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Facts
The assessee, an NBFC, deposited Rs. 39.66 crores in Specified Bank Notes (SBNs) during the demonetization period (November 9, 2016, to December 30, 2016). The Assessing Officer treated this amount as unexplained money under Section 69A of the Income Tax Act, 1961, as the SBNs ceased to be legal tender from November 9, 2016. The CIT(A) upheld the addition, rejecting the assessee's explanation that these were normal collections from borrowers.
Held
The Income Tax Appellate Tribunal found that neither the Assessing Officer nor the CIT(A) properly examined the relevant facts and records of the assessee in the light of the Standard Operating Procedure (SOP) issued by the CBDT for demonetization-related cash deposits. The Tribunal held that a proper verification and examination of the record and the genuineness of the assessee's claim, as per CBDT SOP, was necessary.
Key Issues
Whether cash deposits made in Specified Bank Notes by an NBFC during demonetization, claimed as loan recoveries, constitute unexplained money under Section 69A, and if tax authorities correctly applied CBDT guidelines.
Sections Cited
69A, 142(1), 115BBE
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Income Tax Appellate Tribunal, Hyderabad ‘ DB-B ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Manjunatha, G.
ORDER
Per Vijay Pal Rao, Vice President This appeal filed by the assessee is directed against the order dated 31/07/2023 of the learned CIT (A)-NFAC Delhi, for the A.Y.2017-18.
2. The assessee has raised the following grounds:
Page 1 of 22 Page 2 of 22
The assessee is a Non-Banking Finance Company (NBFC) registered with the RBI and engaged in micro-finance business since 1999. The assessee filed its return of income for the year under consideration on 27/10/2017 declaring total income at “Nil”. The case was selected for scrutiny under CASS under complete scrutiny. During the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has made cash deposits to the tune of Rs.39,66,15,500/- in the bank account during the demonetization period in Specified Bank Notes (SBNs). The Assessing Officer asked the assessee to explain the source of the deposits of SBNs during the demonetization period. In response, the assessee explained that the assessee is in the business of micro-finance and lending small loans to the poor and women in the rural area. It collects cash and ultimately deposits this amount in the Bank. Therefore, the assessee explained that the cash deposits made during the demonetization period were related to the day-to-day activities of the business of the assessee. The Assessing Officer did not accept this explanation of the assessee and held that as per the notification in S.O No.3407(E), dated 8/11/2016 issued by the Govt. of India, the SBNs in the denomination of Rs.500 and Rs.1000 were withdrawn as legal tender w.e.f. 09/11/2016 and permitted the deposit and such SBNs held by a person into his bank account. Thus, the Assessing Officer held that the acceptance of SBNs by the assessee after 8/11/2016 and deposit of the same in the bank account of the assessee were in contravention of the notification Page 3 of 22 issued by the Govt. of India. The Assessing Officer accordingly held the said deposits of Rs.39,66,15,500/- as unexplained money u/s 69 of the I.T. Act, 1961 while passing the assessment order dated 30/12/2019.
The assessee challenged the action of the Assessing Officer before the learned CIT (A) but could not succeed.
Before the Tribunal, the learned AR of the assessee has submitted that the assessee operates under highly regulated environment as the activities of the assessee are regulated by the RBI. The assessee is required to maintain the record of category of customers, KYS norms, proper loan agreement, repayment schedule and disclosure of interest rates etc. The books of account of the assessee are subjected to annual audit as per the provisions of the Companies Act, 2013 as well as the Tax Audit under the I.T. Act, 1961. The RBI conducts annual inspection of the company’s records and to ensure the compliance with the RBI directions, the assessee is not permitted to take unsecured borrowings from any source other than the corporates. Therefore, generation of any unexplained income in the hand of the assessee is not possible. The assessee operates its business through a network of 700 branches spread out in 19 states. The disbursements of loan are made in the branch office, but the collections are made in the centers with each branch up to 9 and 10 centers. The centers are working close to the borrowers’ places Page 4 of 22 and therefore, the collections are made in the center where group of women meet and repay the instalment. Thus, the Field Credit Officer collects the instalments and deposits in the bank account attached to the respective bank branches. Each and every transaction is recorded in the branch and also in the loan management system (LMS) at the Head of Office. Thus, the learned AR has submitted that all the daily collections are deposits in the company’s bank account except for small amount of collection from the overdue borrowers which takes place after the closure of the banking hours. The cash received from the borrowers towards the repayment of loan/instalment was a maximum of specified bank notes and non-specified bank notes. The learned AR has submitted that this is not a consideration received by the assessee against the sale of goods or commodity but it is a collection of loan receivable from the borrowers which was advanced earlier. He has referred to the loan receivable details as on 31/03/2016 which is more than 1500 crores. The loan receivable is an identifiable with each individual and they are supported by the agreement in writing and also duly recorded in the books of accounts. Therefore, the transaction of loan advance by the assessee and recovery from the borrowers are not in dispute which were source of deposits in the bank account of the assessee. The learned AR has further submitted that the nature of the business of the assessee is such that, it cannot be scaled up or down significantly in a short span of time and therefore, there is no abnormality in the recovery of loan and deposits in the bank Page 5 of 22 account in comparison to the other period/months of the year under consideration as well as in the corresponding period of the earlier years. The Assessing Officer has not disputed the sundry debtors as on 31/03/2014 and recovery of the loan from the borrowers as source of deposits. However, he has made the addition only due to the notification issued by the Govt. of India to declare the currency notes of Rs.500 and Rs.1000 is not legal tender w.e.f. 09/11/2016. He has pointed out that during the demonetization period, the assessee has accepted the specified bank notes (SBN) of Rs.39,66,15,500/- only against the total collection of Rs.196,09,54,572/- which were collected from its borrowers against 3 existing agreements; therefore, the acceptance of Specified Bank Notes was only 20% of the total collection and deposits made by the assessee. Thus, the recovery of debts would not partake the character of income when the assessee has already declared interest income which is not disputed by the Assessing Officer. Thus, the learned AR has submitted that when the collection of loan from borrowers is a business receipt of the assessee and the genuineness of the same is not disputed by the Assessing Officer, then the addition made by the Assessing Officer only because of the reason that the deposits was made in SBNs is not justified and sustainable. He has referred to instruction No.3 of 2017 issued by the CBDT dated 21/02/2017 whereby the tax authorities are instructed to follow the procedures and source specific general guidelines in respect of the cash deposits in the bank account. As per the instructions Page 6 of 22 annexed to the said instructions, the cash received from identifiable persons can be verified only to see whether the receipts are in line with the normal directions of the concerned business and therefore, the Assessing Officer can verify the monthly sale sum details with breakup of cash and credit as well as entries in the bank account to identify the cases having suspicion of back data in sale of fictitious sale. Thus, when the transactions of recovery from the borrowers are not disputed by the Assessing Officer, then the addition is contrary to the guidelines issued by the CBDT. He has further submitted that the CBDT has issued as many as six circulars to guide the tax authorities and to follow this standard operating procedure in respect of the deposits of SBNs in the banks. The learned AR has pointed out that prior to the assessement proceedings, the Investigation Wing has also conducted a proper investigation and inquiry about the SBN deposits in the bank account and no adverse finding was given by the Investigation Wing after conducting the said investigation in the case of the assessee. The assessee produced all the relevant details including the month- wise recoveries and loan advances by the assessee as well as the deposits in the bank account during the year as well as the 3 preceding years. Nothing was found abnormal either by the Investigation Wing during the inquiry conducted about the deposit of SBN or by the Assessing Officer to treat the deposits in the SBN as unexplained income of the assessee. Thus, the learned AR has referred to the comparative details of monthly and yearly Page 7 of 22 deposits placed at page No.240 of the paper book and submitted that the deposits during the demonetization period is will within the line of the deposits made in the earlier months as well as tin the earlier years. He has also referred to the assessment order of other NBFCs and submitted that the Assessing Officer that the Assessing Officer has issued the show cause notice u/s 142(1) of the I.T. Act, 1961 in those cases and then made no addition in respect of the deposits of SBNs in the bank account during the demonetization period. Such assessment orders are placed at page No.72 to 77 of the Paper Book No.4. Thus, the learned AR has submitted that when the Department has accepted similar deposits in SBNs, then the additions made in the hand of the assessee is not justified. The learned AR has relied upon the following decisions:
Thus, the learned AR has submitted that on identical facts, this Tribunal has taken a consistent view that when there is no significant change in the cash deposits during the demonetization period, then merely for the reason that the assessee has accepted the specified bank notes in violation of circular/notification dated 08/11/2016, the source explained by the assessee cannot be rejected. He has further submitted that once the transactions are duly recorded in the books of account of the assessee, then without prejudice to the rights and submission of the assessee, the provisions of section 69A cannot be invoked.
On the other hand, the learned DR has submitted that once the currency notes of the denomination of Rs.500 and Rs.1000 declared are no longer legal tender by the notification/ ordinance of the Govt. of India which was subsequently enacted as Act, then the claim of the assessee cannot be accepted that the source of the deposits in the bank account is recovery from the borrowers during the demonetization period. He has relied upon the orders of the authorities below. The learned DR has also relied upon the following decisions: i) Hon'ble Madras High Court in the case of Salem Sree Ramavilas vs. Dy. CIT reported in 423 ITR 525. ii) Hon'ble Madras High Court in the case of S.M.I.L.E Microfinance Ltd vs. ACIT on the Writ Petition No.2078 and 1742 of 2020 Page 9 of 22 and submitted that the Hon'ble High Court has remanded the matter to the record of the Assessing Officer for verification and comparing the earlier statement of account to find out if there is any violation in the transaction of deposits during the demonetization period in comparison to the earlier order. Thus, he has pleaded that at the most, the matter may be remanded to the record of the Assessing Officer for verification of the facts and details in the light of the judgment of the Hon'ble Madras High Court.
In the rejoinder, the learned AR of the assessee has submitted that all the details were furnished before the Assessing Officer in response to the notice u/s 142(1) of the Act and therefore, it is not the case of non-furnishing of the details by the assessee before the Assessing Officer.
We have considered the rival contentions as well as the relevant material available on record. The dispute before is confined to the addition made by the AO on account of cash deposit in the Bank A/c to the tune of Rs.39,66,15,500/- in Specified Bank Notes (SBNs) during the demonetization period from 09/11/2016 to 30/12/2016. The AO has made the addition solely on the basis of the notification issued by the Govt. dated 08/11/2016 whereby the bank notes of the denomination of Rs.500/- and 1000/- referred as SBNs were declared to be as Page 10 of 22 ceased to be legal tender w.e.f. 09/11/2016. For ready reference, the notification dated 08/11/2016 is reproduced as under: “NOTIFICATION NO. S.O. 3407(E) [F.NO.10/03/2016-CY.I] SECTION 26 OF THE RESERVE BANK OF INDIA ACT, 1934 - CHARACTER OF NOTES - LEGAL TENDER - CEASING OF BANK NOTES OF EXISTING SERIES OF DENOMINATION OF VALUE OF RS.FIVE HUNDRED RUPEES AND ONE THOUSAND RUPEES (SPECIFIED BANK NOTES) TO BE LEGAL TENDER W.E.F. 9-11-2016 NOTIFICATION NO. S.O. 3407(E) [F.NO.10/03/2016- CY.I], DATED,8-11-2016 ([AS AMENDED BY NOTIFICATIONS NO. S.O. 3418(E) (F.NO.10/03/2016-CY.I), DATED 9-11- 2016];S.O. NO. 3446(E) [F.NO.10/03/2016-CY.I], DATED 13- 11-2016; S.O. NO. 3449(E) [F.NO.10/03/2016-CY.I], DATED 14-11-2016; S.O. NO. 3479(E) [F.NO. 10/03/2016-CY.I], DATED 17-11-2016; S.O. NO. 3488(E) [F.NO. 10/03/2016- CY.I], DATED 18-11-2016; S.O. NO.3543(E) [F.NO.10/03/2016- CY.I], DATED 24-11-2016; S.O. NO.3599(E) [F.NO.10/03/2016- CY.I], DATED 30-11-2016 AND S.O. NO. 4086(E) [F.NO.10/03/2016-CY.I], DATED 17-12-2016) Whereas, the Central Board of Directors of the Reserve Bank of India (hereinafter referred to as the Board) has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender; And whereas, it has been found that fake currency notes of the specified bank notes have been largely in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones and that the use of fake currency notes is causing adverse effect to the economy of the country; And whereas, it has been found that high denomination bank notes are used for storage of unaccounted wealth as has been evident from the large cash recoveries made by law enforcement agencies; And whereas, it has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the Page 11 of 22 country and the Central Government after due consideration has decided to implement the recommendations of the Board; Now, therefore, in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934) (hereinafter referred to as the said Act), the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016 to the extent specified below, namely:— 1. (1) Every banking company, 1[Co-operative Banks (only Urban Co-operative Banks and State Co-operative Banks)], corresponding new bank, subsidiary bank, regional rural bank and the State Bank of India as defined under the Banking Regulation Act, 1949 (10 of 1949) (hereinafter referred to as 'banking company' or 'bank') and every Government Treasury shall complete and forward a return showing the details of specified bank notes held by it at the close of business as on the 8th November, 2016, not later than 13:00 hours on the 10th November, 2016 to the designated Regional Office of the Reserve Bank of India (hereinafter referred to as the Reserve Bank) in the format specified by it. (2) Immediately after forwarding the return referred to in sub- paragraph (1), the specified bank notes shall be remitted to the linked or nearest currency chest, or the branch or office of the Reserve Bank, for credit to their accounts.
The specified bank notes held by a person other than a banking company referred to in sub-paragraph (1) of paragraph 1 or Government Treasury may be exchanged at any Issue Office of the Reserve Bank or any branch of bank referred to in sub- paragraph (1) of paragraph 1 for a period up to and including the 30th December, 2016, subject to the following conditions, namely: — (i) 1a [ *** ] 2 [ *** ] (ii) (iii) there shall not be any limit on the quantity or value of the specified bank notes to be credited to the account maintained with the bank by a person, where the specified bank notes are tendered; however, where compliance with extant Know Your Customer (KYC) norms is not complete in an account, the maximum value of specified bank notes as may be deposited shall be Rs.50,000: 2a [Provided that the deposit up to the amount of Page 12 of 22 Rs.5000 shall be made directly into such account and the rest of the amount, if any, shall be subject to such conditions as the Reserve Bank of India may specify: Provided further that the deposit of an amount exceeding Rs.5000 shall be made only once per account until 30th December, 2016; ] 2aa [ (iiia) there shall not be any limit on the quantity or value of the specified bank notes that are tendered for payment and deposit under the Taxation and Investment Regime for the Pradhan Mantri Garib Kalyan Yojana, 2016; ] (iv) the equivalent value of specified bank notes tendered may be credited to an account maintained by the tenderer at any bank in accordance with standard banking procedure and on production of valid proof of Identity; (v) the equivalent value of specified bank notes tendered may be credited to a third party account, provided specific authorisation therefor accorded by the third party is presented to the bank, following standard banking procedure and on production of valid proof of identity of the person actually tendering; 3 [ (vi) cash withdrawal from a bank account over the counter shall be such as may be specified by the Reserve Bank of India from time to time: Provided that cash withdrawal from a current account shall be such as may be specified by the Reserve Bank of India from time to time: Provided further that the withdrawal limit provided for current accounts shall also be applicable to the traders registered with the Agricultural Produce Market Committee (APMC) markets and mandis.] (vii) there shall be no restriction on the use of any non-cash method of operating the account of a person including cheques, demand drafts, credit or debit cards, mobile wallets and electronic fund transfer mechanisms or the like; 4 [ (viii) cash withdrawal from an ATM shall be such as may be specified by the Reserve Bank of India from time to time.] (ix) any person who is unable to exchange or deposit the specified bank notes in their bank accounts on or before the 30th December, 2016, shall be given an opportunity to do so at specified offices of the Reserve Bank or such other facility until a later date as may be Page 13 of 22 specified by it. 5 [ (x) the limits for cash withdrawal by farmers from their loan and other accounts shall be such, as may be specified by the Reserve Bank of India. (xi) for wedding expenses, a maximum of Rs. 2,50,000 may be withdrawn in cash from the bank accounts, subject to such conditions as may be specified by the Reserve Bank of India.] 5a [ (xii) deposit of specified bank notes collected between 10th day of November to 14th day of November, 2016, by the District Co-operative Central Bank shall be subject to instructions of the Reserve Bank of India and for the specified bank notes deposited by individual customers or by the Primary Agricultural Credit Societies complete audit check of the veracity of the Know Your Customer documents of the said individual or the members of the said Primary Agricultural Credit Societies shall be conducted by the National Bank for Agriculture and Rural Development: Provided that the linked currency chest to District Co- operative Central Banks shall give the exchange value for verified specified bank notes only and subject to usual checks relating to identification of fake Indian currency notes.] 3. (1) Every banking company and every Government Treasury referred to in sub-paragraph (1) of paragraph 1 shall be closed for the transaction of all business on 9th November, 2016, except the preparation for implementing this scheme and remittance of the specified bank notes to nearby currency chests or the branches or offices of the Reserve Bank and receipt of bank notes having legal tender character. (2) All ATMs, Cash Deposit Machines, Cash Recyclers and any other machine used for receipt and payment of cash shall be shut on 9th and 10th November, 2016. (3) Every bank referred to in sub-paragraph (1) of paragraph 1 shall recall the specified bank notes from ATMs and replace them with bank notes having legal tender character prior to reactivation of the machines on 11th November, 2016. (4) The sponsor banks of White Label ATMs shall be responsible to recall the specified bank notes from the White Label ATMs and replacing the same with bank notes having legal tender character prior to reactivation of the machines on 11th November, 2016.
Page 14 of 22 (5) 6[***] (6) The banking company referred to in sub-paragraph (1) of paragraph 1 and Government Treasuries shall resume their normal transactions from 10th November, 2016. 4. Every banking company referred to sub-paragraph (1) of paragraph 1, shall at the close of business of each day starting from 10th November, 2016, submit to the Reserve Bank, a statement showing the details of specified bank notes exchanged by it in such format as may be specified by the Reserve Bank.”
In pursuant to the said notification, the SBNs were ceased to be the legal tender between the citizens. However, a time period was provided within which the SBNs could be exchanged at the notified bank or the same could have been deposited in the bank a/c of the person. Therefore, the only option with the person having the SBNs after the notification dated 8/11/2016 was either to get the same exchanged as indicated in the notification and the bearer of the SBNs would receive an equal amount from the Bank in the bank notes demonetized or to deposit/tender in the Bank Account. The window was given to the holders of the SBNs to get it exchanged or deposit in the Bank A/c up to 31/12/2016. Thus, it is clear that except for the specific transaction as provided in the notification, the SBNs were ceased to be legal tender for all purposes between the citizens. The factual legal status of the SBNs in pursuant to the notification dated 8/11/2016 would be that it belongs to the bearer of such notes and therefore, the value of the SBNs deposited in the Bank A/c would be the money of the bearer. Thus, the question arises whether a transaction in the Page 15 of 22 SBNs between the citizens other than allowed under the notification can be accepted as preponderance of human probabilities of carrying out such transaction with prohibited currency notes (SBNs) as a bank note which is demonetized and declared as ceased to be legal tender can only be exchanged through the notified bank as indicated in the notification and the bearer of the SBNs would receive an equal amount of the bank notes. The effect of the demonetization of the Bank notes is that it ceased to be in circulation except tendering or exchanging by way of returning to the bank. Therefore, the bearer of the SBNs would be considered as owner of the Bank notes as the same could not be used as a currency in circular except the manner and purpose as allowed in the notification. Therefore, after the demonetization when the SBNs were ceased to be a legal tender and ceased to be as currency in circulation, the holder of the SBNs was having only option of it exchanged or deposit in the Bank A/c. Nobody was allowed to collect the SBNs from other person and then deposit in the bank as it would defeat the very object of the demonetization. Therefore, it is highly unlikely that the holder of the SBNs after the notification dated 8/11/2016 would use the SBN as a legal tender and currency in circular because no person of ordinary prudence would enter into such a transaction of accepting or tendering the SBNs other than the manner and purpose allowed in the said notification. The assessee being a Non-Banking- Finance Company (NBFC) is also not supposed to deal in SBNs after the said notification dated 8/11/2016. Therefore, the claim Page 16 of 22 of the assessee that the amount deposited in the Bank A/c during the demonetization period from 9/11/2016 to 31/12/2016 is a recovery from the borrowers during the said period is not only in contravention of the notification dated 8/11/2016 but also subsequent ordinance/Act on Specified Bank Notes (Cessation of Liabilities) Act, 2017 as well as against the preponderance of human probabilities. The CBDT has also issued various circulars including Circular No.225/100/2017/TA-II dated 21/02/2017 notifying the Standard Operating Procedure (SOP) to be followed by the AO in verification of the cash transactions relating to the demonetization. There are as many as 6 circulars/notifications issued by the CBDT providing necessary guidance and instructions to the tax authorities to deal with the cases of substantial cash deposits during the demonetization period. Neither the AO nor the CIT (A) has examined the relevant facts and records of the assessee by following the SOP as notified by the CBDT. The CIT (A) has confirmed the addition made by the AO in para 5 to 15 as under:
“5. I have gone through the assessment order, the grounds of appeal and the appellants’ submissions in the appeal. It was the case of the appellant that the cash deposits amounting to Rs. 39,66,15,500/- in Specified Bank Notes (SBNs) represented collection in specified bank notes effected by the company from its loan borrowers from 9th November 2016 to 30th December 2016, which were adjusted against the borrowers' regular loan obligations which had fallen due in the ordinary course of its business. To that effect, the appellant also submitted that adequate disclosure of the same was also made in Point No 33 of Notes to financial statements of the company.
6. On the other hand, the Assessing Officer, referred to the Notification S.O.3407(E) dated 08.11.2016 of the Central Government issued; withdrawing the legal tender status of the bank notes of the value of Rs.500 and Rs.1000 with effect from 09.11.2016 and subsequent notification exempting certain categories of payments like petrol bunks, gas agencies etc. to accept SBNs. As the assessee company does not fall under any of the exempted category, it was not eligible to accept the specified bank notes after 08.11.2016. In the result the assessing officer added the cash deposits in specified bank notes of Rs. 39,66, 15,500 as unexplained money under section 69A of the Income Tax Act 1961.
7. In this regard, it was argued by the appellant that the inference that the specified bank notes ceased to be legal tender during the period 9th November 2016 to 30th December 2016 is incorrect and such specified bank notes ceased to be legal tender only from 31st December 2016. For this proposition the appellant drew reference to The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016.
8. The above argument of the appellant is absurd having regard to the fact that the Notification of the Central Government in S. O. 3407(E) dated 8th November 2016; categorically declares that the specified bank notes shall cease to be legal tender with effect from the 9th November 2016 to the extent specified in the said notification. The said notification categorically directed that the specified bank notes held by a person other than banking company, or the government treasury may be exchanged at any issue office of the Reserve Bank or any branch of public sector banks etc. for a period up to and including the 30th December 2016, subject to certain conditions for exchange, deposit and withdrawal specified therein. Further the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 itself in its preamble referred that the central government on the recommendations of the central board of Reserve Bank vide notification number S.O.3407(E) dated 8th November 2016, declared the then existing series of bank notes of the denominational value of Rs.500 and Rs.1000 to ceased to be legal tender with effect from the 9th November 2016 to the extent specified therein. In the backdrop of demonetization and the returning of bank notes to the Reserve Bank of India which have ceased to be legal tender on account of the notification dated 8th November 2016, the preamble of the ordinance further declared its objective as- to have clarity and finality to the liabilities of the Reserve Bank of India and the Central Government arising from such bank notes and hence the ordinance was promulgated. Further the ordinance declared that Page 18 of 22 the specified bank notes ceased to be liability of the Reserve Bank or the Central Government under sub-section 2 & 1 of section 26 of the Reserve Bank of India Act 1934 and granted the grace period for exchange of specified bank notes in certain cases etc. In view of the above, the appellant’s argument that the specified bank notes have ceased to be legal tender only with effect from 31st December 2016 by virtue of the Specified Bank Notes (Cessation of Liabilities) Ordinance 2016 cannot be acceptable as correct legal proposition in so far as the effective date on which the SBNs have ceased to be legal tender.
9. Considering the fact that the specified bank notes have ceased to be legal tender with effect from 9th November 2016 and accordingly it was not possible for anyone to transact in the specified bank notes except otherwise as provided in the notification dated 8th November 2016 and subsequent notifications allowing certain transactions in the specified bank notes, the Assessing Officer did not accept the appellants’ explanation of the transaction and added the sum of Rs.39,66,15,500 as unexplained money under section 69A of the Income Tax Act.
10. The appellant’s explanation that the specified bank notes deposited in the bank account represents recoveries from the borrowers from 9th November 2016 to 30th December 2016 in the normal course of its business defies the logic and common sense. It is to be noted that the appellant is a non-banking financial company and is into the business of micro financing to the poor, which is regulated and licensed by Reserve Bank of India for that purpose. Being so the appellant claims that it had transacted in the banned specified bank notes to affect its recoveries during the demonetization, in utter disregard to the notifications issued by the Central Government and the Reserve Bank of India from time to time, cannot be acceptable as a plausible explanation about the source of the specified bank notes deposited amounting to Rs.39,66,15,500.
11. The appellant submitted that from a comparative analysis of cash deposits made during the demonetization period against cash deposits of earlier year, the appellant submitted that the average monthly deposits during the financial year 2016- 17 was around Rs 80.93 crores and during the demonetization the cash deposit was Rs.130.54 crores out of which SBN deposits was Rs.39.66 crores. From this the appellant argued that no abnormality was noticed in the data furnished & hence it is evident that these collections and deposits are out of normal business operations. Such an analysis & comparisons may not Page 19 of 22 hold water in the eyes of the notifications issued declaring the specified bank notes as ceased to be legal tender with effect from 9th November 2016 and there is no reason for anyone much less than an NBFC of appellant’s stature to transact in SBNs and the alleged transaction of recovery is devoid of any merit.
12. The appellant contented that in order to attract section 69A as an explained money the following 4 conditions have to be satisfied cumulatively.
1. Assessee is found to be the owner of any money, bullion or article etc. and 2. Such money, bullion, or article, etc. is not recorded in the books of accounts maintained by the assessee and 3. Assessee offers no explanation as to the nature and source of acquisition of the money and 4. such explanation offered by the assessee is not to the satisfaction of the assessing officer. Further the appellant also referred to the case of Narendra G Goradia (HUF) Vs Commissioner of Income Tax dated 25th June 1998 Bombay High Court to submit that once the source of deposits was proved no amount could be added to the assessee’s income as income from undisclosed sources.
13. I have carefully considered the above submissions of the appellant and note that in the appliance case the explanation that the appellant received the specified bank notes even after it was declared to be a non-illegal tender by the notification dated 8th November 2016 cannot be acceptable as satisfactory explanation as no prudent person would undertake such a transaction in utter disregard to the above notification issue & the financial and legal consequences thereof. As the appellant’s explanation is untenable in the eyes of law, it cannot be said that appellant has offered a satisfactory explanation within the meaning of section 69A of the Income Tax Act and there is no case for the appellant that the source of the impugned cash deposits in specified bank notes have been explained and the accordingly the appellant cannot draw strength from the above decision of the Honourable High Court of Bombay to this case.
14. It is quite interesting to note that though the appellant claims to have made recoveries in specified bank notes having its interpretation that the said bank notes have ceased to be legal tender only with effect from 31st December 2016, no disbursements by way of loan or otherwise to its customers or Page 20 of 22 borrowers is found to have been made in the banned specified bank notes meaning that the customers/the borrowers were wary of the fact not to accept the specified bank notes declared as ceased to be legal tender from 9th November 2016. On the other hand, the appellant claims to have made recoveries in specified bank notes from the above customers and borrowers closing its eye on the demonetization notifications withdrawing the legal tender status, which in my view appears impossible legally and otherwise. Further, as the appellant’s explanation is not well founded, no reliance whatsoever can be placed on the accounts and notes to the accounts relied on by the appellant.
15. In the above circumstances, I do not find any infirmity in the order of the assessing officer and more so, the assessing officer having not satisfied about the appellant’s explanation about the impugned cash deposits in SBNs amounting to Rs. 39,66,15,500, correctly taxed the same as unexplained money under section 69A of the Income tax Act,1961.”
11. Thus, the AO as well as the CIT (A) has made the addition by rejecting the claim of the assessee that the source of the said cash is the collection made by the assessee from the borrowers during the demonetization period solely on the basis of the notification issued by the Govt. and without verifying the relevant record and particularly, the correctness of the claim of the assessee in the light of SOP issued by the CBDT. Accordingly, we are of the considered opinion that this matter requires a proper verification and examination of the record as well as the genuineness of the claim of the assessee in the light of the SOP issued by the CBDT in this respect. Hence, the impugned order of the CIT (A) is set aside and the matter is remanded to the record of the CIT (A) for fresh adjudication in the light of our above discussion.
In the result, appeal filed by the assessee is allowed for statistical purposes.