the assessee has placed on record the confirmations along with their Aadhaar and PAN Card. Therefore, the identity of these parties was not rightly doubted by the lower authorities. Regarding creditworthiness, the Revenue, apart from raising doubts, did not conduct any independent enquiry despite having the necessary details. Therefore, not even an iota of material has been brought on record by the Revenue to doubt the creditworthiness of the purchases of livestock.

Therefore, in view of the facts and circumstances of the present case, once the assessee was found to have the net cash flow of INR 23,26,016 and in the absence of any material to doubt the submission of the assessee that part cash deposited during the demonetisation period was from the sale of live-stock, we agree with the submissions of the assessee and delete the balance addition upheld by the learned CIT(A) under section 69A of the Act. Accordingly, the impugned addition made under section 69A of the Act is deleted, and the grounds raised by the assessee are allowed.

In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 04/09/2025