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Facts
The assessee, an individual, filed a return declaring income. The case was selected for scrutiny, and the Assessing Officer (AO) noted cash deposits of ₹2,60,000/- made during the demonetization period in Specified Bank Notes (SBNs). The AO treated this as unexplained money under section 69A of the Income Tax Act and added it to the total income.
Held
The Tribunal held that the source of the deposits, which was from ordinary business sales, was not disputed. It was noted that the demonetization scheme did not prohibit the acceptance or deposit of SBNs prior to December 31, 2016. Therefore, a mere violation of certain notifications would not justify rejecting the explained source of funds.
Key Issues
Whether cash deposits made in Specified Bank Notes (SBNs) during the demonetization period can be taxed under Section 69A of the Income Tax Act when the source of funds is explained and the acceptance of SBNs was not explicitly prohibited at the time.
Sections Cited
69A, 143(1), 143(2), 142(1), 133(6), 69, 115BBE
AI-generated summary — verify with the full judgment below
Before: Shri S.S. Viswanethra Ravi & Shri Jagadish
Year: 2017-18 Arumugam Sivasankaran, Vs. The Income Tax Officer, No. 160, National Agencies Ward 4, Main Road, Vasistapuram, Tittagudi, Cuddalore. Cuddalore 606 106. [PAN:ADQPS5673J] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri N. Arjun Raj, Advocate ��थ� की ओर से/Respondent by : Shri M.P. Guru Prasad, Addl. CIT सुनवाई की तारीख/ Date of hearing : 24.04.2025 घोषणा की तारीख /Date of Pronouncement : 30.04.2025 आदेश /O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 30.12.2024 passed by the Addl./JCIT(A), Agra for the assessment year 2020-21.
2. The assessee raised 9 grounds of appeal amongst which, the only issue emanates for our consideration as to whether the ld. CIT(A) is justified in confirming the addition made under section 69A of the Income Tax Act, 1961 [“Act” in short] exparte of the assessee in the facts and circumstances of the case.
3. Brief facts of the case are that the assessee is an individual and filed return of income declaring income at ₹.3,15,320/-. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for scrutiny and issued notice under section 143(2) of the Act. Notice under section 142(1) r.w.s. 129 of the Act with questionnaires was issued to the assessee. Notice under section 133(6) of the Act was also issued to the Canara Bank, Agaramsigoor Branch. After verification of bank details as reflected at pages 2 to 5, the Assessing Officer noted that the assessee made cash deposit during the demonetization period to the tune of ₹.2,60,000/- in SBNs and accordingly, treated the same as unexplained money under section 69A of the Act and added to the total income of the assessee. As not satisfied with the order of the Assessing Officer, the assessee preferred an appeal before the ld. CIT(A). On appeal, the ld. CIT(A) dismissed the appeal of the assessee for want of prosecution. On being aggrieved, the assessee is in appeal before the Tribunal.
4. The ld. AR Shri N. Arjun Raj, Advocate submits that there is no prohibition to receive SBNs during demonetization period upto 31.12.2016. Further, SBNs were permitted to deposit in the Bank upto 31.12.2016, argued vehemently, where there is no prohibition to accept and is permitted to deposit, addition cannot made. He submits that similar issue on identical facts was subject matter in appeal before this Tribunal in the case of Tamil Nadu State marketing Corporation ltd. v. ACIT in dated 07.10.2024 and placing copy of the order on record, it was prayed to following the same.
The ld. DR Shri M.P. Guru Prasad, Addl. CIT supported the order passed by the ld. CIT(A).
We have heard both the parties and perused the material available on record. The assessee is a proprietor of “M/s. National Agencies” doing cement trade and explains the source for cash deposits made out of sales during the demonetization period. After verification of details furnished by the assessee and bank statement furnished by Canara Bank, the Assessing Officer noted that the assessee made cash deposit during demonetization period in Canara Bank account of ₹.2,60,000/-, which is not allowable and treated the same as unexplained cash deposits under section 69A of the Act and the same was confirmed by the ld. CIT(A).
We note that the source of deposits has not been disputed and has been created out of ordinary business sales. Before the Assessing Officer, the assessee explained the source for cash deposits by accepting SBNs, which was out of sales and it is an admitted fact that there is no case of the Assessing Officer that the assessee has deposited any unaccounted cash into bank account in SBNs. Under such situation, the point at issue is whether the cash deposits made in SBNs during demonetization period can be brought to tax under section 69A of the Act or not. Before us, the ld. AR relied on the order of the Tribunal in the case of Tamil Nadu State marketing Corporation Ltd. v. ACIT (supra), wherein, the Tribunal has observed and held as under: 8.1 Now the question arises whether the demonetized currency received by assessee on account of sale of IMFS and beer to the customers and accepted demonetized currency in return is to be assessed u/s.69 of the Act or not as unexplained investment. The ld. Senior DR has raised a question on this that when there was an express bar by Government on transacting business from 09.11.2016 in SBNs in view of Question No.2 of FAQ issued by RBI on 08.11.2016 vide Circular No.DCM(Plg) No.1226/10.27.00/2016-17. The ld. Senior DR has argued that vide this very circular, the Government of India has declared the SBNs as not a legal currency w.e.f. 09.11.2016 except only from few notified business transactions were permitted to transact in SBNs and that too for a limited period upto 24.11.2016 as far as demonetized currency of Rs.1000/- and Rs.500/- and then it was extended upto 15.12.2016. The ld. Senior DR has also argued that the assessee’s nature of business is not covered under the notification of the Government of India exempting certain categories. We noted that the ld. counsel for the assessee in reply to the same referred to Ordinance issued by the Ministry of Law & Justice, Government of India in the Gazette of India, wherein the SBNs were declared or ceased to be liability of RBI or Central Government and penal provisions were incorporated in the same for holding the demonetized currency as well as transacting in the same. The relevant Ordinance No.10 of 2016, The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was brought in on 30.12.2016. We noted that vide this Ordinance dated 30.12.2016 i.e., Specified Bank Notes (Cessation of liabilities) Ordinance, 2016, No.10 of 2016 dated 30.12.2016, has clearly held the demonetized currency to have ceased to be legal tender as pointed out by ld. counsel, the provision of Section 5 very categorically states that no person shall knowingly or voluntarily hold or transfer any Specified Bank notes on or from the appointed day of 31.12.2016. The relevant provisions of section 5, 6, 7 & 8 reads as under:- 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 that court.
6. Whoever knowingly and wilfully makes any declaration or statement specified under sub-section (1) of section 4, which is false in material particulars, or omits to make a material statement, or makes a statement which he does not believe to be true, shall be punishable with fine which may extend to fifty thousand rupees or five times the amount of the face value of the specified bank notes tendered, whichever is higher. Penalty for contravention of section 5 7. Whoever contravenes the provisions of section 5, shall be punishable with fine which may extend to ten thousand rupees or five times the amount of the face value of the specified bank notes involved in the contravention, whichever is higher. Offences by companies
(1) Where a person committing a contravention or default referred to in section 6 or section 7 is a company, every person who, at the time the contravention or default was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contravention or default and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention or default was committed without his knowledge or that he had exercised all due diligence to prevent the contravention or default. (2) Notwithstanding anything contained in sub-section (l), where an offence under this Ordinance has been committed by a company and it is proved that the same was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary, or other officer or employee of the company, such director, manager, secretary, other officer or employee shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. Explanation.-For the purpose of this section,- (a) “a company” means anybody corporate and includes a firm, trust, a co-operative society and other association of individuals; (b) “director”, in relation to a firm or trust, means a partner in the firm or a beneficiary in the trust. This was further explained by the Central Government i.e., RBI vide Circular dated 26.05.2017 and the relevant reads as under:- Why was the Scheme of Withdrawal of Legal Tender Character of the old Bank Notes in the denominations of ₹ 500 and ₹ 1000 introduced? The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal tender character of the old Bank Notes in the denominations of ₹ 500 and ₹ 1000 was introduced.
What is this scheme? The legal tender character of the bank notes in denominations of ₹ 500 and ₹ 1000 issued by the Reserve Bank of India till November 8, 2016 (hereinafter referred to as Specified Bank Notes) stands withdrawn. In consequence thereof these Bank Notes cannot be used for transacting business and/or store of value for future usage. The Specified Bank Notes (SBNs) were allowed to be exchanged for value at RBI Offices till December 30, 2016 and till November 25, 2016 at bank branches/Post Offices and deposited at any of the bank branches of commercial banks/Regional Rural Banks/Co-operative banks (only Urban Co-operative Banks and State Co-operative Banks) or at any Head Post Office or Sub-Post Office during the period from November 10, 2016 to December 30, 2016.
What is the Specified Bank Notes (Cessation of Liabilities) Act 2017? On February 27, 2017 Government of India notified the Specified Banknotes (Cessation of liabilities) Act 2017. The Act repealed the Specified Banknotes (Cessation of liabilities) Ordinance 2016 providing for cessation of liabilities for the Specified Banknotes (SBNs) and for matters connected therewith and incidental thereto, with effect from December 31, 2016. The SBNs cease to be the liabilities of the Reserve Bank under Section 34 of the RBI Act and cease to have the guarantee of the Central Government. 8.2 The ld. counsel explained that till 31.12.2016, these notes i.e., SBNs in demonetized currency was not held to be illegal tender and there is no provision that holding these notes or transacting the same will amount to violation of any law. Before us, the ld. counsel compared the earlier demonetization scheme of 1978, i.e., The High Denomination Bank Notes (Demonetization) Act, 1978 with the present Demonetization Scheme, whereby the scheme was announced on 16.01.1978 wherein the high demonetization notes of value Rs.500/-, Rs.1000/- or Rs.10000/- was withdrawn from circulation and there was a clear bar in the Act for transfer or receipt of high denomination notes and that demonetized bank notes was ceased to be legal tender vide section 3 & 4 from 16.01.1978 only, which reads as under:- “3. High denomination bank notes to cease to be legal tender.—On the expiry of the 16th day of January, 1978, all high denomination bank notes shall, notwithstanding anything contained in section 26of the Reserve Bank of India Act, 1934 (2 of 1934), cease to be legal tender in payment or on account at any place.
Prohibition of transfer and receipt of high denomination bank notes.—Save as provided by or under this Act, no person shall, after the 16th day of January, 1978, transfer to the possession of another person or receive into his possession from another person any high denomination banknote.” The ld. counsel for the assessee also relied on one decision of Hon’ble Bombay High Court in the case of Narendra G. Goradia (HUF) vs. CIT reported in (1998) 234 ITR 571 and stated that the Hon’ble Bombay High Court has categorically held that where the assessee is required to prove source of money, in such case and once, he is successful in proving that source, he could not be asked to produce proof of acquisition of such amount in currency notes of particular denominations. The ld. counsel for the assessee relied on para 9 of the decision, which reads as under:- “10. We have also perused the decision of A. Govindarajulu Mudaliar v. CIT, on which reliance is placed by learned counsel for the Revenue. We, however, fail to understand how the above decision helps the Revenue in the instant case. In that case, certain amounts appeared in the account books of a firm of which the assessee was a partner as credits for him. The assessee was asked for an explanation as to how he came to possess this amount. His explanation in regard to the source of this amount in part was not accepted. It was in that context that the Supreme Court observed that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature. That is not the position in the case before us. In this case, the assessee could prove satisfactorily the source and nature of the amounts. Addition was made not for that reason. The assessee was further required to prove the receipt of the amount of Rs. 2 lakhs therefrom in high denomination notes. In other words, the assessee was asked to prove as to when and from whom he received the amount in high denomination notes. The assessee gave reasonable explanation for his inability to give detailed account of receipts and disbursements of amounts from time to time in currencies of various denominations including high denomination notes. He could, however, satisfy the authorities about the fact that he was often in possession of Rs. 1,000 denomination notes and the probability of high denomination notes of the value of Rs. two lakhs being included therein. In fact, the Revenue itself was satisfied about the inclusion of 96 notes of Rs. 1,000 each therein. The amount of Rs. 1,04,000 was added as income from undisclosed sources only because, according to the Revenue, the assessee failed to discharge the onus cast on him to prove the acquisition of each and every high denomination note encashed by him. This approach, as earlier indicated, is not correct.
The assessee having proved the source and shown satisfactorily the possibility of the inclusion of Rs. 1,000 high denomination notes of the value of Rs. 2 lakhs therein, the addition of Rs. 1,04,000 to his income for his failure to furnish detailed particulars of the receipt of such notes each of the 200 notes of Rs. 1,000 denomination tendered by him for encashment, is not in accordance with law.” This judgment was referred by the ld. counsel for meeting the argument made by ld. Senior DR that the demonetized currency received by assessee in the present case is not out of sale proceeds of liquor. We have gone through the scheme and noted that the Specified Bank Notes (cessation of liabilities) Ordinance 2016 (subsequently this was passed as an Act), was towards cessation of liability of RBI in respect of SBNs with effect from 31.12.2016. The Government of India vide Gazette of India Notification dated 8.11.2016 notified that the SBNs of Rs.500 and Rs.1,000 notes is not a legal tender w.e.f. 9.11.2016. We noted that even the Revenue admitted that the Government has not declared the SBNs as an illegal tender and even possessing of SBNs was not an offence till 31.12.2016. Between the period from 9.11.2016 to 31.12.2016,all the public, who were holding such SBNs were permitted to exchange such holdings against valid currency notes but the scheme itself does not render the SBN as illegal or declaration does not bar in receiving or paying through the SBNs in the course of business like other documents i.e., through cheques, promissory notes, Government securities, which are not legal tender can be freely exchanged so can the SBNs. The Ordinance of December 2016 clearly specifies that on or from 31.12.2016, it is illegal for any person to hold, transfer or receive SBNs. This would mean that prior to 31.12.2016 there is no bar on any person holding, transferring or receiving SBNSs prior to 31.12.2016 was not illegal. If a currency is not a legal tender, only the recipient may refuse or cannot force to receive currency which is not legal tender. When both parties to the transaction agrees, there is no prohibition for one party to transfer and the other party to receive SBNs in the course of a legal transactions prior to 31.12.2016. We noted that with the notification of ‘’The Specified Bank Notes (Cessation of Liabilities) Act, 2017”, even this liability to honour such exchange, transact, transfer or hold SBNs ceased to be operative from 31.12.2016, the appointed date. 8.3 In view of the above provisions, as in the present case, once the receipt of SBNs by assessee is not illegal or barred by any legal provisions the receipt of SBNs cannot be put on a different footing for the purpose of Section 68 or Section 69 of the Act from other currency as the source of SBNs are same as the source of other currency. The SBNs though are not legal tender, is of no consequence for determination of source, because the SBNs can be encashed for the face value with the bank without any question being raised. We further noted from the RBI circulars or CBDT circulars that neither the RBI circulars nor any CBDT circulars including any instructions on demonetization requires any person to disclose the source of SBNs. We noted from the facts of the case placed before us that out of total deposits of Rs.2635.35 Crores were in cash for the month of November 2016, which has been accepted as the value of liquor sold for a sum of Rs.2582.56 Crores, hence it can be easy presumed, unless disproved by Revenue, that the balance sum of Rs.52.79 Crores is out of sale of liquor. There is no basis or evidences or examination of any person for reaching a conclusion that this sum of Rs.52.79 Crores received by assessee has been substituted in demonetized currency. We noted from the evidences placed before us that the observation of the AO that branch wise details of deposits made in SBNs was not available is not correct for the reason that the complete details of deposits of SBNs account-wise, branch-wise was submitted before the AO as well as before the CIT and also before us. 8.4 We have gone through the notifications issued by the RBI and Government of India, to deal with specified bank notes. The only premise of the Revenue is mainly on the issue of notification issued by the RBI to deal with the specified bank notes and argument is that the assessee is not one of the eligible person to accept or to deal with specified bank notes and thus, even if assessee furnish necessary evidence, the assessee cannot accept specified bank notes after demonetization and the explanation offered by the assessee cannot be accepted. No doubt specified bank notes of Rs. 500 & Rs. 1000 have been withdrawn from circulation from 09.11.2016 onwards. The Government of India and RBI has issued various notifications and SOP to deal with specified bank notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes up to 31.12.2016. Further, the specified bank notes (cessation of liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact specified bank notes, and appointed date has been stated as 31.12.2016. Therefore, there is no clarity on how to deal with demonetized currency from the date of demonetization and up to 31.12.2016. Therefore, under those circumstances, some persons continued to accept and transact the specified bank notes and deposited into bank accounts. Therefore, merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with specified bank notes, the genuine explanation offered by the assessee towards source for cash deposit cannot be rejected, unless the AO makes out a case that the assessee has deposited unaccounted cash into bank account in specified bank notes. 8.5 We further noted that the Central Board of Direct Taxes had issued a circular for the guidance of the Revenue 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 AO 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 circular issued by the CBDT, it is very clear that, while making additions towards cash deposits in demonetized currency, the AO needs to analyze the business model of the assessee, its books of account and analysis of sales etc. In this case, if we go by analysis furnished by the assessee in respect of total sales, cash sales including the cash received in demonetized currency and cash deposits, there is negligible amount in demonetized currency. 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 circular/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected. Simpliciter violation of certain notification issued by RBI or demonetization scheme announced by Government of India on 08.11.2016 will not entitle the Revenue to make addition u/s.69 or 69A of the Act. Because, the mandate of the provisions of Section 69 & 69A of the Act, i.e., unexplained investments and unexplained money etc., may be deemed to be the income of the assessee for the financial year relevant to assessment year concerned, in which the assessee is found to be the owner of such money, bullion, jewellery or valuable article or unexplained expenditure, if, the such expenditure or such money etc., are not recorded in the books of accounts, if any, maintained by assessee for any source of income and the assessee offers no explanation about the nature and source of such expenditure or acquisition of such money, etc., or the explanation offered by him, in the opinion of AO is not satisfactory. For violation of any RBI notification, etc., can have any civil or criminal liability and can be dealt with under any other provision of law by the concerned authority but for the purpose of bringing the amount under Income-tax, the provisions are very clear i.e., 69 & 69A of the Act. In our considered view, to bring any amount u/s. 69 or 69A 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 been duly 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 of demonetized cash in SBNs.
9. In the result, the appeal filed by the assessee stands allowed.
8. On perusal of the above, we note that this Tribunal observed that Government of India and RBI issued various notification and SOP to deal with specified bank notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes upto 31.12.2016. Moreover, the Specified Bank Notes (cessation of liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact specified bank notes, and appointed date has been stated as 31.12.2016. However, the Tribunal observed that there is no clarity on how to deal with demonetized currency from the date of demonetization and upto 31.12.2016. Therefore, under those circumstances, some persons continued to accept and transact the specified bank notes and deposited into bank accounts. In the present case also, the assessee made cash deposits in SBNs. Therefore, we find the order of this Tribunal in the case of Tamil Nadu State Marketing Corporation Ltd. v. ACIT (supra) is applicable to the facts on hand of the present appeal, following the above order of this Tribunal, we hold that the source explained for cash deposits made by the assessee during the period from 24.11.2016 to 30.12.2016 cannot be rejected and brought to tax under section 69A of the Act just because the assessee accepted SBNs in violation of notification issued by the Government of India & RBI, when the Assessing Officer has not disputed that the assessee made any unaccounted cash into bank account in SBNs. Accordingly, we set aside the order of the ld. CIT(A) and delete the addition made by the Assessing Officer under section 69A of the Act. Thus, the ground raised by the assessee is allowed.
In the result, the appeal filed by the assessee is allowed. Order pronounced on 30th April, 2025 at Chennai.