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Facts
The assessee, a Sikkimese settler, failed to file an income tax return for AY 2017-18. During demonetization, the assessee deposited ₹22 Lakh in old currency notes. The Assessing Officer (AO) treated this as unexplained money and undisclosed income, making additions under Sections 69A and 144. The CIT(A) partially allowed the appeal, providing some relief but confirming substantial additions.
Held
The Tribunal noted that the assessee claimed exemption under Section 10(26AAA) based on their status as an old Sikkimese settler. The Tribunal found that the CIT(A)'s order violated principles of natural justice due to insufficient opportunity for the assessee to present their case. The Tribunal decided to set aside the CIT(A)'s order and remand the matter to the AO for de novo assessment.
Key Issues
Whether the assessee is eligible for exemption under Section 10(26AAA) as an old Sikkimese settler, and if the assessment and appellate orders violated principles of natural justice.
Sections Cited
10(26AAA), 69A, 144, 250, 115BBE, 142(1), 371F
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Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH AT KOLKATA
Before: SHRI SONJOY SARMA & SHRI RAKESH MISHRA
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
This appeal filed by the Assessee is against the order of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as Ld. 'CIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2017-18 dated 28.10.2025. 2. The Assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1. That the learned CIT(A) erred in law and on facts in confirming additions of ?34,03,553/-. The order is bad in law, arbitrary, perverse, and liable to be quashed.
The appellant, a bona fide Sikkimese old settler, is entitled to exemption under Section 10(26AAA) of the Income Tax Act, which provides tax relief on income from Sikkim for those with a valid Sikkimese status. The appellant meets all requirements, including being a resident of Sikkim before its merger with India in 1975, a member of the Association of Old Settlers, and having income from business in Gangtok. The Supreme Court decision in 2023 supports the exemption, striking down restrictive interpretations. Despite the CIT(A)s refusal to grant exemption, citing pending litigation, the ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. IT AT Kolkata in a similar case for AY 2017-18 granted the exemption, supporting the appellants claim.
The appellant argued that there was no mandatory obligation to file a return of income as all income was exempt under Section 10(26AAA). The appellant had a bona fide belief based on Supreme Court interim stay orders and prima facie merit in the old settlers claims. The assessment under Section 144 was completed hastily, with only 6 days between the show- cause notice and assessment order. Key evidence like the Residential Certificate, Trade License, and VAT Returns were rejected without proper consideration. The ITAT Kolkata decision in Chandra Sales Agency supports that when the exemption under Section 10(26AAA) applies, the assessment is unsustainable. Therefore, the assessment under Section 144 is invalid and should be quashed.
The appellant challenged the addition of Rs. 20,00,000 under Section 69A, claiming the entire Rs. 22,00,000 was explained as legitimate business receipts from the textile business Darjeeling Stores. The cash represented accumulated sales proceeds, with turnover disclosed in VAT returns, and was deposited during demonetization as required. The AO made dual additions on the same receipts Rs.22,00,000 as unexplained income under Section 69A and Rs. 14,03,553 as estimated profit from business, leading to impermissible double taxation. The CIT(A) granted only Rs. 2,00,000 relief without basis, which was arbitrary. The ITAT Kolkata in Chandra Sales Agency held that such additions must be deleted when exemption under Section 10(26AAA) applies. Thus, the entire addition of Rs. 22,00,000 under Section 69A should be deleted.
The appellant argued that the assessment order and CIT(A) order violated the principles of natural justice. The assessment was completed in just 6 days, denying adequate time for the appellant to respond. No personal hearing was granted, even though detailed written replies and supporting documents were submitted. Key evidence, including the Residential Certificate, Trade License, and VAT Returns, were rejected without reasons OR an opportunity for explanation. The CIT(A) also ignored the Supreme Courts decision in Association of Old Settlers of Sikkim, despite it being cited. Furthermore, the CIT(A) did not provide sufficient opportunity to present the case in light of new legal developments. As a result, both orders should be set aside due to violations of natural justice.”
Brief facts of the case are that the assessee failed to file his income tax return for the AY 2017-18. The Assessing Officer (hereinafter referred to as Ld. 'AO') noted that during the demonetization period the assessee had deposited a significant amount of cash of ₹22 Lakh into his bank account in old currency notes (SBNs). The Ld. AO issued notice ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. u/s 142(1) of the Act which was duly complied by the assessee. The Assessing Officer (hereinafter referred to as Ld. 'AO') noted that the assessee had not maintained any books of account except sale and purchase register. The Ld. AO issued a show cause notice mentioning that there was no stay of assessment proceedings under the Income Tax Act, 1961 and also there was no stay for filing of the return of income and accordingly, proposed a sum of ₹22 Lakh u/s 69A of the Act as unexplained money and ₹14,03,553/- as undisclosed income to be added and subsequently assessed the total income of the assessee at ₹36,03,550/- u/s 144 of the Act in the absence of any response. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A), who partly allowed the appeal of the assessee by giving relief of ₹2 Lakh and confirming the rest of the addition made at ₹20 Lakh and ₹14,03,553/- by giving his findings as under: “6.3 The first ground of appeal is that the assessment order is bad in law as well as facts. The assessment order passed by the Ld. Assessing Officer (AO) is arbitrary, conjectural, and without due opportunity of being heard. The ex parte order does not qualify as a “best judgment" assessment as contemplated under the Act and is, therefore, liable to be quashed, annulled, or suitably modified I have gone through the assessment order and see that the AO allowed adequate opportunity to the appellant to explain his case Whatever has been submitted by him has been duly considered and accorded due consideration The reasonable profit of 8% has been applied to the turnover Regarding cash deposit during demonetisation, the appellant was required to explain its sources, which has failed to do In view of these facts there is nothing which has been done wrong as per Income Tax Act 1961 and accordingly the contention of the appellant is dismissed
4 In the second, fourth, fifth, sixth, ninth & tenth grounds of appeal it has been stated that the appellant is from the state of Sikkim and a member of association of old settler of Sikkim The appellant has claimed that income earned from within the state of Sikkim is not chargeable to tax as the matter of income tax is sub-judice before the Hon’ble Supreme Court of India. The appellant in his submission dated 09.10.2025 stated that the Ld. AO was ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. fully aware that the appellant is a bona fide Sikkimese, eligible for exemption under section 10(26AAA) of the Income-tax Act, 1961. A copy of the Residential Certificate, confirming that the appellant has been residing in Sikkim prior to 26th April, 1975, is attached herewith in support of the claim The AO has erred in assessing income in the hands of the appellant despite the special constitutional status granted to the State of Sikkim under Article 371F of the Constitution of India Accordingly the assessment order suffers from serious legal infirmities The Hon’ble Supreme Court of India, in its subsequent decision, has recognized the right of old settlers (residing in Sikkim prior to 26th April, 1975) to avail exemption under section 10(26AAA) of the Act, with retrospective effect from AY 1989-90 onwards Hence, the appellant squarely falls within the ambit of exemption as per the said provision. 6.4.1 I have gone through the submission and supporting documents of the appellant in respect of section 10(26AAA) of the Income Tax Act, 1961 and special constitutional status granted to the State of Sikkim under Article 371F of the Constitution of India As stated by the appellant himself the issue, as to whether he qualifies to be called a Sikkimese within the meaning of this section, is sub-judice before the Hon’ble Supreme Court in the form of writ petition filed by the association of old settlers of Sikkim. The Hon’ble Supreme Court vide its interim order dated 11.02.2013 as well as subsequent interim order dated 14.03.2016 has stayed only taking any coercive steps for collection of demand in pursuant to demand notices. This clearly means that the Hon’ble Court has not yet issued any final order or judgement in favour of the appellant. In this situation, there is nothing conclusive, on the basis of which any relief can be granted to the appellant
Accordingly the decision of the Ld. AO doesn’t require any interference at this stage. In case the Hon’ble Supreme Court decides the issue in favour of the appellant, he will get the due benefit in terms of the directions of the Hon’ble Court. For the time being, there is no case for granting any relief and all these grounds of appeal are dismissed.
5 In the third ground of appeal the appellant has stated that the tax calculation is wrong as there is NIL tax in Clause 23(i) of the computation sheet. The computation sheet is perused and found that the addition has been made u/s 69A which attracts tax u/s 115BBE as per act which is clearly mentioned by the Ld. AO in the assessment order. The discrepancy pointed out by the appellant is only typographical. Once an income is included in the taxable income, tax on that is chargeable as per law. As such the mistake is not going to confer any exemption to the appellant. As such, the contention and ground of appeal of the appellant is dismissed ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal.
6 The seventh and eighth grounds of appeal is related to additions of Rs 14,03,553/- and Rs. 22,00.000/- On perusal of the facts of the case, submission and as per form-35 submitted by the appellant, the appellant has submitted that he filed his VAT return for the months covered in aforementioned assessment year and for the previous assessment years as well That the appellant deposited Rs 22,00,000 out of his sale proceeds and balance of cash in hand before demonetization date, in its bank account during the demonetisation period. Thus, it is not in the nature of unexplained money u/s 69A. It is part and parcel of his sale proceeds and cash savings before demonetisation period. Also, the proposed estimated addition of Rs. 14,03,553 on account of net profit AT THE RATE OF 8 PERCENT on total turnover of Rs 1,97,44,416 minus cash deposited during demonetisation of Rs.22,00,000 is bad in facts as well as law. That Rs.22,00,000 is part of turnover of A.Y 2018-19 before demonetisation and the same has already been disclosed in VAT Returns. The VAT Department has duly accepted the turnover and Taxes thereon and that there is no adverse finding by the State Revenue. Segregating the same and identifying it as unexplained money under section 69A even though the same was deposited in regular bank account is against the principle of natural justice. 6.6.1 I have gone through the submission filed by appellant alongwith documentary evidence. The appellant has shown the certain amount of turnover and the same amount has been adopted by the AO for assessment of income generated out of the same. The Ld. AO has applied the most justified rate of profit @8 percent. On the other hand the appellant has not stated anything about its rate of profit and has not submitted any basis for the same. As such no fault can be found with the profit rate adopted by the AO and the ground of appeal to that extent is dismissed. 6.6.2 On the issue of addition of Rs 22,00,000/- being cash deposits during demonetization, the appellant has not submitted any documentary evidences which may substantiate that this cash is from his cash sales out of his sale proceeds and balance of cash in hand before demonetization date, in its bank account during the demonetization period. He stated that the alleged money has already been disclosed in VAT Returns for the A.Y. 2017-18 but there is no documentary evidences to prove his contention. The VAT annual report deals with sales. This does not prove as to whether the said transaction is his cash sales or otherwise. Since cash was deposited during demonetisation, it means this much cash in SBNs was available with the appellant as on 08.11.2016. How this was accumulated and whether this was genuine or not needs to be established by submitting relevant documents and evidence. The banking behavior of the appellant and his cash books etc. needs to be perused in detail However the appellant has not provided any opportunity to the AO to go into this exercise He had been only ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. stating that he is not liable to tax being one of old settlers in Sikkim This issue has been separately dealt with and rejected. As such, in the absence of relevant material, this part of the ground of appeal is not allowable and is dismissed. 6.6.3 There is another aspect of the matter. The demonetization was announced in the evening of 08 11.2016 suddenly Every citizen and businessman must be having some genuine cash in hand in the form of SBNs on 08.11.2016 when the demonetization was announced. Accordingly he was under compulsion to deposit that much amount in the bank account and this deserves to be treated as genuine. Keeping in view the profile of the appellant it is held that an amount of Rs. 2,00,000/- was genuinely available with him in his personal capacity as well as in business. Accordingly, it is held that out of deposit during demonetization period, the amount of Rs. 2,00,000/- is explained in this manner. Accordingly out of the total addition u/s 69A, the appellant gets relief of Rs 2,00,000/- and the balance addition is confirmed. In this way the appellant gets partial relief. To sum up, the appellant gets relief of Rs. 2,00,000/- and balance additions of Rs. 20,00,000/- and Rs. 14,03,553/- are confirmed.
In result appeal is partly allowed for statistical purposes.”
Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before the Tribunal.
Rival contentions were heard and the submissions made have been examined. The assessment order was made u/s 144 of the Act as no return of income was filed. The assessee was not able to establish that the sums were accounted income exempt under section 10(26AAA) of the Act. Since the assessee failed to provide the required details, the appeal was partly allowed.
We have gone through the facts and circumstances of the case and the submission made. Since adequate opportunity was not availed by the assessee, both at the assessment stage as well as before the Ld. CIT(A) who has granted part relief and the assessee has submitted that he has sufficient evidence for the claim of exemption; therefore, the Bench was of the view that in the interest of justice and fair play, ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. another opportunity may be provided to the assessee to produce the required documents before the Ld. AO for examining and deciding the claim of exemption. Hence, the order of the Ld. CIT(A) is hereby set aside and the matter is remanded to the Ld. AO to make the assessment de novo as per law after granting an opportunity of being heard and after considering the claim of the assessee on the basis of the documents which the assessee may file for seeking claim of exemption of income as per law.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 25th February, 2026. [Sonjoy Sarma] [Rakesh Mishra] Judicial Member Accountant Member Dated: 25.02.2026 Bidhan (Sr. P.S.) ITA No.: 3248/KOL/2025 Assessment Year: 2017-18 Padam Kumar Agarwal. Copy of the order forwarded to:
Padam Kumar Agarwal, Gangtok, East Sikkim, Gangtok, Sikkim, 737101. 2. Assessing Officer, Ward 3(1) Gangtok.
CIT(A)-NFAC, Delhi.
CIT-
CIT(DR), Kolkata Benches, Kolkata.
Guard File. //// By order