Loading judgment…
Facts
The assessee, Kalavathy Ganesan, appealed against the order of the NFAC regarding additions made for the assessment year 2017-18. The Assessing Officer had made additions of Rs. 29,61,000/- for cash deposits during demonetization and Rs. 13,03,038/- for disallowance of expenses. The CIT(A) partially allowed the appeal by deleting Rs. 4,05,000/- of the cash deposit addition.
Held
The Tribunal held that the cash deposits were explained by the withdrawal from the partnership firm and the matter requires fresh consideration by the Assessing Officer. The Tribunal also held that Section 115BBE of the Act cannot be applied for the Assessment Year 2017-18. Furthermore, the Tribunal found no illegality in the CIT(A)'s finding that Section 44AD of the Act is not applicable to remuneration and share of profits from a partnership firm.
Key Issues
Whether cash deposits made during demonetization were unexplained and if Section 115BBE and 44AD are applicable to the assessee's income.
Sections Cited
69A, 115BBE, 44AD, 143(3), 28(v)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI INTURI RAMA RAO
PER INTURI RAMA RAO, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee directed against the Order of the National Faceless Appeal Centre, Delhi (hereinafter called as ‘NFAC’) dated 07.10.2025 for the assessment year 2017-18.
The assessee raised the following grounds of appeal:
1. The Order of the Commissioner of Income Tax(Appeals) NFAC in so far as it is against the assessee is contrary to law, erroneous and unsustainable on the facts of the case.
2. The CIT(A) NFAC erred in confirming the addition to the extent of Rs.25,56,000/- as unexplained money u/s.69A of the Act.
3. The CIT(A) NFAC failed to appreciate that source for the cash deposit was explained out of opening balance of Rs.37,54,246 as on 01.4.2016, disclosed in the return filed by M/s.R.K.& Sons (Firm) for 2 -: asst. year 2016-17 and the rejection of the same was arbitrary and unsustainable on the facts of the case.
4. The CIT(A) NFAC further failed to appreciate that assessee had post 01.4.16, withdrawn amounts in cash from the Firm in which she is a partner on various dates and these amounts were available as on 08.11.16 for deposit in the bank account and hence there was no basis or material to reject the valid explanation of the assessee.
5. The CIT(A) NFAC had completely misled himself by stating that there was no documentary evidence for generating income in cash, whereas assessee had clearly explained that the cash availability from the withdrawal from the Firm's books and deposited in the bank after demonetisation was announced on 08.11.16 and hence confirming the addition was wholly unjustified on the facts of case.
6. The CIT(A) NFAC ought to have considered that the source for the cash deposit was clearly explained as arising out of the opening balance and there was no case for applying the provisions of sec. 115BBE of the Act and also concluded that higher rate of tax cannot be applied for the asst. year 2017-18 as held by the jurisdictional High Court.
7. The CIT(A) NFAC erred in confirming the addition under other sources of Rs. 13,03,308 made by the officer as disallowance of claim of expenditure under presumptive income.
8. The CIT(A) NFAC ought to have seen that assessee had declared income of Rs.356962 u/s.44AD of the Act from the money lending activity carried on by her and the addition was unjustified.
9. The CIT(A) NFAC further failed to appreciate that the AO was entirely wrong in treating the difference between the gross interest of Rs. 1660000 and the net income admitted of Rs.356962 as unaccounted business income and there is no basis for the assumption that the difference is the expenses to be disallowed.
10. The CIT(A) NFAC further failed to appreciate that the business of money lending carried on by the assessee does not fall under any of the exclusions provided under sec.44AD and his conclusion that assessee is not licensed money lender to be eligible for presumptive rate of taxation is beyond the scope of the provisions of sec.44AD and therefore is untenable in law.
11. The CIT(A) NFAC, in any event, ought to have considered the contentions of assessee in the proper perspective, deleted the additions and thus accepted the income returned by assessee under sec.44AD of the Act.
The appellant is an individual deriving income from share of profits, remuneration from the partnership firm. The return of income for the Assessment Year 2017-18 was filed on 5th December, 2017, disclosing a total income of Rs. 22,43,110/-. Against the said return of income, the assessment was completed by the DCIT, Circle-1 (1), Salem (hereinafter referred to ‘AO’) vide order dated 5th December, 2019 passed u/s 143(3) of the Act at a total income of Rs. 65,07,148/-. While doing so, the Assessing Officer made addition of Rs. 29,61,000/- being the cash deposits made in the bank accounts in specified bank notes (SBN) during demonetization period treating as unexplained money, rejecting the explanation of the appellant that the said cash deposits were made out of cash withdrawals made from the partnership firm namely, M/s R. K & Sons of which the appellant is a partner. The Assessing Officer also made addition of Rs. 13,03,038/- by disallowance of the claim for the deduction of expenses incurred to earn business income in the form of interest on capital contribution and remuneration from partnership firm by holding that the provisions of section 44AD of the Act, cannot be applied in respect of interest income earned on capital contributions to partnership firm and remuneration received from the partnership firm.
4 -: 4. Being aggrieved by the above assessment order and, an appeal was preferred before ld. CIT(A), who vide impugned order deleted the addition to extent of Rs. 4,05,000/- in respect of cash deposits by holding that the cash withdrawals from partnership firm namely M/s R. K. & Sons to extent of Rs. 4,05,000/- commensurate to the date of cash deposit in the bank account. The balance additions were confirmed by the ld. CIT(A). Thus, appeal filed by the assessee was partly allowed by ld. CIT(A).
Being aggrieved by the above appeal, the appellant is in appeal before us in the present appeal, the ld. Counsel for the assessee submitted that the source of cash deposits were out of opening balance of Rs. 37,54,245/- as on 01.04.2016 shown in the return of income filed by the M/s R. K. & Sons of which the appellant is a partner and further submitted that the appellant had withdrawn the amounts in cash from the partnership firm and these amounts were available for subsequent deposits in the bank account. It is further contended that the provisions of section 44AD can be applied in respect of the share of profits from partnership firm and remuneration received from the partnership firm.
On the other hand, ld. Departmental representative had vehemently opposed the above submissions and contends that the appellant had failed to offer satisfactory explanation as to the source of 5 -: the cash deposits made in the bank account during demonetization period. He further contends that the provisions of section 44AD of the Act cannot be applied in respect of share of profit and remuneration from the partnership firm as same are not in the nature of receipts from business.
We heard the rival submissions and perused the material on record. Grounds of appeal Nos. 1 & 11 are general in nature and hence, requires no specific adjudication.
Grounds of appeal Nos. 2 to 5 challenges the correctness of the decision of the ld. CIT(A) in sustaining the addition of Rs. 25,56,000/- on account of unexplained cash deposits during the demonetization period.
The ld. Counsel for the assessee submits that the said cash deposits in specified bank notes during the demonetization period, were made out of cash withdrawals from the partnership firm namely M/s. R. K. & Sons of which the appellant was a partner. The Assessing Officer made addition of cash deposits by rejecting the above explanation by holding that the explanations was highly suspicious in nature. The Assessing Officer also noted that the amount of cash withdrawn from partnership firm on various dates. It is settled the position of law that in the absence of any evidence to show that the amounts withdrawn were utilized for some other purpose, the amounts so withdrawn and should be treated as available for deposits in the bank account. Therefore, we are considered opinion that the matter requires fresh consideration by the Assessing Officer and 6 -: accordingly, the matter is remanded to the file of Assessing Officer for fresh adjudication in accordance with law after affording an opportunity being heard to the assessee.
In the result, ground nos. 2 to 5 stands partly allowed for statistical purposes.
Ground of appeal Nos. 6 challenges the applicability of provisions of section 115BBE of the Act in respect of addition made on account of cash deposit in the bank account. The Hon’ble Madras High Court in the case of S.M.I.L.E Mircrofinance Limited vs. ACIT in W.P.
(MD) NO. 2078 of 2020 and W.M.P (MD) No. 1742 of 2020 dated 19.11.
2024, wherein it is held as under:-
The next contention raised by the Learned Senior Counsel is that the under section 115BBE the rate of tax imposed is increased from 30% to 60% and the same is applicable with effect from 01.04.2017 onwards as per the amendment. Therefore, the same is applicable to any transaction from 01.04.2017 onwards and nor prior to any transactions prior to 01.04.2017. Since in the present case all alleged transactions are for the period from 08.11.2016 to 30.12.2016, hence the erstwhile rate of tax 30% only is applicable. But the contention of the revenue is that the amendment was with effect from 01.04.2017 and hence the same is applicable for the financial year 2016-2017 and the assessment year 2017-2018. Further the amendment to section 115BBE is directly related to demonetization which would be evident from objects and reasons for such amendment. In order to consider the same, the objects and reasons of Taxation Laws (Second Amendment) Bill 2016 is extracted hereunder: Press Information Bureau Government of India Ministry of Finance 28-November-2016 15:56 1ST Taxation Laws (Second Amendment) Bill, 2016 introduced in Lok Sabha; A scheme namely, "Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY) proposed in the Bill.
7 -: Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programmes. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of denomination of the value of Rs.500 and Rs. 1000 [Specified Bank Notes(SBN)] have been recently withdrawn the Reserve Bank of India Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 (the Act) can possibly be used for concealing black money. The Taxation Laws (Second Amendment) Bill, 2016 ('the Bill') has been introduced in the Parliament to amend the provisions of the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision.
Further, in the wake of declaring specified bank notes "as not legal tender", there have been suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy.
In this backdrop, an alternative Scheme namely, "Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY) has been proposed in the Bill. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income, and penalty @10% of the undisclosed income. Further, a surcharge to be called 'Pradhan Mantri Garib Kalyan Cess' @33% of tax is also proposed to be levied. In addition to tax, surcharge and penalty (totaling to approximately 50%), the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the RBI under the 'Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. This amount is proposed to be utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality.
An overview of the amendments proposed in the Bill are placed below; Overview of Amendments Proposed
In the aforesaid objects and reasons nowhere it is stated that due to "demonetization" the unaccounted money ought to be charged 60% rate of tax. It only states that step had been taken to curb black money by withdrawing Specified Bank Notes of denomination of Rs.500 and Rs.1000. And also states the people may find illegal ways of converting their black money into black again, hence as per experts advice heavy penalty ought to be levied. From the language of the object "that instead of allowing people to find illegal ways of converting their black money into black again", it is evident that the government is intended to impose the same for future transactions. Especially the use of word "again" in the object would clearly indicate it is for future transactions i.e. from 01.04.2017. Therefore this Court is of the considered opinion that the revenue is empowered to impose 60% rate of tax for the transactions from 01.04.2017 onwards and not prior to the said cut-off date. And for prior transaction the revenue is empowered to impose only 30% rate of tax.
9 -: In view of the above decision, we are of the considered opinion that the provisions of section 115BBE of the Act cannot be applied for the Assessment Year 2017-18. Therefore, we direct to Assessing Officer not to apply the provisions of section 115BBE in respect of addition made on account of unexplained cash deposits in the bank account.
In the result, ground of appeal Nos. 6 stands allowed.
Ground of appeal Nos. 7 to 10 challenges the correctness of finding of the ld. CIT(A) that the provisions of section 44AD of the Act cannot be applied in respect of interest income, share of profit and remuneration partnership firm. On mere reading of the provisions of section 44AD of the Act, it would be evident that the provisions of section 44AD, pre-supposes the receipt of money from carrying on the business or trade. Mere receipt of remuneration from partnership firm or share of profits from the firms cannot be said that it amounts to carrying on business by the appellant irrespective of fact that such income is assessable to tax under head ‘profits and gains of business or profession’ by virtue of specific provisions of section 28(v) of the Act.
Therefore, we do not find any illegality in the findings of ld. CIT (A) in holding the provisions of section 44AD have no application in respect of income received from remuneration of partnership firm and share of partnership firm.
In the result, ground of appeal No. 7 to 10 stands dismissed.
Order pronounced on the 4th day of March, 2026 in Chennai.