Section 115BBE Applies Only to Transactions On or After April 1, 2017

I. Lump-Sum Addition for Unexplained Cash Deposits During Demonetization, Not to be a Precedent

Issue:

Whether a lump-sum addition for unexplained cash deposits made by an assessee during the demonetization period is justified, even when the assessee attempts to explain the source through cash withdrawals and increased cash sales due to a government directive, but some element of failure to explain remains.

Facts:

For the assessment year 2017-18, during scrutiny, the Assessing Officer (AO) observed a sudden spike in cash sales and disproportionate cash deposits made by the assessee during the demonetization period. The AO issued notices under Section 133(6) to eight buyer parties. Most of these notices remained uncomplied with, except for one party which confirmed a purchase from the assessee. Based on the unverified deposits, the AO made an addition under Section 68 of the Income-tax Act, 1961, on account of the cash deposits.

The assessee attempted to prove the entire source of the cash deposit during demonetization as derived from cash withdrawals from the bank as well as increased sales due to a government directive requiring sugar mills to liquidate stock by October 31, 2016. However, the court found that there was “some element of failure to explain some of cash deposit which could not be ruled out.”

Decision:

Yes, the court held that in the larger interest of justice, a lump-sum addition of ₹5 lakhs would be just and proper, with a rider that the same should not be treated as a precedent, so as to cover all loopholes. The decision was partly in favor of the revenue.

Key Takeaways:

Demonetization and Scrutiny: The demonetization period saw intense scrutiny of cash deposits. Assessees had a high onus to explain the source of large cash deposits during this time.
Partial Explanation and Lump-Sum Addition: When an assessee provides a partial explanation for cash deposits (e.g., some sales confirmed, some withdrawals), but a portion remains unexplained, courts sometimes resort to a lump-sum addition. This approach aims to cover the unexplained portion without disproportionately penalizing the assessee when complete documentary proof is hard to come by for every small transaction, but some doubts persist.
No Precedent: The specific rider that this lump-sum addition should “not be treated as a precedent” is crucial. It means this is an ad-hoc solution based on the unique facts of the case, and it doesn’t create a general rule for all demonetization-related cash deposit cases. This allows the authorities to apply their mind to each case individually.
Onus Probandi (Section 68): This case reinforces the principle that the assessee has a strong onus to explain cash credits under Section 68. Failure to do so can lead to additions, even if they claim a genuine source.

II. Section 115BBE Applies Only to Transactions On or After April 1, 2017

Issue:

Whether the provisions of Section 115BBE of the Income-tax Act, 1961 (which levies a higher tax rate on income referred to in Sections 68 to 69D), would apply only to transactions done on or after April 1, 2017.

Facts:

The context is the assessment year 2017-18, and the issue is the applicability of Section 115BBE to unexplained income/cash credits. Section 115BBE was introduced/amended to impose a higher tax rate on unexplained credits, investments, etc. The question is whether its application is prospective from April 1, 2017, or if it can apply to transactions occurring before this date but falling in an assessment year that spans this date.

Decision:

Yes, the court held that the provisions of Section 115BBE would apply only to transactions done on or after April 1, 2017. The decision was in favor of the assessee on this point.

Key Takeaways:

Prospective Application of Law: Unless expressly stated or clearly implied, tax statutes are generally presumed to be prospective in application. Provisions that impose a higher tax burden or new liabilities are typically applied only from their effective date.
Effective Date of Section 115BBE Amendment: Section 115BBE underwent significant amendments by the Taxation Laws (Second Amendment) Act, 2016, effective from April 1, 2017 (i.e., Assessment Year 2017-18 onwards). These amendments substantially increased the tax rate on unexplained credits.
Taxability of Transactions: The judgment implies that for a transaction to be subject to the enhanced rates of Section 115BBE, the transaction itself must have occurred on or after April 1, 2017. Income or credits that arose from transactions before this date, even if assessed in AY 2017-18, would not fall under the amended Section 115BBE.
Favor of Assessee: This ruling is beneficial to the assessee as it means the higher tax rate under Section 115BBE will not be applied to the explained or partly explained cash deposits that occurred before April 1, 2017, even if they relate to AY 2017-18.

IN THE ITAT DELHI BENCH ‘F’

Dy. C.I.T

Rai Bahadur Narain Singh Sugar Mills Ltd.

Ms. Madhumita Roy, Judicial Member
and Naveen Chandra, Accountant Member

IT Appeal No. 3027 (DEL.) OF 2024
[Assessment year 2017-18]

MAY 28, 2025

Aditi Gupta, Adv and Abdullah Mustqueem, Adv. for the Appellant. Sanjay Tripathi, Sr. DR for the Respondent.

ORDER

Naveen Chandra, Accountant Member. – This appeal by the Revenue is directed against the order of the NFAC, Delhi dated 09.10.2023 for A.Y 2017-18.

2. The Revenue has raised the following grounds of appeal:

“1. Whether, on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 91,77,000/-on account of cash deposit during demonetization period.?

2. Whether, on the facts and circumstances of the case and in law the Ld. CIT(A) was right in deleting the additions of Rs. 91,77,000/-without appreciating that the parties to whom cash sale was made had not filed any response in pursuance to notices u/s 133(6) of the Act during Assessment proceedings?

3. The appellant craves leave to add, alter, amend, append or delete any of the above grounds of appeal.”

3. Briefly stated, the facts of the case are that the assessee is engaged in the manufacture of white crystal sugar of molasses from sugarcane and production of ethanol, liquor, and CO2 gas. The assessee filed its return for A.Y 2017-18 declaring a total income of Rs. 17.81 crores under normal provisions and Rs.62.59 crores as book profits under Section 115JB of the Income-tax Act, 1961 [the Act, for short]. The case was selected for scrutiny and assessment was completed u/s 143(3) of the Act after making an addition of Rs. 91.77 lakhs u/s 68 of the Act unexplained cash credits during the demonetization period.

4. Aggrieved, the assessee went in appeal before the ld. CIT(A) who allowed the appeal of the assessee. Now the Revenue is aggrieved and has come in appeal before us.

5. Before us, the ld. DR vehemently supported the order of the Assessing Officer. The ld AR stated that the Assessing Officer added a sum of Rs.91.77 Lakhs to the income of the assessee as there was a sudden spike in cash sales and disproportionate cash deposited in FY 2016-17 vis a vis the previous year. The AO issued notices u/s 133(6) to 8 buyer parties which remained uncompiled with except one which confirmed the purchase from the assessee at Rs 750/- in cash as against Rs 11.58 lakh claimed by the assessee.

6. Per contra, the counsel for the assessee vehemently stated that the AO did not consider the directive of the Government dated 08.09.2016 for sugar stock liquidation and the same was only applicable in FY 2016-17 and not in FY 2015-16. Hence, the comparison of cash sales of FY 2016-17 with FY 2015-16 is fundamentally flawed and incorrect.

7. The ld. counsel for the assessee continued by saying that the ld. CIT(A) categorically noted that VAT returns reconciled with financials. The ld. counsel for the assessee contended that the Assessing Officer overlooked that the cash deposit stemmed from earlier bank withdrawals as well as out of cash sales made pursuant to the Government’s directive dated 08.09.2016 for sugar stock liquidation, a distress sale accepted by the CIT(A) and never disputed by the Assessing Officer. It is the say of the ld AR that section 68 is not applicable in the present case as the assessee had duly explained in detail the source and legitimacy of the cash deposits made during the demonetization period.

8. The ld. counsel for the assessee further submitted that the Assessing Officer without conducting any independent inquiry, proceeded to make an addition u/s 68 of the Act solely on the basis that the parties did not respond to the notice issued u/s 133(6) of the Act. However, at the same time, while not disputing the sale of stock, the Assessing Officer questioned the genuineness of the cash deposits despite there being no discrepancies in the stock records and no qualification in the tax audit report, as rightly noted by Ld. CIT(A) also. Moreover, the Performa-PII submitted to the government also duly reconciles with stock records of the Company. Thus, the legitimacy of the transaction has been duly substantiated by the company.

9. The ld. counsel for the assessee continued by saying that the percentage of such cash sale was miniscule in comparison to the total sale. It was further submitted that the Assessing Officer has not disputed the fact that the cash sales were out of existing stock. Since the said sales have been duly accounted for and offered to tax, and have been accepted, any addition of the same amount u/s 68 of the Act would result in double taxation of the same income.

10. We have heard the rival submissions and have perused the relevant material on record. In the instant case, we find that the assessee has attempted to prove the entire source of cash deposit during demonetization as cash withdrawals from bank as well as sales due to a government directive requiring sugar mills to liquidate stock by 31.10.2016. Although the assessee, prima facie, appears to have discharged its onus of explaining source of cash deposit, it’s contentions to prove the source, hardly deserves to be accepted in entirety especially when the AO’s notice u/s 133(6) to the Buyers who purchased sugar in cash, all but one, did not respond. One buyer Mr Saksham Agarwal who responded, as per the assessee had purchased 11,58,000/- worth of sugar in cash, but he confirmed having purchased sugar in cash worth only Rs 750/-. On the other hand, the Revenue’s endeavour to disbelieve the assessee’s contention that cash deposits have been made out of cash withdrawals from bank as well as sales due to a government directive, cannot be fully justified on the basis of comparative cash deposits of previous year. In this factual matrix, there is some element of failure to explain some of the cash deposit, cannot be ruled out. Be that as it may, it is deemed appropriate, in larger interest of justice, that a lump-sum addition of ^ 5 lakh only would be just and proper with a rider that the same shall not be treated as a precedent, so as to cover all loopholes. The ground of appeal no 1 to 2 are partly allowed.

11. In so far as assessee’s levy of tax at a higher rate under section 115BBE of the Act is concerned, we find that the Madras High Court in the Writ petition in the case of S.M.I.L.E. Microfinance Ltd. v. ACIT [W.P. (MD) Nos. 2078 of 2020 & 1742 of 2020, dated 19-11-2024] has held that the impugned statutory provision would come into effect on the transaction done on or after 01.04.2017 only. Accordingly, we direct the AO to tax the addition under normal provisions of tax and not under the provisions of 115BBE.

12. In the result, appeal of Revenue in ITA No. 3027/DEL/2024 is partly allowed.