KUPPUSAMY BASKARAN,CHENNAI vs. ITO NON CORPO WARD 10(1), CHENNAI

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the

Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in

short "the Ld.CIT(A)”), Delhi, dated 09.03.2024 for the Assessment Year

(hereinafter in short "AY”) 2017-18.

Ld.CIT(A) confirming the addition of Rs.25,46,290/- u/s.69 of the Income

Tax Act, 1961 (hereinafter in short ‘the Act’) regarding Specified Bank

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Notes (hereinafter in short ‘SBNs’) deposited during the demonetization

period.

Proprietaryship Firm in the name and style of M/s.Baskaran Milk Parlour

and filed his return of income on 31.03.2018 for AY 2017-18 admitting

total income of Rs.4,56,870/-, which was processed u/s.143(1) of the Act

on 21.04.2018; and later, the case was selected for complete scrutiny.

The AO noted that during the year assessee had deposited SBNs of

Rs.31,47,900/- in his two bank accounts (Canara Bank - Rs.3,34,000/- &

Lakshmi Vilas Bank - Rs.28,13,900/-, totaling Rs. Rs.31,47,900/-). The

AO further noted that Lakshmi Vilas Bank informed the AO that out of the

aforesaid cash deposit of Rs.28,13,900/-, Rs.6,01,610/- was not SBNs but

valid currency. Therefore, the AO asked the assessee to prove the nature

and source of balance amount of Rs.25,46,290/-. The assessee replied

that the nature of the deposits/SBNs was trade receipts i.e. sale

consideration of milk & milk products, and source of the same was from

customers to whom milk/milk products were sold and expressed his

willingness to furnish the names of his distributors/customers. However, the AO was of the opinion that after 8th November, 2016, assessee ought

not to have received the SBNs and therefore, he was pleased to add

Rs.25,46,290/- u/s.69 of the Act.

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and filed detailed Written Submissions, wherein, he reiterated that he was

running a Proprietaryship Firm in the name of M/s.Baskaran Milk Parlour

and he was a trader in milk and allied products. It was pointed out to the

Ld.CIT(A) that assessee had asserted before the AO that amount

deposited during demonetization period was from cash sales of milk &

milk products and such transaction has been duly recorded in the books

of the assessee. Therefore, according to the assessee, question of

addition made of such deposit in bank can’t in any case attract

unexplained investment u/s.69 of the Act; and therefore, the addition

made u/s.69 of the Act can’t be sustained. However, the Ld.CIT(A) was

not convinced and according to him, the assessee ought not to have

accepted SBNs after 08.11.2016 and therefore, he confirmed the action of

the AO making addition of Rs.28,13,900/- (erroneously adopted this

figure, whereas, AO added only Rs.25,46,290/-) u/s.69 of the Act.

on record. We note that the assessee is an individual, who is in the

business of trading of milk & milk products; and had filed his return of

income declaring Rs.4,56,870/-; and later, the return was taken up for

scrutiny and AO noted that in the relevant year, there was deposit of cash

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during demonetization in assessee’s two bank accounts i) Canara Bank -

Rs.3,34,000/- & ii) Lakshmi Vilas Bank - Rs.28,13,900/-, totaling

Rs.31,47,900/- and the AO asked the assessee to explain/prove the

nature and source of cash deposits of Rs.31,47,900/- deposited in the

bank accounts. Pursuant to the same, the assessee filed audited

financials, P&L A/c, balance sheet of the relevant assessment year and

explained to the AO that the SBNs were trade receipts/sales receipts from

the sale of milk products. It is noted that the assessee purchased milk [in

packets] from M/s.Creamline Dairy Products Ltd., (hereinafter in short

‘M/s.CDPL’) and the assessee distributed the same through small vendors

who gave cash to the assessee which were deposited by the assessee in

the bank accounts of M/s.CDPL. The assessee has filed customer

statement maintained by M/s.CDPL in the name of the assessee for the

period from 01.04.2016 to 31.03.2017 which reveals that on 01.04.2016,

there was opening balance of Rs.5,18,630/- debited in the name of the

assessee and on that date M/s.CDPL supplied milk products of value of

Rs.90,969.25; and on next date i.e. 02.04.2016 supplied milk valued

Rs.88,285.50 and the assessee deposited dues on 02.04.2016 of

Rs.73,750/- and on 03.04.2016 deposited Rs.90,620/- and M/s.CDPL

supplied products worth Rs.88,152/- and also Rs.1,755/- and assessee

deposited Rs.90,620/- on 03.04.2016, likewise, every day from

01.04.2016, it is seen that regular transaction were taking place between

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the assessee and M/s.CDPL, wherein, M/s.CDPL used to give milk

products to the assessee on credit and the assessee in turn used to collect

it and distribute the same to his customers, and the dues were collected

and deposited regularly in the bank account of the M/s.CDPL. Thus,

assessee followed modus operandi throughout till 15.11.2016. [Please

note that demonetization was ordered on 08.11.2016]. It was also

brought to our notice that from 08.11.2016 to 15.11.2016, M/s.CDPL

accepted the cash deposits in their bank account (of M/s.CDPL) by the

assessee; however, from 15.11.2016, they refused to accept the cash to

be deposited in their bank account, instead, asked the assessee to deposit

it in his own bank-account and issue cheques to M/s.CDPL. It is noted

from the customer statement that from 15.11.2016, the assessee was

issuing cheques to M/s.CDPL after depositing the same into the assessee’s

bank account. This fact is proved from the assessee’s bank statement

also and also noted these facts from perusal of audited financials (Form

No.3CB) which was filed before the AO. A perusal of the same would

reveal that the assessee had procured milk products worth

Rs.2,99,84,346/- and total sales was to the tune of Rs.3,13,70,274/- and

has shown gross profit of Rs.13,85,928/- and has shown net profit of

Rs.4,56,872/-. We find that the AO has not rejected the purchases, sales

or audited books of accounts of the assessee. And it is common

knowledge that the milk products were essential commodity for human

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consumption and were perishable items and were being supplied on day

to day basis which fact is also discernable from the customers statement

placed before us for the period from 01.04.2016 to 31.03.2017. Thus, it is

noted that assessee’s total sale consideration from sale of milk/milk

products was to the tune of Rs.3,13,70,274/- which included cash

deposits/sales of Rs.31,47,900/-. However, the AO having taken note that

out of the total deposit of Rs.31,47,900/-, cash deposits of Rs.6,01,610/-

was valid currency and therefore, the AO has added only Rs.25,46,290/-.

In other words, profit derived from the total sales of Rs.3,13,70,274/-

includes cash/SBNs of Rs.25,46,290/- which was shown as total income

for the purpose of Income Tax and the assessee has paid tax on the said

income.

profits embedded in the total sales of Rs.3,13,70,274/- has been accepted

by the AO. However, the AO has made separate addition of

Rs.25,46,290/- which has already been considered for the purpose of

Income Tax; and by again adding the entire cash/SBNs which was sales

of Rs.25,46,290/- u/s.69 of the Act alleging it as unexplained investment

of the assessee is legally sustainable or not is the question before us.

sec.69 of the Act, which reads as under:-

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Unexplained investments 69. “Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year”.

the assessee has made investments which are not recorded in the books

of accounts of the assessee, and the assessee offers no explanation about

nature and source of investments or the explanation offered by him is not

in the opinion of the AO satisfactory, the value of the investment may be

deemed to be income of the assessee. Keeping the definition of

unexplained investment in mind, in order to make an addition under this

section i.e. sec.69, the AO has to first make a finding of fact that this

investment of Rs.25,46,290/- has not been recorded in the books of the

assessee; and when asked by the AO (about the investment), the

assessee failed to explain the nature and source of such investment or his

explanation offered (by assessee) is not to the satisfaction of the AO, then

only the value of such investment may be deemed to be un-explained

investment u/s.69 of the Act. Unless the conditions prescribed in sec.69

of the Act are satisfied, the deeming provision can’t be said to be

attracted. In the present case, it is noted that it is not the case of the AO

that the assessee has not recorded the impugned sum of Rs.25,46,290/-

in his regular books; and that when asked by him (AO) to explain the

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nature and source of such sum, the assessee failed to do so. In such a

scenario, in the facts and circumstances of the case, the deeming

provision of sec 69 of the Act are not attracted. It is further noted that

the assessee even told the AO that he was ready to give the details,

name & address of his customers to whom he was regularly supplying

milk & milk products. Despite that the AO didn’t ask the details of the

customers and went ahead and made the addition u/s.69 of the Act,

which action can’t be countenanced, because, assessee who deals with

supply of milk products to customers on daily basis has recorded the sum

of Rs.25,46,280/- as well as Rs.6,01,640/- cash but valid currency during

demonetization period shows that cash deposit of Rs.25,46,290/- was

also from sale of milk/milk products; and when AO accepted the nature

and source of cash deposit of Rs.6,01,640/- (being valid currencies)

during demonetization period, in the absence of or without incriminating

material, the AO couldn’t have rejected the explanation backed by audited

books of accounts.

its books as trade receipts and when confronted by the AO to prove the

nature and source of the same, the assessee produced the relevant

documents to prove it and thus, discharged the burden on him to prove

the nature and source of the SBNs deposited during the demonetization

period. The Hon’ble Supreme Court in the case of Sreelekha Banerjee &

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Ors. v. CIT reported in [1963] 49 ITR 112 (SC), observed that “the

department could not act unreasonably and reject that explanation to

hold that it was income. If, however, the evidence was unconvincing then

such rejection could be made. The department cannot by merely rejecting

unreasonably a good explanation, convert good proof into no proof”. Thus

we find that assessee has discharged his burden to prove the nature and

source of the cash deposits during the demonetization period which was

nothing but the receipts from trade of milk & milk products, therefore, the

explanation/evidences could not have been brushed aside by the AO on

conjectures, surmises and assumptions.

the tune of Rs.25,46,290/- as cash sales of milk & milk products along

with the relevant evidences which shows that average sales of the

assessee in a month comes to Rs.26 lakhs; and it is noted that during

demonetization period, assessee has deposited Rs.31,47,900/- and also

deposits made between 08.11.2016 to 15.11.2016 which also comes to

around Rs.6 lakhs. In this case, we have asked for the sales during the

earlier years and have gone through the analysis furnished by the

assessee in respect of total sales, cash sales realization from debtors and

cash deposits during Financial Years 2015-16 & 2016-17, and find that

there is no significant change in cash deposits during demonetization

period. Thus, we find that there is no much variation in the cash deposits

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during the demonetization period. We also noted that the modus operandi

of the assessee (sale of milk & milk products which are normal in cash

and that the CBDT notification dated 08.11.2016 (S.O.3408 (E) had

exempted the payments as collection of SBNs for purchase of milk though

it was milk booths operating under the authorization of Central or State

governments. However, the general public was not aware of the

intricacies of the exemptions given by this Notification and insisted

assessee to distribute the milk and they had given SBNs which could not

be refused by the assessee. It is common knowledge that members of

the public gives cash for purchase of milk and considering that the

assessee into milk & milk products business, we can’t doubt the

explanation offered by the assessee. We note that the assessee also

declared sales made in their books of accounts and has filed return of

income and paid tax on the said income and as noted, the assessee has

also been regularly depositing the cash in the suppliers account

(M/s.CDPL) up to 15.11.2016 and thereafter, only deposited

Rs.25,46,290/- in the assessee’s own account and immediately thereafter

issued cheques to M/s.CDPL. The AO has not disputed the claim of the

assessee, the nature and source of the deposits were from sale of milk &

milk products and only reason given by the AO to make addition was that

the assessee could not have transacted/received SBNs after 08.11.2016.

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issued by the Ministry of Finance (Department of Economic Affairs)

S.O.3408 (E), whereby, Government of India notified certain exemptions

for the convenience of the members of public in carrying out certain

emergent and urgent transactions using the SBNs like viz, a) for making

payments in government hospitals for medical treatment and pharmacies

in government hospitals for buying medicines with doctor’s prescription;

b) at railway ticketing counters, ticket counters of Government or Public

Sector Undertaking buses and airline ticketing counters at airports for

purchasing of tickets; c) for purchases at consumer cooperative stores

operated by the Central/State Government; d) for purchase at milk

booths operating under authorization of the central/state governments; e)

for purchase of petrol, diesel and gas; and f) for payments at cremation

at burial grounds, etc., According to the Ld.AR, the exemption given in

this notification, even though, for few days was conveyed through

newspapers/TV channels, which the assessee bonafidely believed included

milk & milk products sold by person like him and thus, believed that he

was exempt from collecting sale consideration in SBNs. Moreover,

according to the Ld.AR, when the co-operative stores of Central State

Government are allowed to receive SBNs on sale of milk, then, assessee

can’t be prohibited from receiving the sale consideration from sale of milk

in SBNs, which would violate Article 14 of the Constitution of India.

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According to the Ld.AR, when the Central/State Government indulges in

business/trade of milk, then both assessee & the government agency

stand on same pedestal and can’t be discriminated. We find considerable

force in the submission of the assessee that when Central/State

Government Stores were allowed to receive SBNs on sale of milk, then

assessee could not have been discriminated from receiving the same,

which will offend Article 14 & 19 of the Constitution of India.

prohibited transacting in SBNs from 08.11.2016 to 31.12.2016. And the

only reason given by the AO to make addition u/s.69 of the Act was that

assessee could not have transacted/received SBNs during demonetization

period and relies on the notification issued by the Government of India

(supra). No doubt Specified Bank Notes of Rs.500/- & Rs.1,000/- has been withdrawn from circulation from 09th November, 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 31st

December, 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 31st December, 2016. Therefore, there is no

clarity on how to deal with demonetized currency from the date of

ITA No.809/Chny/2024 (AY 2017-18) Shri Kuppusamy Baskaran :: 13 :: demonetization to 31st December, 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 can’t be rejected, unless the Assessing Officer makes out a case

that the assessee has deposited unaccounted cash into bank account in

Specified Bank Notes.

a Circular for the guidance of the Assessing 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 Assessing Officer 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 Assessing Officer needs to analyze

ITA No.809/Chny/2024 (AY 2017-18) Shri Kuppusamy Baskaran :: 14 ::

the business model of the assessee, its books of account and analysis of

sales etc. In this case, we have gone through the analysis furnished by

the assessee in respect of total sales, cash sales realization from debtors

and cash deposits during Financial Years 2015-16 & 2016-17, there is no

significant change in cash deposits during demonetization period.

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 can’t be countenanced.

relevant documents to prove the nature and source of cash/SBNs

deposited during demonetization; and asserted that it was trade receipt

and had been part of the turnover, which has been offered to tax.

However, the AO without finding any infirmity in the books regularly

maintained by the assessee and which has been audited, has added

Rs.25,46,290/- u/s 69 without rejecting the books cannot be countenced.

And we find that amount of Rs.25,46,290/- deposited in bank-account

was part of the total turnover of the assessee and has been offered for

taxation. Therefore, making a separate addition of Rs.25,46,290/- would

tantamount to double addition; and in the facts and circumstances

discussed such an addition is legally unsustainable. Therefore, we hold

ITA No.809/Chny/2024 (AY 2017-18) Shri Kuppusamy Baskaran :: 15 :: that the addition of Rs.25,46,290/- u/s.69 of the Act is legally unsustainable.

Order pronounced on the 30th day of August, 2024, in Chennai.

Sd/- Sd/- (एस. आर. रघुनाथा) (एबी टी. वक�) (S.R.RAGHUNATHA) (ABY T. VARKEY) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 30th August, 2024. TLN, Sr.PS आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF