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Facts
The assessee, a partnership firm dealing in Hindustan Unilever products, deposited a significant amount of old currency notes into its bank account during the demonetization period. The Assessing Officer (AO) treated a portion of these deposits as unexplained cash credit, while the CIT(A) partly upheld this addition.
Held
The Tribunal held that the assessee had provided a valid explanation for the source of the cash deposits, which were collections from sundry debtors and part of their business operations. The Tribunal found no violation of law in accepting old currency notes before the 'appointed date' and set aside the addition.
Key Issues
Whether cash deposits made during the demonetization period from business collections are to be treated as unexplained cash credit, and if the provisions of Section 69A or 68 of the Income Tax Act are applicable in such circumstances.
Sections Cited
250, 69A, 44AB, 143(2), 142(1), 68, 115BBE, 234B, 234A
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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY
O R D E R
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 9.1.2025 vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1072043511(1) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.
The assessee has raised the following grounds of appeal:
Brief facts of the case are that the assessee is a partnership firm engaged in the business of redistribution and stockiest of Products manufactured by M/s. Hindustan Unilever Ltd. The assessee firm filed its return of income for the assessment year 2017-18 on 16.10.2017 declaring total income of Rs.24,31,450/-. Thereafter, the case of the assessee was selected for scrutiny under CASS and accordingly notices u/s 143(2) as well as 142(1) of the Act were issued calling for details/documents/evidences. The assessee was specifically asked to furnish the details of cash deposits bank account wise along with the bifurcation of the old currency and legal currency during the said period with sources of both along with evidences in form pay in slip or bank certificate. Further, the assessee was also asked to furnish details and produce evidences/books of accounts for cash in hand as on 8.11.2016.
3.1 In response to the notices issued by the AO, the assessee filed the required details in ITBA. On verification, it was noticed by the AO that the assessee firm had made cash deposits of Rs.1,48,16,500/- in Karnataka Bank in old currency (Rs.500/- & M/s. Surabhi Distributors, Bangalore Page 5 of 9 Rs.1,000/-) from 9.11.2016 to 30.12.2016. It was further noticed by the AO that the closing cash in hand as on 8.11.2016 was Rs.1,05,59,000/- against which the assessee had deposited cash in old currency to the tune of Rs.1,48,16,500/- i.e. in excess of Rs.42,57,500/-. The AO was of the opinion that since the assessee was not allowed to transact in old currency w.e.f. 9.11.2016 to 30.12.2016 and the business of the assessee was also not under the exempt category notified by the RBI & hence the assessee cannot deposit the old currency in excess of cash in hand as on 8.11.2016. However, the AO taking into account that the said amount of Rs.42,57,500/- is credited to the bank account of the assessee and even if it is to be taken as part of turnover, an amount of Rs.49,812/- was reduced from the above addition @ 1.17% of net profit as declared by the assessee for year under consideration on Rs.42,57,500/- and hence added the income to the tune of Rs.42,07,688/- as unexplained cash credit u/s 68 of the Act.
Aggrieved by the order of ld. AO passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC. The main contention of the assessee before the ld. CIT(A)/NFAC was that the source of the cash deposit were out of collection from the business and till 31.12.2016, the assessee was allowed by the Act to deposit the specified bank notes which were demonetized w.e.f. 09.11.2016. The ld. CIT(A)/NFAC partly allowed the appeal of the assessee and addition to the tune of Rs.40,07,500/- was sustained and granted the relief of Rs.2,00,188/-.
Again aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal.
Before us ld. A.R. of the assessee vehemently submitted that the assessee is a partnership firm engaged in the business of M/s. Surabhi Distributors, Bangalore Page 6 of 9 redistribution and is also stockiest of the products manufactured by Hindustan Unilever Ltd. The assessee maintained regular books of accounts which are also subjected to audit u/s 44AB of the Act. The ld. A.R. of the assessee vehemently submitted that the nature of business of the assessee is predominantly cash oriented as the assessee is a distributor of fast moving consumer goods. The assessee’s business model is such that the part of the sales made to the traders are on credit basis and the period of credit is also not fixed and the trader when possible pay the assessee in cash for the goods purchased by them from the assessee previously. The ld. AO grossly erred in holding that impugned deposits of Rs.42,07,688/- is unexplained cash credit as the assessee has deposited the cash in the overdraft account of the assessee, which is the cash collected from the debtor of the assessee to whom sales were effected previously.
Ld. D.R. on the other hand supported the orders of the authorities below.
We have heard the rival submissions and perused the materials available on record. We take note of the fact that the assessee had made cash deposit of Rs.1,45,66,500/- (Rs. 1,48,16,500/- (-) 2,50,000/-) in his bank account No.1047000100154001 with Karnataka Bank from 9.11.2016 to 30.12.2016. It is an undisputed fact that as verified by the AO, the closing cash in hand as on 8.11.2016 was Rs.1,05,59,000/- and accordingly, the excess cash deposit of Rs.40,07,500/-/- was alleged to be transacted in old currency even though the assessee was not in the exempted category as per the Gazetted notification dated 9.11.2016. The assessee before both the authorities had submitted that the nature of the business of the assessee is predominantly cash oriented as the assessee firm is a distributor of M/s. Surabhi Distributors, Bangalore Page 7 of 9 fast moving consumer goods of Hindustan Unilever Ltd. and the assessee’s business model is such that a part of the sales made to the traders are on credit basis. Further, the credit period is also not fixed and the traders when possible pay the assessee in cash for the goods purchased by them from the assessee previously. The assessee submitted before both the Authorities that the impugned deposits of Rs.40,07,500/- were deposited in the over draft account of the assessee during the demonetization period which are nothing but the cash collected from the debtors of the assessee to whom sales were effected previously. We also take a note of the fact that the assessee maintains books of accounts on day to day basis and the AO has also not rejected the said account audited u/s 44AB of the Act. We also take a note of the fact that assessee while filing the VAT returns had accounted for all the sales and purchases and paid the due taxes to the Government. Further, we also take a note of the fact that the sales and purchases of the assessee were accepted by the AO and therefore, the genuineness of the sales, purchases and stocks were not doubted by the AO.
8.1 We are of the considered opinion that in the present case, the AO has not disputed the fact that the cash received by the assessee during the demonetization period are neither from the cash sales/collection from debtors nor had been recorded in the books of accounts. Further, the said books of accounts had been duly audited by the CA and the same were also accepted by the AO. In fact, it is the view of the AO that since the specified notes were banned and seized to be a legal tender on and from 9.11.2016, the assessee was not allowed to receive or transact in old SBN notes for depositing the same into the bank account and accordingly held that the same is unexplained. We are unable to understand the rationale in the above view taken by the AO. We are of the considered opinion that the assessee has produced all the details of M/s. Surabhi Distributors, Bangalore Page 8 of 9 sources of cash deposits made by the assessee during the demonetization period stating that same were received through sales consideration/receipts from sundry debtors. Therefore, we are of the view that the initial burden of explaining the nature and sources of these cash deposits were established by the assessee and AO merely by stating that the assessee cannot deposit the same during the demonetization period had added the same as unexplained, which in our opinion is not correct. We could not understand merely because the assessee had accepted the SBNs from his Sundry Debtors on or after 09.11.2016, then how the same remain unexplained for the purposes of Income Tax act. We are of the considered opinion that the assessee had offered the explanation & the explanation was also not found to be false by both the Authorities below. In any case, we notice that the assessee has also explained as to why it has collected demonetized notes after the prescribed date of 8.11.2016. Therefore, merely by contravening of the notification issued by the RBI, the provisions of section 68 of the Act cannot be attracted automatically.
8.2 Further we are also of the opinion that the RBI had permitted the assessee to deposit SBN into the bank account on or before the “appointed date”. The Bank were asked to accept the same before the “appointed date”. The SBNs (Cessation of Liabilities Act, 2017) defines the “appointed day” vide section 2(1)(a) of the Act. “appointed day” means 31st day of December,2016. Therefore the bar on the holding and transferring or receiving SBNs is only after the “appointed day” which is 31/12/2016. In view of the above, there is no violation by the assessee of any law in accepting SBNs from the sundry debtors in the normal course of business of the Assessee. For this we rely on the decision of the coordinate Bench in the case of Smt. Malapur Mounika Vs. ITO, Ward-1, Chitradurga (ITA No.599/Bang/2023) vide Order pronouncement dated M/s. Surabhi Distributors, Bangalore Page 9 of 9 30/10/2023 as well as Visakapatnam Bench of the Tribunal in the case of ITO Vs. Sri Tatiparti Satyanarayana in C.O. No. 42/Viz/2014 (Order dated 16/03/2022) which held that dealing in SBNs prior to the appointed day i.e. 31/12/2016 can not be prohibited and the source of deposit needs to be examined.
8.3 In view of the above, we set aside the order passed by the ld. CIT(A)/NFAC and direct the AO to delete the addition.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 26th Sept, 2025