2021 (12) TMI 599 - AT - Income Tax

Unexplained cash deposits in two bank accounts - Legal tender money in demonetization of currency - AO culled out, the deposits that was made of bank notes that were declared as not legal tender owing to demonetization of currency - HELD THAT - Both AO and CIT(A) accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. 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. 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. As in the case of CIT Vs. Associated Transport Pvt. Ltd. 1994 (1) TMI 18 - CALCUTTA HIGH COURT 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. 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 - See M/S HIRAPANNA JEWELLERS AND (VICE-VERSA) 2021 (5) TMI 447 - ITAT VISAKHAPATNAM - thus the addition made is not sustainable and the same is directed to be deleted. Appeal of the assessee is allowed.

Summary

Issues:
- Addition of cash deposits post-demonetization under section 68 of the Income Tax Act.
- Treatment of cash deposits as unexplained income.
- Applicability of section 115BBE of the Act.
- Legal tender status of demonetized notes.
- Double taxation concerns.

Analysis:

Issue 1: Addition of cash deposits post-demonetization under section 68 of the Income Tax Act
The Assessing Officer (AO) observed significant cash deposits in the assessee's bank accounts post-demonetization. The AO made an addition of the cash deposits as unexplained income under section 68 of the Act, citing the discrepancy between the closing cash balance and total deposits.

Issue 2: Treatment of cash deposits as unexplained income
The assessee contended that the cash deposits were sales proceeds from business transactions with small and medium traders. The contention was supported by maintaining regular books of accounts and undergoing compulsory audits. The AO and CIT(A) acknowledged the cash receipts as sales proceeds but still treated them as unexplained income.

Issue 3: Applicability of section 115BBE of the Act
The assessee argued against the application of section 115BBE, emphasizing that the income was solely from the business of trading in specific goods. The provisions of section 115BBE were deemed inapplicable to categorize the income as from other sources.

Issue 4: Legal tender status of demonetized notes
The CIT(A) held that accepting demonetized notes post-declaration as illegal tender was illegal. However, the assessee argued that old notes could be accepted till a specified date and that there were no prohibitions on accepting them.

Issue 5: Double taxation concerns
The assessee raised concerns about potential double taxation if the cash deposits were added under section 68, as the sales proceeds were already taxed as income. Judicial precedents were cited to support the argument that adding the cash deposits as unexplained income would lead to double taxation.

Judgment:
The Tribunal ruled in favor of the assessee, emphasizing that the cash receipts were sales proceeds already admitted as income. Referring to judicial decisions, the Tribunal held that adding the cash deposits under section 68 would result in double taxation. The addition was deemed unsustainable, and the appeal of the assessee was allowed, directing the deletion of the addition made by the AO.

This comprehensive analysis highlights the key issues, arguments presented, legal interpretations, and the final judgment of the Tribunal in the case.