ORDER
S.R. Raghunatha, Accountant Member.- The brief facts of the case emanating from the records are that the assessee is a company incorporated under the Companies Act, 2013, engaged in the business of procurement and distribution of cow milk in and around Gingee Town, Villupuram District. The business of the assessee is cash-intensive by its very nature, involving daily cash collections from distributors and customers. For the Assessment Year 2017-18, the assessee filed its return of income on 29.08.2017, declaring a total loss of Rs.18,57,213/-. The case was selected for scrutiny under the CASS, pursuant to which statutory notices were issued, calling upon to furnish details relating to cash deposits. Thereafter, the AO completed the assessment vide order dated 16.12.2019, determining the total income at Rs.49,77,000/- as against the returned loss. While doing so, the AO treated the entire cash deposits made during the period from 10.11.2016 to 16.12.2016 as unexplained investment and brought the same to tax as income of the assessee.
2. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Ld.CIT(A). On perusal of the submission of the assessee the ld.CIT(A) dismissed the appeal by stating that the assessee has failed to discharge the onus of explaining the source of cash deposits during the demonetisation period and confirmed the addition of Rs.49,77,000/- made u/s.69 of the Act.
3. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.
4. The ld.AR for the assessee assailing the action of the ld.CIT(A) submitted that the assessee maintains regular books of account, which are Audited under the provisions of the Companies Act, 2013 and subject to tax audit u/s.44AB of the Act. The audited financial statements for the relevant assessment year were prepared in accordance with Sections 129, 134, and 137 of the Companies Act, 2013 and filed with the Registrar of Companies (ROC) within the prescribed statutory timelines which form part of the public record, accessible to all regulatory authorities, including the Income-tax Department.
5. The ld.AR further submitted that as mandated under the Companies Act, 2013, the assessee prepared and presented the following financial statements:
| i. | | Balance Sheet-reflecting the assets, liabilities, and shareholders’ funds; |
| ii. | | Statement of Profit and Loss-disclosing the revenue from milk procurement and distribution; |
| iii. | | Cash Flow Statement- evidencing cash generated from operating activities; |
| iv. | | Statement of Changes in Equity; and |
| v. | | Notes to Accounts, explaining accounting policies, assumptions, and disclosures. |
6. Further, the annual accounts were duly adopted in the AGM and filed with the ROC u/s.129(3) and 137 of the Companies Act, while the annual return was filed u/s.92 read with Rule 11 of the Companies (Management and Administration) Rules, 2014. Importantly, these filings pre-date the assessment proceedings and therefore cannot be treated as an afterthought or a self-serving explanation
7. It is also submitted that pursuant to G.O. Notification No. G.S.R. 308(E) issued during demonetisation, companies were mandatorily required to disclose the amount of Specified Bank Notes (SBNs) held as on 08.11.2016, details of SBNs deposited or exchanged and the manner of utilisation. The assessee has fully complied with the said notification, and the disclosure of SBNs forms part of the audited financial statements and notes to accounts. Once such statutory disclosure has been made in audited accounts filed with the ROC, the same carries a presumption of correctness, unless disproved by cogent material.
8. The ld.AR contended that Section 69 of the Act is a deeming provision which can be invoked only when the statutory conditions prescribed therein are cumulatively satisfied, namely that the assessee has made investments which are not recorded in the books of account, if any, maintained by the assessee for the relevant previous year, and that the assessee offers no explanation about the nature and source of such investments, or the explanation offered is not found to be satisfactory. The provision applies only to unrecorded investments and does not extend to monies or receipts which are duly accounted for in the regular books of account, the provisions of section 69A cannot be mechanically or routinely invoked. In the present case, the assessee has maintained regular and contemporaneous books of account, and the cash deposited during the demonetisation period is duly and transparently recorded in the cash book maintained in the ordinary course of business. The assessee has also clearly explained the source of such cash as arising from business receipts generated from the procurement and distribution of milk, an activity which is inherently cash-intensive and fully consistent with the nature and scale of the assessee’s business. Further, the corresponding cash balance stands reflected in the audited balance sheet, which forms part of the statutory financial statements.
9. The ld.AR argued that the mere timing of the cash deposits during the demonetisation period does not, by itself, alter the intrinsic character or source of the receipts. Demonetisation was a monetary policy measure and did not create a legal presumption that cash held or deposited during the relevant period was per se unexplained. Lawful business receipts do not lose their legitimacy solely on account of being deposited during the demonetisation window, particularly when such deposits were made in compliance with Government notifications and regulatory mandates, which encouraged the deposit of SBNs into banking channels.
10. The ld.AR further submitted that the cash deposits made was:
| (a) | | emanated from pre-existing cash balances and day-to-day business collections generated from the Appellant’s regular activity of milk procurement and distribution, which is inherently cash-driven in nature; |
| (b) | | were deposited strictly in compliance with Government notifications, RBI directions, and regulatory instructions issued during the demonetisation exercise, which expressly required holders of Specified Bank Notes to deposit the same into bank accounts within the prescribed window; and |
| (c) | | were fully accounted for, reconciled, and traceable in the regularly maintained cash book and other primary records, forming part of the audited books of account and financial statements. |
11. Thus, ld.AR argued that the deposits represent nothing but conversion of recorded cash-in-hand into bank balances, without any generation of new or undisclosed income.
12. Further, the ld.AR contended that the Assessing Officer has neither rejected the books of account u/s.145 of the Act nor pointed out any specific discrepancy, inflation, suppression, manipulation, or inconsistency in the cash book, ledger accounts, or audited financial statements. The books of account have therefore been accepted by implication. In the absence of rejection of books or adverse findings based on tangible and credible material, the AO lacks the jurisdictional foundation to disregard the recorded business receipts and invoke section 69. Consequently, the addition made thereunder is unsustainable in law, being based on conjecture rather than statutory conditions precedent.
13. In view of these undisputed facts, the ld.AR contended that the basic jurisdictional requirement for invoking section 69 namely, that the money in question is not recorded in the books of account fails outright, rendering the invocation of section 69 wholly unsustainable in law.
14. The ld.AR further argued that it is a settled and well-entrenched position of law that where cash receipts emanate from regular and disclosed business activity, and such receipts are duly recorded in the books of account maintained in the ordinary course of business, the same cannot be characterised as “unexplained investment” within the meaning of section 69 of the Act. Section 69 is a deeming provision of limited application, which can be invoked only in cases where the money in question is not recorded in the books of account, and the assessee either offers no explanation or the explanation offered is found to be unsatisfactory on the basis of cogent material. Once the existence of regular books and contemporaneous recording is established, the foundational condition for invoking section 69 fails.
15. The ld.AR submitted that Section 69 of the Act is a deeming provision which can be invoked only when the statutory conditions prescribed therein are cumulatively satisfied, namely that the assessee has made investments which are not recorded in the books of account, if any, maintained by the assessee for the relevant previous year, and that the assessee offers no explanation about the nature and source of such investments, or the explanation offered is not found to be satisfactory. The provision applies only to unrecorded investments and does not extend to monies or receipts which are duly accounted for in the regular books of account, the provisions of section 69A cannot be mechanically or routinely invoked.
16. Therefore, the ld.AR stated that the assessee is carrying on a regular, identifiable and continuous business of procurement and distribution of cow milk, a trade which is inherently cash-oriented, involving daily collections from customers and distributors. The cash deposits made during the demonetisation period represent normal business receipts, accumulated out of:
| • | | opening cash-in-hand available as per books; and |
| • | | daily cash collections generated in the ordinary course of business. |
Such receipts have been systematically accounted for, supported by contemporaneous entries in the cash book and reflected in the audited financial statements.
17. In view of the above arguments the ld.AR prayed that the addition made u/s.69 of the Act be held to be without jurisdiction, contrary to law, and unsustainable on facts, and accordingly be deleted in full.
Per contra, the ld. DR supported the orders of the Assessing Officer and the ld.CIT(A) and submitted that the assessee had failed to substantiate the source of cash deposits to the satisfaction of the Assessing Officer and therefore the addition was rightly made and confirmed.
18. We have heard the rival submissions and carefully perused the material available on record. Upon consideration of the facts and circumstances of the case, certain foundational aspects remain undisputed. Firstly, the assessee maintains regular books of account in the ordinary course of its business. Secondly, such books are duly audited in accordance with the statutory requirements. Thirdly, the impugned cash deposits stand recorded in the cash book maintained by the assessee. Fourthly, the Assessing Officer has not invoked the provisions of Section 145 of the Act, so as to reject the books of account. Lastly, no independent or incriminating material has been brought on record by the Revenue to demonstrate that the deposits represent unaccounted income of the assessee.
19. We note that section 69 of the Act is a deeming provision and, being in the nature of a legal fiction, must be strictly construed. The provision is attracted only when the following cumulative conditions are satisfied: (i) the assessee has made investments; (ii) such investments are not recorded in the books of account, if any, maintained by the assessee for the relevant previous year; and (iii) the assessee either offers no explanation regarding the nature and source of such investments or the explanation offered is found to be unsatisfactory. Thus, non-recording of the investment in the books of account is a sine qua non for invoking Section 69.
20. In the present case, it is not in dispute that the impugned cash deposits are duly recorded in the regularly maintained cash book of the assessee. Once the transactions are admittedly recorded in the books of account, the very jurisdictional foundation for invoking Section 69 collapses. A deeming provision cannot be extended to transactions that are already accounted for in the books maintained in the normal course of business.
21. The mere fact that the deposits were made during the demonetisation period, in our considered view, cannot by itself justify an adverse inference in the absence of any material to show that the cash so deposited was unaccounted or represented undisclosed income. Suspicion, howsoever strong, cannot take the place of proof.
22. The Tribunals have consistently taken the view in matters concerning cash deposits during the demonetisation period that where such deposits are traceable to regular books of account, the books have not been rejected, and the nature of business is cash-oriented, additions u/s.69 or 69A cannot be sustained merely on suspicion or on the basis of the timing of deposits.
23. The Tribunal under the identical set of facts deleted the additions made by the Assessing Officer in the case of Raju Dinesh Kumar v. Dy. CIT (Chennai – Trib.)/ITA No. 1321/Chny/2023 dated 19.01.2024, after considering this Tribunal’s following decisions in Micky Fireworks Industries v. ACIT [IT Appeal No. 264 (Chny) of 2023, dated 26-07-2023], Mrs. Umamaheshwari v. ITO [IT Appeal No. 527/Chny/2022 dated 14-10-2022], Amar Sparklers Factory v. ITO [IT Appeal No. 808 (Chny) 2023, dated 11-10-2023], held as under:
“9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts borne out from the record clearly indicate that the assessee is running a dhall mill and manufacturing various kinds of dhalls. The facts brought on record by the AO further indicated that the assessee procures various kinds of pulses from local market and manufacturing into various kinds of dhalls and sells to unregistered dealers in cash. The assessee has filed comparative cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17 and also cash sales and cash deposits for the month of October & November, 2015 and October & November, 2016. On perusal of details filed by the assessee, which has been reproduced by the AO in the assessment order, we find that there is no abnormal variation in cash sales and cash deposits into bank account for FY 2015-16 & FY 2016-17. Further, the cash sales achieved by the assessee for FY 2015-16 is higher than the cash sales reported for FY 2016-17. From the details filed by the assessee, it is abundantly clear that there is no sudden increase in cash sales during demonetization period when compared to earlier Financial Years. Further, the assessee has filed cash book and other details to prove availability of cash in hand as on 08.11.2016 at Rs.71,76,208/-. In fact, the AO is not disputed the fact that the assessee has filed cash book and as per said cash book, cash in hand as on 08.11.2016 was at Rs.71,76,208/-. If you go by the nature of business of the assessee and sales trend, it is undoubtedly clear that the assessee’s sales predominantly in cash, and thus, the cash in hand shown by the assessee as on 08.11.2016 appears to be genuine and bona fide. To this extent, in our considered view, the reasons given by the AO to reject explanation of the assessee for source for cash deposits into bank account is devoid of merits.
10.Having said so, let us come back to the explanation of the assessee with regard to source for remaining cash deposits. The assessee claims that he is into manufacturing of various kinds of dhalls and sells to unregistered dealers in cash. The assessee claims that he has collected cash in demonetized currency from customers even after 09.11.2016 and said cash receipts is not violation of Specified Bank Notes (Cessation of Liabilities) Act, 2017. We find that although, the Government of India & RBI issued various notifications and circulars barring people transacting in SBNs, but, as per Specified Bank Notes (Cessation of Liabilities) Act, 2017, no person shall accept or transact any SBNs from the appointed date. As per said Act, appointed date is 31.12.2016. From the above, it is very clear that up to appointed date, persons can transact in SBNs. However, the only requirement is, they should be able to establish source for said cash deposits. This principle is further fortified by the decision of the ITAT Chennai Bench in the case of Amar Sparklers Factory v. ITO in ITA No.808/Chny/2023 order dated 11.10.2023, where the Tribunal after considering relevant facts has held as under:
7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. In so far as addition of Rs. 6,62,783/-, we find that the assessee itself has admitted shortage of source in their cash flow statement filed before the AO. Therefore, from the above, it is undoubtedly clear that the assessee could not explain source for cash deposits to the extent of Rs. 6,62,783/- and thus, we are of the considered view that, there is no error in the reasons given by the CIT(A) to sustain additions made towards cash deposits to the tune of Rs. 6,62,783/-. In so far as addition of Rs. 20,40,000/- towards advance received from group concerns, it was an argument of the appellant that group concerns have paid advance in cash during demonetization period and deposited into IDBI bank account. In this regard, the appellant has filed necessary details including PAN nos. and confirmation letters from the group concerns to prove receipt of trade advance. The Assessing Officer has not disputed these facts, however made additions only on the ground that the assessee should not have accepted cash in specified bank notes after 08.11.2016. We find that this issue is covered in favour of the assessee by the decision of ITAT, Chennai Benches in the case of M/s. Micky Fireworks Industries v. ACIT in ITA No. 264/Chny/2023, dated 26.07.2023, where the Tribunal under identical set of facts deleted additions made by the Assessing Officer, and the findings of the Tribunal is reproduced as under:
“4. From the facts, the undisputed position that emerges is that the assessee has made sale of fireworks during festival season. The sales are duly accounted for by the assessee in the books of accounts. The accounts have duly been audited. The assessee has realized debtors out of such sale in SBN which have been deposited in the bank account of the assessee. The cash deposited by the assessee has duly been accounted for in the books of accounts. The Ld. AO has not alleged any bogus sales or back dated sales made by the assessee. No defect has been pointed in the books of accounts as maintained by the assessee.
5. It could also be seen that during the course of assessment proceedings, various notices were issued u/s 142(1) from time to time calling numerous details from the assessee. The assessee was required to file numerous details including monthly cash flow statement, inventory of closing stock, copy of sales tax assessment order, monthly cash deposits and credits for various periods, ledger account for purchase and other expenditure, monthly sales gross receipts, monthly purchases, details of old notes and new notes deposited during demonetization period, the day book, Cash book, ledger maintained for business, cash balance as per cash book etc. All these details were duly submitted by assessee vide reply dated 12-122019. The assessee also submitted month-wise cash deposits in all bank accounts, details of old notes deposited at the time of demonetization period. Pertinently, the assessee also furnished details of name, address and PAN of cash depositors who deposited cash during demonetization period. The same has been detailed on pages 24 to 35 of the paper book. Apparently, the same could not be faulted with by Ld. AO. There is no allegation of any irregularity in the books of accounts.
6. We find that the only reasoning to treat the said deposits as unexplained cash credit u/s 68 is that the assessee was debarred from dealing in SBN after 08-11-2016. However, in the present case, the cash so received by the assessee is backed by sales carried out by the assessee as recorded in the books of accounts. Therefore, the source of cash is duly explained. The provisions of Sec.68 could be invoked only in cases when there was unexplained cash credit in the books of accounts maintained by the assessee. However, the assessee has duly identified the debtors from whom the cash was received and the same could not be disputed by lower authorities. The PAN of respective debtors as well as quantum of cash realized from each of them has duly been detailed by the assessee before Ld. AO during assessment proceedings. No defect has been pointed out in the books of accounts. In such a case, the credit could not be held to be unexplained cash credit and the impugned additions are not sustainable in law.
7. The SMC bench of this Tribunal in Mrs. Umamaheswari v. ITO (supra), on identical facts, deleted similar additions on the ground that the assessee had duly evidenced the source of cash deposit and therefore, addition could not be made u/s 68. Similar is another decision of SMC Raipur Bench in Rahul Cold Storage v. ITO (supra) wherein it has similarly been held that when the deposits were sourced out of business receipts duly recorded in the books of accounts, no such addition could be made u/s 68. The other cited decision of Bangalore Tribunal is also on similar lines.
8. Considering the facts and circumstances of the case, we find force in assessee’s case and therefore, delete the impugned addition as made u/s 68. We order so. The Ld. AO is directed to re-compute the income of the assessee.”
8. In this view of the matter and by following the decision of ITAT, Chennai Benches, we direct the AO to delete additions made towards source for cash deposits at Rs. 20,40,000/- u/s. 69A of the Act.
11. In the given facts of the present case, there is no dispute with regard to the fact that the assessee’s sales predominantly in cash. It is also an undisputed fact that there is no abnormal variation in total sales, cash sales and cash deposits for two Financial Years. The assessee is also able to file various evidences, including month-wise purchase and sales and cash book to prove availability of cash in hand as on 08.11.2016. Therefore, we are of the considered view that going by the nature of business of the assessee and also details submitted for two Financial Years, the explanation offered by the assessee towards source for cash deposits into bank account during demonetization period, is bona fide and acceptable. The AO and the Ld.CIT(A) without considering the relevant submissions of the assessee simply made addition towards cash deposits u/s.69A r.w.s.115BBE of the Act. Thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete the addition made towards cash deposits u/s.69A r.w.s.115BBE of the Act.”
24. In cases where the assessee demonstrated availability of sufficient cash-in-hand as per books and the Department failed to bring any contrary evidence on record, the Tribunal has held that deposits made during the demonetisation window cannot be treated as unexplained income solely because they were deposited during the specified period. The consistent ratio emerging from the decisions of the Chennai Benches is that demonetisation, being a policy measure, does not create a legal presumption that cash deposits made during that period are unexplained. Recorded business receipts cannot be re-characterised as unexplained investments in the absence of material evidence. Suspicion, however strong, cannot substitute proof. Furthermore, unless the books of account are rejected in accordance with law, the entries recorded therein are entitled to due evidentiary weight.
25. Applying the above legal principles to the facts before us, we note that the assessee is engaged in the business of milk procurement and distribution, which is inherently cash-driven. Daily cash collections are a normal and integral feature of such trade. The explanation furnished by the assessee that the deposits represent opening cash balance and daily business receipts is plausible, consistent with the nature of business, and supported by contemporaneous entries in the cash book.
26. We find that the AO has not demonstrated any abnormal spike in turnover inconsistent with past records, nor has he established any falsification of the cash book or discrepancy in the audited financial statements. No material evidence has been brought on record to suggest suppression of sales or introduction of unaccounted money. In the absence of rejection of books and in the absence of any incriminating material, few are of the considered view that the addition appears to have been made solely on account of the timing of deposits during the demonetisation period.
27. It is a settled principle of law that suspicion, however strong, cannot replace legal proof. A deeming provision such as Section 69 must be strictly construed and can be invoked only when its statutory preconditions are fully satisfied. Those conditions are clearly not met in the present case.
28. In view of the foregoing discussion, particularly the fact that the deposits are duly recorded in the regular books of account and in the absence of rejection of books u/s.145 of the Act and in the absence of any independent or contrary evidence brought on record by the Revenue, the deposit of cash cannot be considered as unexplained. This view is supported by the consistent judicial view taken by the Tribunals in similar matters and hence, we hold that the invocation of Section 69 in the present case is legally unsustainable. Accordingly, the addition of Rs.49,77,000/- made u/s.69 of the Act and sustained by the learned CIT(A) is hereby deleted.
29. In the result the appeal of the assessee is allowed.