The Chennai Income Tax Appellate Tribunal (ITAT) has eliminated the addition of cash deposits made during the demonetization period, despite a violation of RBI notification. The ITAT concluded that the Assessee’s genuine explanation for the source of the cash deposit should not be rejected solely due to the violation of the RBI/Government of India notification regarding specified bank notes. The Assessee, involved in the distribution of pharmaceutical goods, surgical and diagnostics goods, underwent scrutiny for the Assessment year 2017-18 due to substantial cash deposits during the demonetization period and significant cash receipts from third parties.
The revenue authorities argued that the Assessee failed to justify the large deposits of INR 1.87 crore in contrast to the closing cash balance of only INR 20,000. Consequently, they added the total cash deposits in specified bank notes as unexplained investment under Section 69, taxable under Section 115BBE, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The ITAT observed that the Assessee had deposited INR 1.87 crore in specified bank notes during the demonetization period to various bank accounts, which arose from cash sales before the demonetization period. The Assessee provided necessary details, including copies of sales bills made in cash before the demonetization period and a list of parties from whom cash was collected after the demonetization period. However, the revenue authorities made the addition solely on the grounds that the Assessee was not eligible to transact or receive specified bank notes after demonetization, as per the notification/GO issued by the RBI and Government of India.
The ITAT conducted a comparative analysis of the amount collected from sales for the financial years 2015-16 and 2016-17, as well as the details of cash deposited into the bank for those years. They concluded that there was no deviation in cash sales and cash deposits when compared to the previous financial year and the demonetization period. Additionally, they noted that the Assessee dealt with essential commodities, where a majority of sales were conducted in cash due to doctors, hospitals, and medical shops primarily dealing in cash. The Assessee’s agents collected cash from parties and directly deposited it into the Assessee’s bank account. Therefore, the ITAT determined that there was no doubt regarding the Assessee’s explanation that they had collected cash from debtors for sales made in cash before the demonetization period. Consequently, the ITAT held that the Assessee had satisfactorily explained the source of the cash deposits made during the demonetization period in specified bank notes and that the revenue authorities erred in making the addition under Section 69.
Regarding the revenue authorities’ reliance on the notification/GO issued by the RBI and Government of India, the ITAT acknowledged that specified bank notes of INR 500 and INR 1000 had been withdrawn from circulation, and various notifications and standard operating procedures (SOP) were issued to deal with specified bank notes, allowing certain categories of persons to accept and transact them until December 31, 2016. However, the ITAT pointed out the lack of clarity on how to handle demonetized currency from the date of demonetization until December 31, 2016. As a result, some individuals continued to accept and transact specified bank notes. The ITAT concluded that the genuine explanation offered by the Assessee for the source of the cash deposit should not be rejected solely based on the violation of certain notifications/GOs issued by the government regarding transacting with specified bank notes.
The ITAT also referred to a circular by the Central Board of Direct Taxes (CBDT), clarifying that when cash deposits are found in business cases, the revenue authorities need to verify the explanation provided by the Assessee regarding the realization of debtors outstanding in the previous year or credited during the year. In this case, since there was no significant change in cash deposits during the demonetization period, the ITAT determined that the source explained for the cash deposits should not be rejected merely because the Assessee accepted specified bank notes in violation of the circulation/notification issued by the Government of India and RBI. Consequently, the ITAT deleted the addition made by the revenue authorities.