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Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI NIKHIL CHOUDHARY
This appeal has been preferred by the assessee against the order dated 09.03.2024, passed by the ld. Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi for Assessment Year 2017-18.
2. The brief facts of the case are that the assessee- company is engaged in the business of manufacturing and export of leather and leather products. The assessee filed its return of income for the year under consideration on 07.11.2017, declaring a total income of Rs.30,39,720/-. The case of the assessee was selected for scrutiny under CASS. The Assessing Officer (AO) issued notices under section 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter called “the Act’). Since there was no compliance to the above notices issued by the AO, he issued a show cause notice under section 144 of the Act. In response to the said notice, assessee furnished a chart, showing the details of month-wise opening cash-in-hand, cash sales, payments received in cash, payments made in cash, cash deposited in bank, cash withdrawals from bank and closing cash-in-hand. From the chart so furnished by the assessee, the AO noticed that there was substantial increase in realization of receipts from debtors in cash during the period from 09.11.2016 to 30.12.2016 (demonetization period) to the tune of Rs.5,65,74,051/- and out of this realization, the assessee had made payments in cash to the tune of Rs.4,37,33,519/- and had deposited cash of Rs.1,25,82,000/- in Specified Bank Notes (SBNs) in its bank account(s). After considering the material available on record and also gathered during the course of assessment proceedings, the AO was of the view that the assessee had created bogus entries of debtors and had transacted in prohibited currency notes during the demonetization period and, therefore, the same was to be added to the income of the assessee. The AO held that “The alleged sale shown during demonetization period creating bogus debtors in its books of accounts and subsequently showing cash receipt from these debtors during demonetization period was used as a device to legalize unaccounted money lying with the assessee before demonetization in the form of Specified Bank Notes to be deposited in its bank account(s).” The AO, accordingly, treated the cash credit of Rs.1,25,82,000/- found recorded in the books of the assessee-company as unexplained income and added the same to the total income of the assessee under section 68 of the Act. He, accordingly, completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.1,56,21,720/-.
2.1 The AO also invoked the provisions of section 115BBE of the Act and initiated penalty proceedings under section 271AAC of the Act.
3. Aggrieved, the assessee preferred an appeal before the NFAC, who partly allowed the appeal of the assessee. The NFAC sustained addition of Rs.1,18,82,000/- and deleted the addition of Rs.7,00,000/- out of the total addition of Rs.1,25,82,000/- made by the AO under section 68 of the Act. The NFAC held that the addition under section 68 of the Act at Rs.1,18,82,000/-, being the credits appearing in the books of account of the assessee, the nature and source of which has not been satisfactorily explained before the AO, was to be treated as income of the assessee.
4. Now, the assessee has approached this Tribunal challenging the order of the NFAC by raising the following grounds of appeal:
1. Because the appeal being finally heard on 02.08.2023, and the submissions uploaded, the appellate order having being passed on 09.03.2024 beyond 15 days of hearing, the said order passed is in violation of CBDT Instruction dated 19 June 2015, the same be quashed.
2. Because the authorities below have erred on facts and in law in making and upholding an addition of Rs.1,18,82,000/- u/s 68 of the Act on the ground that the nature and source of the amount deposited in bank has not been satisfactorily explained, the said addition is contrary to facts, bad in law, be deleted.
3. Because the authorities below have erred on facts and in law in disbelieving the submission as advanced by the assessee and have arbitrarily held that the amounts realized from the customers and the sale proceeds, are unexplained credits, thereby making addition u/s 68 of the Act which addition is contrary to facts, bad in law, be deleted.
4. Because there being no "cash credits" as defined in section 68, in as much as the amounts outstanding being realized and the sales proceeds, are all part of the revenue receipts which have already been considered while preparing the income and expenditure account of the business, as such to treat the same as "cash credit" and tax it again under section 68 is contrary to the spirit and the provisions of the Act, besides being a case of double taxation, once as part of the sales and the again as unexplained credits, the addition of Rs.1,18,82,000/- upheld by CIT(A) be deleted.
5. Because the authorities have erred on facts and in law in holding that the assessee was not eligible to accept SBNs overlooking the provisions of the Notification on SBNs issued by RBI which permitted the deposit of SBNs till 30.12.2016, as such the deposit of SBNs prior to 30.12.2016 cannot be held to be unexplained income of the assessee, the addition made by the authorities below and upheld by the CIT(A) amounting to Rs.1,18,82,000/- be deleted.
6. Because the CIT(A) has failed to appreciate that the entire amount of Rs.1,18,82,000/- being part of Rs.1,25,82,000/-, is part and parcel of the business comprising of the sale proceeds and realization of outstanding debts, there was no reason to disbelieve the same and treat it as unexplained credit and tax it u/s 68, be deleted.
7. Because the authorities below have erred on facts and in law in overlooking and ignoring the business needs and essentialities, and have arbitrarily applied the provisions of section 68 of the Act, the addition of Rs.1,18,82,000/- upheld by the CIT(A) be deleted.
8. Because the authorities below have erred on facts and in law in invoking the provisions of section 115BBE, which provisions are not applicable, for the entire amount treated as unexplained is part of the business activities, beyond the scope of section 68, the tax calculated as per the said provision be deleted. 5.0 The Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the cash deposited in Specified Bank Notes (SBNs) represented the proceeds from sales as well as realization from debtors. It was submitted that an amount of Rs.89,69,410/- was outstanding (i.e. was yet to be recovered from the debtors) on 08.11.2016, i.e., the date on which demonetization was declared. It was submitted that the assessee not only collected outstanding amount from the debtors, but had also undisputedly made sales after 08.11.2016, against which the assessee-company had received cash in SBNs. The assessee made payments in SBNs and had deposited the remaining balance in cash in its bank accounts. The Ld. A.R. submitted that it has nowhere been pointed out by the AO that proper books of account have not been maintained. It was emphasized that the assessee has been following regular system of accounting and that there has been no change in the system of accounting. It was submitted that it is also to be noted that the books of account were not rejected and the purchases and sales have been accepted in totality. It was further submitted that it is also undisputed that the books of account were produced before the AO as would be evident from page 1 of the assessment order itself. The Ld. A.R. also submitted that the assessee’s books of account were duly audited and that no discrepancy, either with respect to purchases or sales, was pointed out by the AO. It was further submitted that the Ledger accounts/details of purchases and sales were also filed before the AO as well as copies of accounts of various parties, from whom cash payments had been received, were also filed along with list of debtors. The Ld. A.R. also submitted that no discrepancy was pointed out with respect to the stock also.
5.1 It was further argued by the Ld. A.R. that acceptance of SBNs and making payments in SBNs after 08.11.2016 and depositing the balance, i.e., Rs.1,25,82,000/-, which was added to the income of the assessee, was not in violation of the demonetization Ordinance issued by the Reserve Bank of India. It was submitted that as per the Specified Bank Notes (Cessation of Liabilities), Act, 2017, the appointed day was 31.12.2016, after which no person could either accept or make payments in Specified Bank Notes. It was submitted that the said Act also deals with prohibition of holding, transferring or receiving Specified Bank Notes on or after the appointed day, i.e., 31.12.2016 and, accordingly, there was no prohibition either in transferring or holding or receiving the Specified Notes till 31.12.2016. It was submitted that, therefore, it remains undisputed that SBNs were legal tender till 31.12.2016 and, therefore, the transactions entered into in SBNs till 31.12.2016 cannot be rejected as being unlawful requiring addition in the hands of the assessee.
5.2 The Ld. A.R. further submitted that the impugned amount had already been included in the sales, which have been accepted by the lower authorities and, therefore, the same cannot be brought to tax under section 68 of the Act for the reason that, once sales have been accepted, bringing them to tax again would amount to double taxation. It was further submitted that section 68 of the Act pertains to cash credits, i.e., those transactions which are in the form of loans or borrowings and which could not be satisfactorily explained before the AO, but in the present case, the assessee had not received any loan or borrowing or deposit, but the impugned amount represented the sales as well as realization of outstanding from the debtors. The Ld. A.R. further submitted that all the sales, cash receipts as well as payments made and the cash deposited in the bank has been duly recorded in the books of account and, thus, the transactions have not been disputed at all and, therefore, the provisions of section 68 of the Act would not be applicable at all.
5.3 The Ld. A.R. also submitted that the assessee has filed complete details of cash for the period 01.04.2016 to 31.03.2017 before the AO and no discrepancy has been found or pointed out by the AO, but the same has been rejected only under a presumption that the sales shown during the demonetization period was for the purpose of creating bogus debtors and thereafter showing cash receipts from these debtors in the books of account and that the same was only a device to legalize the unaccounted money lying with the assessee before demonetization in the form of SBNs. The Ld. A.R. submitted that this kind of presumption by the AO had no basis and that even copy of VAT returns evidenced the sales having been made and that the same have been accepted by the VAT Department also.
5.4 For the proposition that the assessee could legally and validly accept payments in SBNs and also make payments in SBNs as well as deposit cash in bank accounts in SBNs till 31.12.2016, i.e., the appointed day, the Ld. A.R. placed reliance on two orders of ITAT, Visakhapatnam Bench as under:
(1) ITO, Visakhapatnam vs. Srio Tatiparti Satyanarayana, Visakhapatnam in (2) Polepalli Srinivasulu Gupta, anantapur vs. DCIT, Guntur in 241, 242,243,244, 245 & 246/VIZ/2021.
5.5 The Ld. A.R. submitted that vide orders dated 16.03.2022 and 28.06.2022 respectively, the Visakhapatnam Bench (Supra) had held that as there was sufficient cash balance with the assessee, the contention of the Department, treating the receipt of SBNs from cash sales as illegal and thereby invoking the provisions of section 69A of the Act, was not valid in the eyes of law, as the SBNs could be measured in monetary terms since guaranteed by the Central Government and the liability of the Reserve Bank of India did not cease to exist till 31.12.2016.
5.6 The Ld. A.R. prayed that the appeal of the assessee may kindly be allowed.
6.0 In response, the Ld. Sr. D.R. referred to the order of the Ld. First Appellate Authority in detail and submitted that paragraphs 9.1, 9.2, 9.3, 9.4 and 9.5 succinctly express the view of the Department inasmuch as although the books of account have not been rejected by the AO, there is no evidence filed by the assessee to prove that the realization from debtors had not been realized at a later date and had been entered in the books of account prior to the receipt of the payments. It was submitted that the assessee had failed to produce any evidence in support of its claim that the impugned amounts had been received from debtors. The Ld. Sr. D.R. submitted that the details like names, addresses, PAN numbers, confirmations from the parties, etc. have not been filed and, therefore, without proper evidence, the Ld. First Appellate Authority had rightly considered the alleged receipts as being unexplained cash deposits under section 68 of the Act.
6.1 The Ld. Sr. D.R. submitted that the Ld. First Appellate Authority had given adequate relief to the assessee and no further relief was allowable on the facts and circumstances of the case. The Ld. Sr. D.R. argued that the circumstantial evidence was against the assessee inasmuch as all the payments, claimed to have been received from the debtors, were less than Rs.20,000/- per person per day and this would indicate that the assessee was routing unexplained money through its books of account by showing receipts as having been received from the debtors. The Ld. Sr. D.R. argued that the appeal of the assessee deserved to be dismissed and that the order of the Ld. First Appellate Authority should be upheld.
7.0 We have heard the rival submissions and have also gone through the records. The facts are not in dispute in the present case. The assessee had deposited a sum of Rs.1,25,82,000/- in the bank accounts during the demonetization period, i.e., between 09.11.2016 and 30.12.2016. The AO was of the view that there was a substantial increase in realization of payments from debtors in cash during the period 09.11.2016 to 30.12.2016, which amounted to Rs.5,65,74,051/-. The AO also noted that out of this realization in cash, the assessee had made payments in cash to the tune of Rs.4,37,33,519/- and had deposited cash worth Rs.1,25,82,000/- in SBNs in the bank accounts. The AO was of the view that cash in hand as on 08.11.2016 with the assessee-company was only Rs.57,035/- and if the payments received in cash from debtors during 09.11.2016 to 30.12.2016 was to be excluded, the total payments received during the entire financial year was Rs.1,45,42,448/-. As per the AO, this behavior was very unusual and abnormal on the part of the assessee. The AO further noted that, undoubtedly, the assessee had accepted SBNs from its debtors during the demonetization period, whereas the Reserve Bank of India had authorized only Commercial Banks and Co-operative Banks and some other entities, such as Petrol Pumps, Hospitals, etc., to accept SBNs, but other companies, persons were never authorized to accept SBNs after 08.11.2016, as the character of bank notes in denominations of Rs.500/- and Rs.1,000/- issued by the Reserve Bank of India stood withdrawn. As per the AO, the assessee had generated bogus cash receipts from debtors during the demonetization period to generate cash in hand in the books of account with a view to deposit the unaccounted cash lying with the assessee in the form of SBNs. Although the assessee produced the books of account as well as sales invoices, bills, etc. issued during the demonetization period, the AO was of the view that the assessee failed to prove the genuineness of the cash realization from the debtors. The AO was of the view that the assessee had fabricated a story for justifying the cash deposits in the bank during the demonetization period. It was also observed by the AO that all the payments received from various debtors and as shown in the books of account were less than Rs.20,000/- on a single day, which was hard to believe. The AO further concluded that after 09.11.2016, the SBNs could not be measured in money terms, sales could not be entered in the books of account and, therefore, the entire transactions during the demonetization period were bogus. Accordingly, the AO proceeded to add a sum of Rs.1,25,82,000/- being unexplained cash credit found recorded in the books of the assessee-company in terms of the provisions of section 68 of the Act. The Ld. First Appellate Authority gave nominal relief of Rs.7 lakhs only and confirmed the balance amount of Rs.1,18,82,000/-.
7.1 Thus, a perusal of the factual matrix shows that the main reason for the AO to have made the impugned addition under section 68 of the Act was that the assessee had violated the Notification No.S.O.3408(E) dated 08.11.2016 issued by the Reserve Bank of India, wherein legal character of the SBNs in the denomination of Rs.500/- and Rs.1,000/- was withdrawn w.e.f. 08.11.2016 and, thus, the assessee was not authorized by the Government of India to collect payment in SBNs and/or even make payments in the same mode. However, it is seen that although the AO has at one place held that the assessee was not authorized to receive payments in SBNs, he has only added the sum deposited in the bank accounts i.e. Rs.1,25,82,000/- being the balance left after having made payments in SBNs amounting to Rs.43,73,319/- out of the total cash receipts in SBNs, amounting to Rs.56,74,051/-. Thus, in a way, the AO has negated his own theory by permitting the benefit of allowing the deduction of payments made in SBNs, although as per the AO, the assessee could not have legally done so.
7.2.0 We are in agreement with the contentions to the ld. AR that the RBI had permitted the assessee to deposit SBNs in the bank account on or before appointed date. The banks were asked to accept the same before the appointed date. The SBNs (Cessation of Liabilities Act, 2017) defines 'appointed day' vide section 2(1)(a) of the Act. "Appointed Day" means 31st day of December, 2016. Section 5 of the SBNs Cessation of Liabilities Act, 2017 also deals with prohibition of holding, transferring or receiving SBNs. Section 5 states 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 the court. 7.2.1 Therefore, the bar on holding and transferring or receiving SBNs is only after the 'appointed day' which is 31.12.2016. In view of the above, it is our view that there is no violation by the assessee of any law in accepting SBNs against sales made in cash and in receiving cash from debtors.
7.3.0 Furthermore, even the CBDT had issued various Standard Operating Procedures (SOPs) instructing the AOs on the nature of verification to be made in cases where cash has been deposited in SBNs. The following instructions have been issued:
[a] Instruction No. 03/2017 dated 21/02/2017 [b] Instruction No. 04/2017 dated 03/03/2017 [c] Circular in F No. 225/363/2017-ITA.II dated 15/11/2017; [d] Circular in F No. 225/145/2019-ITA.II dated 09/08/2019 7.3.1 On perusal of Circular F.No.225/145/2017-ITA 11 dated 09.08.2019, it is evident that the AO has to examine the cash deposits made during the demonetization period in the case of businesses in accordance with the SOP laid down in the aforesaid circular. Only in cases where the assessee is unable to explain the source of the cash deposits made, can the said sum be treated as unexplained. In the instant case, it was claimed by the assessee that the entire sales are recorded in the books of accounts and have been offered to tax. The sole reason for both AO and CIT(A) for making/sustaining the addition under section 68 of the Act was that subsequent to 08.11.2016, the SBNs were not legal tender and the assessee was not ‘person’ authorized to collect SBNs. The AO and the CIT(A) has not examined the veracity of source of cash deposits.
7.4 It is seen that in the instant case, the AO as well as the Ld. First Appellate Authority have not only accepted the quantum of sales and purchases, but they have also not pointed out any defect in the books of account maintained by the assessee. It is also undisputed that the sales and purchases have been recorded in the books of account and, therefore, not accepting the bank deposits out of such sales and realization from debtors, cannot be held to be invalid in the eyes of law, especially because the assessee has already been charged to tax on the profit earned from such sales reflected in the books of account.
7.5 In our considered view, the lower authorities have proceeded on mere surmises and conjectures by holding that the cash realization from debtors was sham, inasmuch as, the assessee, as per the records, has provided the required details along with books of account during the course of assessment proceedings. It has been argued by the Department that the assessee did not submit the copies of PAN, confirmation from the debtors, etc., but there is no finding recorded by the AO that these details were in fact called for by him and the assessee did not submit the same. The AO has observed that the assessee has failed to establish its claim by producing cogent evidence, but what such cogent evidences were required by the AO to be submitted by the assessee and which the assessee had failed to do, is not mentioned anywhere in the assessment order. Also, the behavior of the assessee, as commented upon by the AO, could have been abnormal and unusual, given the huge cash transactions during the demonetization period, but without any evidence of the assessee indulging in passing bogus entries in its books of account, addition cannot be made on mere apprehensions and conjectures. As far as the stand of the Department regarding the assessee or any person not having the authorization to deal in SBNs during the demonetization period is concerned, the case of the assessee is squarely covered by the two orders of the ITAT, Vishakhapatnam Bench in the cases of ITO, Visakhapatnam vs. Srio Tatiparti Satyanarayana, Visakhapatnam and Polepalli Srinivasulu Gupta, Anantapur vs. DCIT, Guntur (supra). Apart from this, the ITAT Bangalore Bench in the case of Smt. Malapur Mounika, Chitradurga vs. ITO, Chitradurga in vide order dated 30.10.2023, held that accepting SBNs subsequent to 08.11.2016 cannot be the sole reason for making addition under section 69A of the Act. Although in the assessee’s case, the impugned addition had been made under section 68 of the Act, the reasoning provided by the ITAT Bangalore Bench in the case of Smt. Malapur Mounika, Chitradurga vs. ITO, Chitradurga (supra) would equally apply in the assessee’s case as well. The relevant portion from the above order is reproduced below:
“I have carefully considered the rival submissions. Both the AO and CITA accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. The addition has been made only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender. Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation. It is also on record that the assessee was having only one source of income from trading in beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources. Hon'ble Kolkata Tribunal in the case of CIT Vs. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the view that when cash sales are admitted and income from sales are declared as income, wherein the Hon'ble Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources. The Hon'ble Vishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in on identical facts held that when cash receipts represent the sales which the assessee has offered for taxation and when trading account shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assessee already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. I am of the view that in the light of the facts and circumstances of the present case, the addition made is not sustainable and the same is directed to be deleted.” 7.5.1 Similarly, in the case of Agson Global Pvt. Ltd. Vs. ACIT [2022] 325 CTR 001 (Delhi), the Hon'ble Delhi High Court has held that additions made on the sole ground of deviation in the ratio of cash sales and cash deposits during the demonetization period with that of earlier period, is improper and unlawful.
7.6 Similarly, the ITAT Indore Bench in the case of Dewas Soya Ltd., Ujjain vs. ITO in has held that the claim of the appellant that such addition resulted into double taxation of the same income in the same year because on one hand, cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit and loss account). In the present case, the cash deposited in banks has been added under section 68 of the Act and that has been undoubtedly resulted in double taxation.
7.7 Therefore, considering the above judicial precedents as applicable to the facts of the present case, we are of the considered view that the AO could not have made impugned addition only on the ground that the assessee had dealt in old SBNs during the demonetization period. Secondly, once the sales have been accepted by the AO, he could not have legally brought to tax the cash deposited in bank being the balance of sale proceeds (after deduction of expenses), as this would tantamount to double taxation. Accordingly, we set aside the order of the Ld. First Appellate Authority and direct the AO to delete the impugned addition.
8. In the final result, the appeal of the assessee stands allowed.
Order pronounced in the open Court on 29/11/2024.
Sd/- Sd/- [NIKHIL CHOUDHARY] [SUDHANSHU SRIVASTAVA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29/11/2024 JJ: Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. DR By order Assistant Registrar
IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH “A”, LUCKNOW BEFORE SHRI. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI NIKHIL CHOUDHARY, ACCOUNTANT MEMBER Assessment Year: 2017-18 Tack Exim Pvt. Limited v. Asstt. Commissioner of 11/18-A, Pokharpur Income Tax, Jajmau, Kanpur Circle 2(3)(1), Kanpur TAN/PAN:AADCT7929D (Appellant) (Respondent) Appellant by: Shri Rakesh Garg, Advocate Respondent by: Shri Sanjeev Krishna Sharma, D.R. Date of hearing: 02 09 2024 Date of pronouncement: 29 11 2024 O R D E R
PER SUDHANSHU SRIVASTAVA, J.M.:
This appeal has been preferred by the assessee against the order dated 09.03.2024, passed by the ld. Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi for Assessment Year 2017-18.
The brief facts of the case are that the assessee- company is engaged in the business of manufacturing and export of leather and leather products. The assessee filed its return of income for the year under consideration on 07.11.2017, declaring a total income of Rs.30,39,720/-. The case of the assessee was selected for scrutiny under CASS. The Assessing Officer (AO) issued notices under section 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter called “the Act’). Since there was no compliance to the above notices issued by the AO, he issued a show cause notice under section 144 of the Act. In response to the said notice, assessee furnished a chart, showing the details of month-wise opening cash-in-hand, cash sales, payments received in cash, payments made in cash, cash deposited in bank, cash withdrawals from bank and closing cash-in-hand. From the chart so furnished by the assessee, the AO noticed that there was substantial increase in realization of receipts from debtors in cash during the period from 09.11.2016 to 30.12.2016 (demonetization period) to the tune of Rs.5,65,74,051/- and out of this realization, the assessee had made payments in cash to the tune of Rs.4,37,33,519/- and had deposited cash of Rs.1,25,82,000/- in Specified Bank Notes (SBNs) in its bank account(s). After considering the material available on record and also gathered during the course of assessment proceedings, the AO was of the view that the assessee had created bogus entries of debtors and had transacted in prohibited currency notes during the demonetization period and, therefore, the same was to be added to the income of the assessee. The AO held that “The alleged sale shown during demonetization period creating bogus debtors in its books of accounts and subsequently showing cash receipt from these debtors during demonetization period was used as a device to legalize unaccounted money lying with the assessee before demonetization in the form of Specified Bank Notes to be deposited in its bank account(s).” The AO, accordingly, treated the cash credit of Rs.1,25,82,000/- found recorded in the books of the assessee-company as unexplained income and added the same to the total income of the assessee under section 68 of the Act. He, accordingly, completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.1,56,21,720/-.
2.1 The AO also invoked the provisions of section 115BBE of the Act and initiated penalty proceedings under section 271AAC of the Act.
3. Aggrieved, the assessee preferred an appeal before the NFAC, who partly allowed the appeal of the assessee. The NFAC sustained addition of Rs.1,18,82,000/- and deleted the addition of Rs.7,00,000/- out of the total addition of Rs.1,25,82,000/- made by the AO under section 68 of the Act. The NFAC held that the addition under section 68 of the Act at Rs.1,18,82,000/-, being the credits appearing in the books of account of the assessee, the nature and source of which has not been satisfactorily explained before the AO, was to be treated as income of the assessee.
Now, the assessee has approached this Tribunal challenging the order of the NFAC by raising the following grounds of appeal:
1. Because the appeal being finally heard on 02.08.2023, and the submissions uploaded, the appellate order having being passed on 09.03.2024 beyond 15 days of hearing, the said order passed is in violation of CBDT Instruction dated 19 June 2015, the same be quashed.
2. Because the authorities below have erred on facts and in law in making and upholding an addition of Rs.1,18,82,000/- u/s 68 of the Act on the ground that the nature and source of the amount deposited in bank has not been satisfactorily explained, the said addition is contrary to facts, bad in law, be deleted.
Because the authorities below have erred on facts and in law in disbelieving the submission as advanced by the assessee and have arbitrarily held that the amounts realized from the customers and the sale proceeds, are unexplained credits, thereby making addition u/s 68 of the Act which addition is contrary to facts, bad in law, be deleted.
4. Because there being no "cash credits" as defined in section 68, in as much as the amounts outstanding being realized and the sales proceeds, are all part of the revenue receipts which have already been considered while preparing the income and expenditure account of the business, as such to treat the same as "cash credit" and tax it again under section 68 is contrary to the spirit and the provisions of the Act, besides being a case of double taxation, once as part of the sales and the again as unexplained credits, the addition of Rs.1,18,82,000/- upheld by CIT(A) be deleted.
5. Because the authorities have erred on facts and in law in holding that the assessee was not eligible to accept SBNs overlooking the provisions of the Notification on SBNs issued by RBI which permitted the deposit of SBNs till 30.12.2016, as such the deposit of SBNs prior to 30.12.2016 cannot be held to be unexplained income of the assessee, the addition made by the authorities below and upheld by the CIT(A) amounting to Rs.1,18,82,000/- be deleted.
6. Because the CIT(A) has failed to appreciate that the entire amount of Rs.1,18,82,000/- being part of Rs.1,25,82,000/-, is part and parcel of the business comprising of the sale proceeds and realization of outstanding debts, there was no reason to disbelieve the same and treat it as unexplained credit and tax it u/s 68, be deleted.
7. Because the authorities below have erred on facts and in law in overlooking and ignoring the business needs and essentialities, and have arbitrarily applied the provisions of section 68 of the Act, the addition of Rs.1,18,82,000/- upheld by the CIT(A) be deleted.
8. Because the authorities below have erred on facts and in law in invoking the provisions of section 115BBE, which provisions are not applicable, for the entire amount treated as unexplained is part of the business activities, beyond the scope of section 68, the tax calculated as per the said provision be deleted. 5.0 The Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the cash deposited in Specified Bank Notes (SBNs) represented the proceeds from sales as well as realization from debtors. It was submitted that an amount of Rs.89,69,410/- was outstanding (i.e. was yet to be recovered from the debtors) on 08.11.2016, i.e., the date on which demonetization was declared. It was submitted that the assessee not only collected outstanding amount from the debtors, but had also undisputedly made sales after 08.11.2016, against which the assessee-company had received cash in SBNs. The assessee made payments in SBNs and had deposited the remaining balance in cash in its bank accounts. The Ld. A.R. submitted that it has nowhere been pointed out by the AO that proper books of account have not been maintained. It was emphasized that the assessee has been following regular system of accounting and that there has been no change in the system of accounting. It was submitted that it is also to be noted that the books of account were not rejected and the purchases and sales have been accepted in totality. It was further submitted that it is also undisputed that the books of account were produced before the AO as would be evident from page 1 of the assessment order itself. The Ld. A.R. also submitted that the assessee’s books of account were duly audited and that no discrepancy, either with respect to purchases or sales, was pointed out by the AO. It was further submitted that the Ledger accounts/details of purchases and sales were also filed before the AO as well as copies of accounts of various parties, from whom cash payments had been received, were also filed along with list of debtors. The Ld. A.R. also submitted that no discrepancy was pointed out with respect to the stock also.
5.1 It was further argued by the Ld. A.R. that acceptance of SBNs and making payments in SBNs after 08.11.2016 and depositing the balance, i.e., Rs.1,25,82,000/-, which was added to the income of the assessee, was not in violation of the demonetization Ordinance issued by the Reserve Bank of India. It was submitted that as per the Specified Bank Notes (Cessation of Liabilities), Act, 2017, the appointed day was 31.12.2016, after which no person could either accept or make payments in Specified Bank Notes. It was submitted that the said Act also deals with prohibition of holding, transferring or receiving Specified Bank Notes on or after the appointed day, i.e., 31.12.2016 and, accordingly, there was no prohibition either in transferring or holding or receiving the Specified Notes till 31.12.2016. It was submitted that, therefore, it remains undisputed that SBNs were legal tender till 31.12.2016 and, therefore, the transactions entered into in SBNs till 31.12.2016 cannot be rejected as being unlawful requiring addition in the hands of the assessee.
5.2 The Ld. A.R. further submitted that the impugned amount had already been included in the sales, which have been accepted by the lower authorities and, therefore, the same cannot be brought to tax under section 68 of the Act for the reason that, once sales have been accepted, bringing them to tax again would amount to double taxation. It was further submitted that section 68 of the Act pertains to cash credits, i.e., those transactions which are in the form of loans or borrowings and which could not be satisfactorily explained before the AO, but in the present case, the assessee had not received any loan or borrowing or deposit, but the impugned amount represented the sales as well as realization of outstanding from the debtors. The Ld. A.R. further submitted that all the sales, cash receipts as well as payments made and the cash deposited in the bank has been duly recorded in the books of account and, thus, the transactions have not been disputed at all and, therefore, the provisions of section 68 of the Act would not be applicable at all.
5.3 The Ld. A.R. also submitted that the assessee has filed complete details of cash for the period 01.04.2016 to 31.03.2017 before the AO and no discrepancy has been found or pointed out by the AO, but the same has been rejected only under a presumption that the sales shown during the demonetization period was for the purpose of creating bogus debtors and thereafter showing cash receipts from these debtors in the books of account and that the same was only a device to legalize the unaccounted money lying with the assessee before demonetization in the form of SBNs. The Ld. A.R. submitted that this kind of presumption by the AO had no basis and that even copy of VAT returns evidenced the sales having been made and that the same have been accepted by the VAT Department also.
5.4 For the proposition that the assessee could legally and validly accept payments in SBNs and also make payments in SBNs as well as deposit cash in bank accounts in SBNs till 31.12.2016, i.e., the appointed day, the Ld. A.R. placed reliance on two orders of ITAT, Visakhapatnam Bench as under:
(1) ITO, Visakhapatnam vs. Srio Tatiparti Satyanarayana, Visakhapatnam in (2) Polepalli Srinivasulu Gupta, anantapur vs. DCIT, Guntur in 241, 242,243,244, 245 & 246/VIZ/2021.
5.5 The Ld. A.R. submitted that vide orders dated 16.03.2022 and 28.06.2022 respectively, the Visakhapatnam Bench (Supra) had held that as there was sufficient cash balance with the assessee, the contention of the Department, treating the receipt of SBNs from cash sales as illegal and thereby invoking the provisions of section 69A of the Act, was not valid in the eyes of law, as the SBNs could be measured in monetary terms since guaranteed by the Central Government and the liability of the Reserve Bank of India did not cease to exist till 31.12.2016.
5.6 The Ld. A.R. prayed that the appeal of the assessee may kindly be allowed.
6.0 In response, the Ld. Sr. D.R. referred to the order of the Ld. First Appellate Authority in detail and submitted that paragraphs 9.1, 9.2, 9.3, 9.4 and 9.5 succinctly express the view of the Department inasmuch as although the books of account have not been rejected by the AO, there is no evidence filed by the assessee to prove that the realization from debtors had not been realized at a later date and had been entered in the books of account prior to the receipt of the payments. It was submitted that the assessee had failed to produce any evidence in support of its claim that the impugned amounts had been received from debtors. The Ld. Sr. D.R. submitted that the details like names, addresses, PAN numbers, confirmations from the parties, etc. have not been filed and, therefore, without proper evidence, the Ld. First Appellate Authority had rightly considered the alleged receipts as being unexplained cash deposits under section 68 of the Act.
6.1 The Ld. Sr. D.R. submitted that the Ld. First Appellate Authority had given adequate relief to the assessee and no further relief was allowable on the facts and circumstances of the case. The Ld. Sr. D.R. argued that the circumstantial evidence was against the assessee inasmuch as all the payments, claimed to have been received from the debtors, were less than Rs.20,000/- per person per day and this would indicate that the assessee was routing unexplained money through its books of account by showing receipts as having been received from the debtors. The Ld. Sr. D.R. argued that the appeal of the assessee deserved to be dismissed and that the order of the Ld. First Appellate Authority should be upheld.
7.0 We have heard the rival submissions and have also gone through the records. The facts are not in dispute in the present case. The assessee had deposited a sum of Rs.1,25,82,000/- in the bank accounts during the demonetization period, i.e., between 09.11.2016 and 30.12.2016. The AO was of the view that there was a substantial increase in realization of payments from debtors in cash during the period 09.11.2016 to 30.12.2016, which amounted to Rs.5,65,74,051/-. The AO also noted that out of this realization in cash, the assessee had made payments in cash to the tune of Rs.4,37,33,519/- and had deposited cash worth Rs.1,25,82,000/- in SBNs in the bank accounts. The AO was of the view that cash in hand as on 08.11.2016 with the assessee-company was only Rs.57,035/- and if the payments received in cash from debtors during 09.11.2016 to 30.12.2016 was to be excluded, the total payments received during the entire financial year was Rs.1,45,42,448/-. As per the AO, this behavior was very unusual and abnormal on the part of the assessee. The AO further noted that, undoubtedly, the assessee had accepted SBNs from its debtors during the demonetization period, whereas the Reserve Bank of India had authorized only Commercial Banks and Co-operative Banks and some other entities, such as Petrol Pumps, Hospitals, etc., to accept SBNs, but other companies, persons were never authorized to accept SBNs after 08.11.2016, as the character of bank notes in denominations of Rs.500/- and Rs.1,000/- issued by the Reserve Bank of India stood withdrawn. As per the AO, the assessee had generated bogus cash receipts from debtors during the demonetization period to generate cash in hand in the books of account with a view to deposit the unaccounted cash lying with the assessee in the form of SBNs. Although the assessee produced the books of account as well as sales invoices, bills, etc. issued during the demonetization period, the AO was of the view that the assessee failed to prove the genuineness of the cash realization from the debtors. The AO was of the view that the assessee had fabricated a story for justifying the cash deposits in the bank during the demonetization period. It was also observed by the AO that all the payments received from various debtors and as shown in the books of account were less than Rs.20,000/- on a single day, which was hard to believe. The AO further concluded that after 09.11.2016, the SBNs could not be measured in money terms, sales could not be entered in the books of account and, therefore, the entire transactions during the demonetization period were bogus. Accordingly, the AO proceeded to add a sum of Rs.1,25,82,000/- being unexplained cash credit found recorded in the books of the assessee-company in terms of the provisions of section 68 of the Act. The Ld. First Appellate Authority gave nominal relief of Rs.7 lakhs only and confirmed the balance amount of Rs.1,18,82,000/-.
7.1 Thus, a perusal of the factual matrix shows that the main reason for the AO to have made the impugned addition under section 68 of the Act was that the assessee had violated the Notification No.S.O.3408(E) dated 08.11.2016 issued by the Reserve Bank of India, wherein legal character of the SBNs in the denomination of Rs.500/- and Rs.1,000/- was withdrawn w.e.f. 08.11.2016 and, thus, the assessee was not authorized by the Government of India to collect payment in SBNs and/or even make payments in the same mode. However, it is seen that although the AO has at one place held that the assessee was not authorized to receive payments in SBNs, he has only added the sum deposited in the bank accounts i.e. Rs.1,25,82,000/- being the balance left after having made payments in SBNs amounting to Rs.43,73,319/- out of the total cash receipts in SBNs, amounting to Rs.56,74,051/-. Thus, in a way, the AO has negated his own theory by permitting the benefit of allowing the deduction of payments made in SBNs, although as per the AO, the assessee could not have legally done so.
7.2.0 We are in agreement with the contentions to the ld. AR that the RBI had permitted the assessee to deposit SBNs in the bank account on or before appointed date. The banks were asked to accept the same before the appointed date. The SBNs (Cessation of Liabilities Act, 2017) defines 'appointed day' vide section 2(1)(a) of the Act. "Appointed Day" means 31st day of December, 2016. Section 5 of the SBNs Cessation of Liabilities Act, 2017 also deals with prohibition of holding, transferring or receiving SBNs. Section 5 states 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 the court. 7.2.1 Therefore, the bar on holding and transferring or receiving SBNs is only after the 'appointed day' which is 31.12.2016. In view of the above, it is our view that there is no violation by the assessee of any law in accepting SBNs against sales made in cash and in receiving cash from debtors.
7.3.0 Furthermore, even the CBDT had issued various Standard Operating Procedures (SOPs) instructing the AOs on the nature of verification to be made in cases where cash has been deposited in SBNs. The following instructions have been issued:
[a] Instruction No. 03/2017 dated 21/02/2017 [b] Instruction No. 04/2017 dated 03/03/2017 [c] Circular in F No. 225/363/2017-ITA.II dated 15/11/2017; [d] Circular in F No. 225/145/2019-ITA.II dated 09/08/2019 7.3.1 On perusal of Circular F.No.225/145/2017-ITA 11 dated 09.08.2019, it is evident that the AO has to examine the cash deposits made during the demonetization period in the case of businesses in accordance with the SOP laid down in the aforesaid circular. Only in cases where the assessee is unable to explain the source of the cash deposits made, can the said sum be treated as unexplained. In the instant case, it was claimed by the assessee that the entire sales are recorded in the books of accounts and have been offered to tax. The sole reason for both AO and CIT(A) for making/sustaining the addition under section 68 of the Act was that subsequent to 08.11.2016, the SBNs were not legal tender and the assessee was not ‘person’ authorized to collect SBNs. The AO and the CIT(A) has not examined the veracity of source of cash deposits.
7.4 It is seen that in the instant case, the AO as well as the Ld. First Appellate Authority have not only accepted the quantum of sales and purchases, but they have also not pointed out any defect in the books of account maintained by the assessee. It is also undisputed that the sales and purchases have been recorded in the books of account and, therefore, not accepting the bank deposits out of such sales and realization from debtors, cannot be held to be invalid in the eyes of law, especially because the assessee has already been charged to tax on the profit earned from such sales reflected in the books of account.
7.5 In our considered view, the lower authorities have proceeded on mere surmises and conjectures by holding that the cash realization from debtors was sham, inasmuch as, the assessee, as per the records, has provided the required details along with books of account during the course of assessment proceedings. It has been argued by the Department that the assessee did not submit the copies of PAN, confirmation from the debtors, etc., but there is no finding recorded by the AO that these details were in fact called for by him and the assessee did not submit the same. The AO has observed that the assessee has failed to establish its claim by producing cogent evidence, but what such cogent evidences were required by the AO to be submitted by the assessee and which the assessee had failed to do, is not mentioned anywhere in the assessment order. Also, the behavior of the assessee, as commented upon by the AO, could have been abnormal and unusual, given the huge cash transactions during the demonetization period, but without any evidence of the assessee indulging in passing bogus entries in its books of account, addition cannot be made on mere apprehensions and conjectures. As far as the stand of the Department regarding the assessee or any person not having the authorization to deal in SBNs during the demonetization period is concerned, the case of the assessee is squarely covered by the two orders of the ITAT, Vishakhapatnam Bench in the cases of ITO, Visakhapatnam vs. Srio Tatiparti Satyanarayana, Visakhapatnam and Polepalli Srinivasulu Gupta, Anantapur vs. DCIT, Guntur (supra). Apart from this, the ITAT Bangalore Bench in the case of Smt. Malapur Mounika, Chitradurga vs. ITO, Chitradurga in vide order dated 30.10.2023, held that accepting SBNs subsequent to 08.11.2016 cannot be the sole reason for making addition under section 69A of the Act. Although in the assessee’s case, the impugned addition had been made under section 68 of the Act, the reasoning provided by the ITAT Bangalore Bench in the case of Smt. Malapur Mounika, Chitradurga vs. ITO, Chitradurga (supra) would equally apply in the assessee’s case as well. The relevant portion from the above order is reproduced below:
“I have carefully considered the rival submissions. Both the AO and CITA accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. The addition has been made only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender. Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation. It is also on record that the assessee was having only one source of income from trading in beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources. Hon'ble Kolkata Tribunal in the case of CIT Vs. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the view that when cash sales are admitted and income from sales are declared as income, wherein the Hon'ble Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources. The Hon'ble Vishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in on identical facts held that when cash receipts represent the sales which the assessee has offered for taxation and when trading account shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assessee already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again. I am of the view that in the light of the facts and circumstances of the present case, the addition made is not sustainable and the same is directed to be deleted.” 7.5.1 Similarly, in the case of Agson Global Pvt. Ltd. Vs. ACIT [2022] 325 CTR 001 (Delhi), the Hon'ble Delhi High Court has held that additions made on the sole ground of deviation in the ratio of cash sales and cash deposits during the demonetization period with that of earlier period, is improper and unlawful.
7.6 Similarly, the ITAT Indore Bench in the case of Dewas Soya Ltd., Ujjain vs. ITO in has held that the claim of the appellant that such addition resulted into double taxation of the same income in the same year because on one hand, cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit and loss account). In the present case, the cash deposited in banks has been added under section 68 of the Act and that has been undoubtedly resulted in double taxation.
7.7 Therefore, considering the above judicial precedents as applicable to the facts of the present case, we are of the considered view that the AO could not have made impugned addition only on the ground that the assessee had dealt in old SBNs during the demonetization period. Secondly, once the sales have been accepted by the AO, he could not have legally brought to tax the cash deposited in bank being the balance of sale proceeds (after deduction of expenses), as this would tantamount to double taxation. Accordingly, we set aside the order of the Ld. First Appellate Authority and direct the AO to delete the impugned addition.
In the final result, the appeal of the assessee stands allowed.
Order pronounced in the open Court on 29/11/2024.