2023 (1) TMI 1432 - AT - Income Tax

Unexplained money u/s. 69A - cash deposits during demonetization period - taxation u/s. 115BBE - HELD THAT - As there is no blanket prohibition on receiving demonetized currency notes up to 31.12.2016, we are of the considered view that, when the assessee has explained reasons for accepting specified bank notes even after 08.11.2016, AO ought to have accepted the explanation furnished by the assessee when he is not disputing the nature of business and source for cash deposits. In our considered view, what is relevant to decide the issue is, whether the assessee is able to explain source for cash deposits or not. In case, the assessee explains the source for cash deposits, even though there is certain violation of any other Acts or Rules, the AO cannot make addition towards cash deposits. We further noted that a similar issue has been considered in the case of ITO vs Sri Tatiparti Satyanarayana 2022 (3) TMI 896 - ITAT VISAKHAPATNAM where the Tribunal after considering cash deposits out of specified bank notes after 08.11.2016 and also by considering Specified Bank Notes (Cessation of Liability) bill, 2017 held that the AO is incorrect in treating receipt of specified bank notes from cash sales as illegal and thereby, by invoking provisions of section 69 of the Act. AO as well as the CIT(A) has erred in sustaining addition towards cash deposits to bank account u/s. 69 of the Act and also levied tax u/s. 115BBE of the Act. Hence, we direct the AO to delete addition made towards cash deposits u/s. 69 of the Act. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Whether the cash deposits made during the demonetization period should be treated as unexplained cash credit under Section 69A of the Income Tax Act.
2. Whether the Assessing Officer (AO) followed the Standard Operating Procedure (SOP) for handling demonetization cases.
3. Whether the CIT(A) correctly assessed the cash deposits as income from other sources.

Detailed Analysis:

1. Treatment of Cash Deposits as Unexplained Cash Credit under Section 69A:

The primary issue in the appeal was the treatment of cash deposits made during the demonetization period as unexplained cash credit under Section 69A of the Income Tax Act. The assessee, engaged in the wholesale business of fruits, deposited a significant amount of cash in old currency notes during the demonetization period. The AO treated these deposits as unexplained money under Section 69A, arguing that the assessee could not satisfactorily explain the source of these deposits, especially since the cash balance as per the books was less than the deposited amount. The CIT(A) reduced the unexplained amount but still considered a portion of the deposits as income from other sources.

The Tribunal, however, found that the assessee had a consistent pattern of cash deposits in previous years and that the nature of the business, dealing in perishable goods, justified the acceptance of specified bank notes. The Tribunal concluded that the explanation provided by the assessee was reasonable and that the AO and CIT(A) erred in not accepting it. It was noted that the Specified Bank Notes (Cessation of Liability) Bill, 2017, allowed the holding and receiving of specified bank notes until 31st December 2016, and thus, the deposits could not be treated as unexplained.

2. Following of SOP for Demonetization Cases:

The assessee contended that the AO did not adhere to the SOP issued by the Central Board of Direct Taxes (CBDT) for handling demonetization cases. This SOP required separate checklists for business and non-business cases, which the AO allegedly failed to fill. The Tribunal did not specifically address the adherence to the SOP in its final decision but focused on the substantive issue of whether the cash deposits were satisfactorily explained.

3. Assessment of Cash Deposits as Income from Other Sources:

The CIT(A) had assessed a portion of the cash deposits as income from other sources, considering the explanation provided by the assessee regarding the source of the deposits. The Tribunal, however, found that the CIT(A)'s decision to assess the deposits as income from other sources was incorrect. It held that since the assessee had satisfactorily explained the source of the cash deposits as business receipts, the deposits should not be taxed under any other head. The Tribunal directed the AO to delete the addition made under Section 69 of the Act.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the deletion of the addition made towards cash deposits under Section 69 of the Income Tax Act. It emphasized the importance of considering the nature of the business and the explanation provided for the cash deposits, especially in light of the legal provisions regarding the holding and receipt of specified bank notes during the demonetization period.