ITAT Restricts Demonetization Addition to ₹7 Lakhs; Rules Enhanced Tax Rate u/s 115BBE is Prospective

ITAT Restricts Demonetization Addition to ₹7 Lakhs; Rules Enhanced Tax Rate u/s 115BBE is Prospective

Issue

1. Quantum: Whether cash deposits of ₹78 lakhs made during the demonetization period constitute unexplained money under Section 69A, considering the assessee’s business in handicrafts and exports.

2. Tax Rate: Whether the enhanced tax rate under Section 115BBE (introduced via the Taxation Laws (Second Amendment) Act, 2016) applies to cash deposits made during the demonetization period (FY 2016-17/AY 2017-18), or if it applies prospectively from 01.04.2017.

Facts

• Assessee: An individual engaged in the business of export and local sales of handicraft items.

• The Event: During the demonetization period (Nov-Dec 2016), the assessee deposited cash aggregating to ₹78,00,000/- in his bank accounts.

• Assessment: The Assessing Officer (AO) passed a best judgment assessment (ex-parte under Section 144). He rejected the assessee’s explanation that the cash came from business receipts and treated the entire amount as unexplained money under Section 69A.

• Tax Rate Applied: The AO taxed this addition at the steeper rate prescribed under Section 115BBE.

• Appeal Delay: The appeal before the Tribunal was filed with a delay of 412 days.

Decision

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, partly allowed the appeal.

1. Condonation of Delay:

The Tribunal condoned the 412-day delay in the “larger interest of justice,” relying on the Supreme Court’s landmark judgment in Collector, Land & Acquisition vs. Mst. Katiji, which advocates for a liberal approach in delay condonation.

2. On Quantum of Addition (Relief of ₹71 Lakhs):

• The Tribunal acknowledged that the assessee operates in the unorganized handicraft sector, where cash turnover cannot be ruled out.

• It noted that the AO had not specifically rejected the books of account that recorded these deposits as turnover.

• Ruling: To balance the lack of concrete proof with the probability of business receipts, the Tribunal estimated a lumpsum addition of ₹7,00,000/- and deleted the remaining ₹71,00,000/-.

3. On Section 115BBE Tax Rate:

• The Tribunal relied on the Madras High Court decision in S.M.I.L.E. Microfinance Ltd. Vs. ACIT (2024).

• Ruling: It held that the amendment to Section 115BBE (imposing higher tax rates on unexplained income) comes into effect only for transactions done on or after 01.04.2017.

• Since the deposits were made in 2016, the assessee is directed to be assessed under the normal provisions of the law, not the enhanced penal rates.

Key Takeaways

• Section 115BBE is Prospective: This order reinforces the view that the punitive tax rates introduced post-demonetization generally apply prospectively (from April 1, 2017), potentially saving taxpayers from the 60% tax burden for AY 2017-18 deposits.

• Estimation in Unorganized Sectors: For businesses dealing in handicrafts or unorganized sectors, Tribunals may accept that cash deposits are business receipts rather than unexplained money, even if documentation is imperfect.

• Books of Account: If the AO fails to specifically reject the books of account under Section 145(3), it becomes difficult to treat business turnover as unexplained cash credits under Section 69A.

• Lump Sum Additions: In the absence of precise details, Tribunals have the power to restrict additions to a “just and proper” estimate to resolve the dispute.