Loading judgment…
Facts
The assessee, a firm engaged in the two-wheeler agency business, did not commence operations due to a financial crisis and non-supply of vehicles. The firm did not file its return of income for AY 2017-18 and was selected for scrutiny. The Assessing Officer (AO) made ex-parte additions under Section 69A r.w.s. 115BBE for unexplained money and an addition for business income. The CIT(A) partly allowed the appeal, deleting the business income addition but confirming the addition for unexplained money.
Held
The Tribunal held that the assessee had provided sufficient explanation for the source of cash deposits made during the demonetization period. The Tribunal noted that the assessee had borrowed funds from relatives and friends, and the transactions were supported by confirmations, PAN, and identity of lenders. The Tribunal also relied on various precedents where similar additions were deleted when the source of cash deposit was explained.
Key Issues
Whether the cash deposits made during the demonetization period can be treated as unexplained money under Section 69A of the Income Tax Act, 1961, when the source has been adequately explained by the assessee.
Sections Cited
69A, 115BBE, 144, 234A, 234B, 142(1), 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI S.S. VISWANETHRA RAVI & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal by the assessee is filed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, for the assessment year 2017-18, dated 30.07.2024.
The assessee has raised the following grounds of appeal:
1. The CIT(A) erred in confirming the addition of Rs.50,33,000/- as Unexplained Money u/s.69A which is contrary to facts and circumstances of the case.
:-2-: ITA. No.: 2241/Chny/2024
2. The CIT(A) having considered the sources of the cash deposits was erred in upholding addition u/s.69A of the Act only on the basis it was deposited during the demonetization period.
In any event taxing the addition at the rate prescribed u/s.115BBE of the Act is wholly illegal.
The CIT(A) erred in upholding the levy of interest u/ss. 234A and 234B of Rs.12,55,236/- and Rs.14,28,372/- respectively by the Assessing Officer. 5. Any other grounds that may be raised during the time of hearing.
3. The brief facts of the case are that the assessee is a firm consisting of 3 partners and formed partnership firm on 09.03.2015 to carry on the business of two wheeler agency, but the business not commenced due to financial crisis and non-supply of vehicles from principal. The assessee firm has not filed the return of income for the A.Y.2017-18. The case was selected for scrutiny under OCM cases and accordingly, statutory notices were issued to the assessee. However, the assessee did not participate in the assessment proceedings and hence the assessing officer completed the assessment exparte u/s.144 of the Act dated 29.12.2019 on best judgment basis by making an addition of Rs.50,33,000/- u/s.69A r.w.s. 115BBE of the Act on account of unexplained money and brought to tax. The AO also made addition of Rs.14,25,412/- on an estimate basis at the rate of 8% of the total turnover of the assessee. Subsequently, the assessee filed an appeal before the ld.CIT(A), NFAC, Delhi. Before the ld.CIT(A), the assessee submitted that the AO has passed the order u/s.144, though the assessee had :-3-: ITA. No.: 2241/Chny/2024 furnished the details by participating in the assessment proceedings. The assessee had submitted the agreement entered with the manufacturer of two wheelers in Andhrapradesh for supply of vehicles, for which a loan has been taken from Tamilnadu Mercantile Bank. The manufacturer has failed to supply the vehicles as per the agreement. Hence, the firm was unable to commence the business activity. Due to the violation of the agreement, the assessee filed a criminal case against the manufacturer. Since, the business operation had not been commenced there was pressure from the bank to repay the loan. Hence the firm had collected loan from the relatives and friends to repay the loan and deposited to the bank.
3.1 Further, the assessee also explained that the AO has erred in treating the borrowings which was deposited of Rs.1,78,17,654/- as turnover, though the assessee had not commenced the business, and estimated the net profit @ 8% on such deposits and added as income of the assessee, apart from making an addition of Rs.50,33,000/- as unexplained source of demonetised currency. The assessee also stated that the reply filed on 17.12.2019 along with the following details; - Cash loan recorded in the books of accounts - Consent letter and identity of the lenders - Explained the source of cash deposit, cheques dishonoured and loan transfer entries.
:-4-: ITA. No.: 2241/Chny/2024 - Suit filed copy against the manufacturer Apart from the above, the assessee filed additional evidence under Rule 46A and the same were forwarded to AO and obtained the remand report dated 17.05.2024.
3.2 In response to the remand report, the assessee stated the entire details of the agreement, criminal case filed against the manufacture, non-commencement of business, bankers demand to repay the loan, loan borrowings and deposits made to the bank account. Further, the transactions of Rs.1,78,14,654/- which was treated as turnover by the AO, the assessee explained that an amount of Rs.1,17,00,000/- relates to the dishonour of cheques of the manufacturer deposited by the assessee into his bank account, which are reversed by debiting in the bank account, which has been conveniently ignored by the AO. The balance amount of Rs.61,17,654/- is relates to the borrowings from friends and relatives. In respect of additions made on account of demonetised currency of Rs.50,33,000/- the assessee explained that the source has already been proved and mere deposit of SBNs cannot be treated as unexplained money u/s.69A of the Act. money u/s.69A of the Act.
3.3 On perusal of the submissions, the ld.CIT(A) partly allowed the appeal of the assessee by deleting the addition made by the AO on an estimate basis in regard to business income of the assessee amounting to Rs.14,25,412/- and confirmed the additions made by :-5-: ITA. No.: 2241/Chny/2024 the AO on account of deposit of SBNs to the tune of Rs.50,33,000/-. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.
4. The ld.AR for the assessee submitted the ld.CIT(A) has erred in confirming the addition only for the reason that the deposit of cash made in SBNs during the demonetisation period. The ld.AR filed a paper book of 97 pages containing the replies filed before the AO, Ld.CIT(A), confirmation from the lenders like friends and relatives, letter issued to manufacturer by the bank. The ld.AR submitted that the assessee had entered an agreement with the manufacturer of two wheelers in Andhra pradesh for supply of vehicles, for which a loan has been taken from Tamilnadu Mercantile Bank. The manufacturer has failed to supply the vehicles as per the agreement. Hence, the firm was unable to commence the business activity. Due to the violation of the agreement, the assessee filed a criminal case against the manufacturer. Since, the business operation had not been commenced and consequently the repayment of loan had been defaulted, there was a huge pressure from the bank to repay the loan. Hence the firm had collected loan from the relatives and friends to repay the loan and deposited SBNs to the bank. The ld.AR submitted that the confirmation letters, identity of the person (Page Nos.48 to 69 of paper book) and source of the cash had been :-6-: ITA. No.: 2241/Chny/2024 explained before the AO, the addition made by the AO is not sustainable in the eyes of law. The ld.AR relied on the following decisions of the Tribunals, wherein the courts have held that once the source of cash deposit has been explained the additions cannot be sustained u/s.69A of the Act: - Karnam Rudrapillai Gunseharan Vs.ITO, in dated 17.02.2025, Chennai Tribunal - Spectra Equipment (P) Ltd Vs.ITO, [2025] 170 Taxmann.com 343 (Hyderabad – Trib) - Raju Ravichandran Vs.ITO, [2024] 159 taxmann.com 1518 (Chennai Tribunal) - Maruthi Babu Rao Jadav Vs.ACIT, [2025] 171 taxmann.com 463 (Kerala) – Hon’ble Kerala High Court - Shri Raju Dinesh Kumar vs DCIT, ITA 1321/Chny/2023 dated 19.01.2024, Chennai Tribunal In light of the above arguments the ld.AR prayed for deleting the addition confirmed by the ld.CIT(A).
5. Per contra, the ld.DR relied on the orders of the lower authorities.
We have heard both the parties, perused materials available on record, the paper books and gone through orders of the authorities below along with case laws relied on. Admittedly, the assessee has not carried out any business during the impugned assessment year due to non- supply of vehicles by the manufacturer, consequently, the assessee has defaulted in repayment of loans borrowed from the Tamilnadu mercantile bank. We find that the assessee had borrowed funds from relatives and friends and deposited to bank account during the demonetisation period
:-7-: ITA. No.: 2241/Chny/2024 in SBNs. The assessee has proved the source of loan borrowed by providing the name, identity and genuineness of the cash deposited by providing the confirmation, PAN and identity of the lenders. As argued by the ld.AR even the cash deposited in SBN had been collected during the demonetisation period, which was not prohibited as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017. As observed and confirmed in para 7.1.4 of the order by the ld.CIT(A), the assessee was not legal authority to make legal transactions in SBNs during the demonetisation period is not acceptable relying on the various decisions of this tribunal, wherein it is confirmed that the ‘appointed date’ for ‘not transacting in SBNs’ as 31.12.2016. Therefore, we find force in the argument of the ld.AR, since this issue is covered in favour of the assessee by the decisions of this Tribunal in the following case Shri Raju Dinesh Kumar vs DCIT (Supra), where the Tribunal under the identical set of facts deleted the additions made by the Assessing Officer, after considering this tribunal’s following decisions M/s.Micky Fireworks Industries Vs. ACIT – dated 26/07/2023, Mrs.Umamaheshwari Vs. ITO - dated 14/10/2022, Amar Sparklers Factory vs ITO - ITA No. 808/Chny/2023 dated 11/10/2023, held as under: “9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts borne out from the record clearly indicate that the assessee is running a dhall mill and manufacturing various kinds of dhalls. The facts brought on record by the AO further indicated that the assessee procures various kinds of pulses from local market and manufacturing into various kinds of dhalls and sells to unregistered dealers in cash. The assessee has filed comparative cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17 and also cash sales and cash deposits for the month of October & November, 2015 and October &
:-8-: ITA. No.: 2241/Chny/2024
November, 2016. On perusal of details filed by the assessee, which has been reproduced by the AO in the assessment order, we find that there is no abnormal variation in cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17. Further, the cash sales achieved by the assessee for FY 2015-16 is higher than the cash sales reported for FY 2016-17. From the details filed by the assessee, it is abundantly clear that there is no sudden increase in cash sales during demonetization period when compared to earlier Financial Years. Further, the assessee has filed cash book and other details to prove availability of cash in hand as on 08.11.2016 at Rs.71,76,208/-. In fact, the AO is not disputed the fact that the assessee has filed cash book and as per said cash book, cash in hand as on 08.11.2016 was at Rs.71,76,208/-. If you go by the nature of business of the assessee and sales trend, it is undoubtedly clear that the assessee’s sales predominantly in cash, and thus, the cash in hand shown by the assessee as on 08.11.2016 appears to be genuine and bona fide. To this extent, in our considered view, the reasons given by the AO to reject explanation of the assessee for source for cash deposits into bank account is devoid of merits. 10.Having said so, let us come back to the explanation of the assessee with regard to source for remaining cash deposits. The assessee claims that he is into manufacturing of various kinds of dhalls and sells to unregistered dealers in cash. The assessee claims that he has collected cash in demonetized currency from customers even after 09.11.2016 and said cash receipts is not violation of Specified Bank Notes (Cessation of Liabilities) Act, 2017. We find that although, the Government of India & RBI issued various notifications and circulars barring people transacting in SBNs, but, as per Specified Bank Notes (Cessation of Liabilities) Act, 2017, no person shall accept or transact any SBNs from the appointed date. As per said Act, appointed date is 31.12.2016. From the above, it is very clear that up to appointed date, persons can transact in SBNs. However, the only requirement is, they should be able to establish source for said cash deposits. This principle is further fortified by the decision of the ITAT Chennai Bench in the case of Amar Sparklers Factory v. ITO in order dated 11.10.2023, where the Tribunal after considering relevant facts has held as under: 7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. In so far as addition of Rs. 6,62,783/-, we find that the assessee itself has admitted shortage of source in their cash flow statement filed before the AO. Therefore, from the above, it is undoubtedly clear that the assessee could not explain source for cash deposits to the extent of Rs. 6,62,783/- and thus, we are of the considered view that, there is no error in the reasons given by the CIT(A) to sustain additions made towards cash deposits to the tune of Rs. 6,62,783/-. In so far as addition of Rs. 20,40,000/- towards advance received from group concerns, it was an argument of the appellant that group concerns have paid advance in cash during demonetization period and deposited into IDBI bank account. In this regard, the appellant has filed necessary details including PAN nos. and confirmation letters from the group concerns to prove receipt of trade advance. The Assessing Officer has not disputed these facts, however made additions only on the ground that the assessee should not have accepted cash in specified bank notes after 08.11.2016. We find that this issue is covered in favour of the assessee by the decision of ITAT, Chennai Benches in the case of M/s. Micky Fireworks Industries vs ACIT in dated 26.07.2023, where the Tribunal under identical set of facts deleted
:-9-: ITA. No.: 2241/Chny/2024 additions made by the Assessing Officer, and the findings of the Tribunal is reproduced as under: “4. From the facts, the undisputed position that emerges is that the assessee has made sale of fireworks during festival season. The sales are duly accounted for by the assessee in the books of accounts. The accounts have duly been audited. The assessee has realized debtors out of such sale in SBN which have been deposited in the bank account of the assessee. The cash deposited by the assessee has duly been accounted for in the books of accounts. The Ld. AO has not alleged any bogus sales or back dated sales made by the assessee. No defect has been pointed in the books of accounts as maintained by the assessee.
It could also be seen that during the course of assessment proceedings, various notices were issued u/s 142(1) from time to time calling numerous details from the assessee. The assessee was required to file numerous details including monthly cash flow statement, inventory of closing stock, copy of sales tax assessment order, monthly cash deposits and credits for various periods, ledger account for purchase and other expenditure, monthly sales gross receipts, monthly purchases, details of old notes and new notes deposited during demonetization period, the day book, Cash book, ledger maintained for business, cash balance as per cash book etc. All these details were duly submitted by assessee vide reply dated 12-12- 2019. The assessee also submitted month-wise cash deposits in all bank accounts, details of old notes deposited at the time of demonetization period. Pertinently, the assessee also furnished details of name, address and PAN of cash depositors who deposited cash during demonetization period. The same has been detailed on pages 24 to 35 of the paper book. Apparently, the same could not be faulted with by Ld. AO. There is no allegation of any irregularity in the books of accounts.
6. We find that the only reasoning to treat the said deposits as unexplained cash credit u/s 68 is that the assessee was debarred from dealing in SBN after 08-11-2016. However, in the present case, the cash so received by the assessee is backed by sales carried out by the assessee as recorded in the books of accounts. Therefore, the source of cash is duly explained. The provisions of Sec.68 could be invoked only in cases when there was unexplained cash credit in the books of accounts maintained by the assessee. However, the assessee has duly identified the debtors from whom the cash was received and the same could not be disputed by lower authorities. The PAN of respective debtors as well as quantum of cash realized from each of them has duly been detailed by the assessee before Ld. AO during assessment proceedings. No defect has been pointed out in the books of accounts. In such a case, the credit could not be held to be unexplained cash credit and the impugned additions are not sustainable in law.
The SMC bench of this Tribunal in Mrs. Umamaheswari Vs. ITO (supra), on identical facts, deleted similar additions on the ground that the assessee had duly evidenced the source of cash deposit and therefore, addition could not be made u/s 68. Similar is another decision of SMC Raipur Bench in Rahul Cold Storage Vs. ITO (supra) wherein it has similarly been held that when the deposits were sourced out of business receipts duly recorded in the books of accounts, no such addition could be made u/s 68. The other cited decision of Bangalore Tribunal is also on similar lines.
:-10-: ITA. No.: 2241/Chny/2024
8. Considering the facts and circumstances of the case, we find force in assessee’s case and therefore, delete the impugned addition as made u/s 68. We order so. The Ld. AO is directed to re-compute the income of the assessee.” 8. In this view of the matter and by following the decision of ITAT, Chennai Benches, we direct the AO to delete additions made towards source for cash deposits at Rs. 20,40,000/- u/s. 69A of the Act. 11. In the given facts of the present case, there is no dispute with regard to the fact that the assessee’s sales predominantly in cash. It is also an undisputed fact that there is no abnormal variation in total sales, cash sales and cash deposits for two Financial Years. The assessee is also able to file various evidences, including month-wise purchase and sales and cash book to prove availability of cash in hand as on 08.11.2016. Therefore, we are of the considered view that going by the nature of business of the assessee and also details submitted for two Financial Years, the explanation offered by the assessee towards source for cash deposits into bank account during demonetization period, is bona fide and acceptable. The AO and the Ld.CIT(A) without considering the relevant submissions of the assessee simply made addition towards cash deposits u/s.69A r.w.s.115BBE of the Act. Thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete the addition made towards cash deposits u/s.69A r.w.s.115BBE of the Act.”
7. In the given facts and circumstances of the present case, the cash deposit in SBN made by the assessee was Rs.50,33,000/- during the demonetisation period and the source for the same is explained as received from the relatives and friends by providing the name, identity, address, PAN and confirmation letters. Therefore, we are of the considered view that the AO and ld.CIT(A) erred in confirming the addition of cash deposits as unexplained money U/s.69A of the Act r.w.s.115BBE of the Act. Thus, by considering the facts of the case and respectfully following the precedents laid down by the Tribunal, we find merit in the contentions of the assessee. Accordingly, the order of the learned CIT(A) is set aside by directing the AO to delete the addition made under Section 69A r.w.s 115BBE of the Act. Consequently, the :-11-: ITA. No.: 2241/Chny/2024 grounds raised by the assessee in this regard are allowed. Since, the entire addition is deleted, the grounds raised in respect of interest U/s.234A & 234 B becomes infructuous.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the court on 26th May, 2025 at Chennai.