Demonetisation Deposits Not Taxable: Delhi ITAT Ruling in Favor of Assessee

Brief: In a recent ruling, the Income Tax Appellate Tribunal (ITAT) in Delhi has upheld the position that cash deposits made during the demonetization period are not taxable when the assessee can demonstrate that the cash was maintained for legitimate business operations and exigencies. The case pertained to Jagson International Ltd., which had faced an addition of Rs. 2.88 crore on account of cash deposits in specified bank notes during the demonetization period from 09.11.2016 to 30.12.2016.

Facts: Jagson International Ltd. had cash deposits in its bank account during the demonetization period, and the Income Tax department made an addition of Rs. 2.88 crore to its income. However, the company provided a detailed explanation for the source of these cash deposits:

  1. The Assessee explained that the source of these cash deposits was the cash balance it had on 08.11.2016, the day before demonetization was announced.
  2. The company also highlighted that it had a cash balance of Rs. 2.76 crore on 01.04.2016, which was well before the demonetization period.
  3. Importantly, the return of income filed by the Assessee prior to demonetization had been accepted by the Revenue department.
  4. The Assessee furnished cash movement records for the year in question as well as the previous year, supporting its claim that it had an available cash balance of Rs. 2.94 crore on 08.11.2016.

Decision: The ITAT, in its decision, considered the Assessee’s explanations and the overall circumstances of the case. It made the following key determinations:

  1. Mandated Cash Balance: The ITAT recognized that businesses often need to maintain cash balances at various levels to facilitate their regular operations and address unforeseen business exigencies.
  2. Books of Account: The ITAT noted that the books of account maintained by the Assessee were not rejected, and no deficiencies were identified in the cash book. This absence of discrepancies led the ITAT to conclude that there was no basis for the Revenue to doubt the existence of the cash balance as of 08.11.2016.
  3. Consistent Cash Holdings: The ITAT observed that the Assessee had consistently held a substantial cash balance, which was sufficient to account for all cash deposits made throughout the year, including those during the demonetization period. As such, it ruled that there was no valid reason for the Revenue to make any additions to the Assessee’s income.

Conclusion: The Delhi ITAT’s ruling in the case of Jagson International Ltd. provides a significant precedent in favor of taxpayers who faced additions to their income due to cash deposits made during the demonetization period. The key takeaways from this ruling are:

  1. Cash deposits during demonetization are not automatically taxable if the Assessee can establish that the cash was legitimately held for business operations and exigencies.
  2. The maintenance of proper books of account and the absence of discrepancies are essential factors in determining the validity of the Assessee’s claims regarding cash balances.
  3. Consistency in cash holdings and the ability to explain the source of cash deposits are crucial for the Assessee’s defense against tax additions.

In this specific case, Jagson International Ltd. successfully demonstrated that its cash deposits during demonetization were fully explained by legitimate sources, leading to a favorable ruling by the ITAT. This ruling underscores the importance of maintaining transparent financial records and justifying cash holdings for businesses facing tax scrutiny during extraordinary events like demonetization.

[Related Assessment Year: 2017-18] [Case Reference: Jagson International Ltd. v. DCIT, ITAT Delhi, Judgment Date: 04.08.2023]

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