No addition u/s 69 for cash deposits from liquor sales during demonetization, if properly accounted.

ORDER

Mahavir Singh, Vice President. – This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi in Order No.ITBA/NFAC/S/250/2022-23/1050159763 (1) dated 27.02.2023. The assessment was framed by the Deputy Commissioner of Income Tax, Corporate Circle 3(1), Chennai for the assessment year 2017-18 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 30.12.2019.

2. The sole issue in this appeal of assessee is as regards to the order of CIT(A)-NFAC confirming the addition made by AO of Rs.57.29 crores as unexplained investment u/s.69 of the Act in respect of cash deposits made in Specified Bank Notes(SBNs) during demonetization period i.e., 09.11.2016 to 31.12.2016. For this, assessee has raised various grounds and the same read as under:-

3. Brief facts are that the assessee is a Government of Tamil Nadu undertaking engaged in the business of wholesale/retail vending in liquor. For the relevant assessment year 2017-18, the assessee filed original return of income u/s.139(1) of the Act on 31.10.2017. The assessee’s case was selected for scrutiny assessment by issuing notice u/s.143(2) of the Act dated 21.09.2018 and subsequently, the AO issued notice u/s.142(1) of the Act dated 23.08.2019 asking source &details of large value of cash deposits made during demonetization period. The AO while completing assessment u/s.143(3) of the Act added a sum of Rs.57.29 crores as unexplained investment u/s.69 of the Act on the ground that these were by way of demonetized notes collected during the period 09.11.2016 to 31.12.2016 and taxed the same u/s.115BBE of the Act. Aggrieved, assessee preferred appeal before CIT(A).

4. The assessee before CIT(A) explained that the cash deposits in SBNs amounting to Rs.57.29 crores made during the demonetization period was sourced out of the sale consideration of the liquor. The assessee claimed that the workers/employees of the assessee company were forced to accept demonetized currency in SBNs in 3037 outlets out of total 6200 outlets under the physical threat, which was given by the customers of liquor and beer. Hence, the employees accepted the SBNs and the individual purchases were made by these customers in demonetized currency. The CIT(A) dealt with this issue vide paras 5.3 to 5.7 & 6 as under:-

5.3 The explanation put forth by the appellant appears to be a bit too convenient for my comfort. It can be assumed that might be in some of the places the workers could be under physical threats but how could be it be possible that threats were given to the workers in 3037 shops out of 6200 shops which is around 50% of the total shops the appellant owns. If so much chaos was created and threats were given by the customers, the appellant being a government entity should have escalated the matter to the other Government Authorities who has the power to impose certain reasonable restriction on the right to assemble of the people. It is also pertinent to mention here that it was also not a spontaneous gathering which gathered at once and beaten the workers. Appellant claimed that threats were received at various places which created law and order problem. However the appellant has not taken any preventive measures such as taking police protection, closure of the shops at such places. Whatsoever, even if the threats were given and even the explanations given thereof by the customers to accept the SBN, it did not make the appellant eligible to accept the old currency notes as the same were banned as a legal tender. Hence the contention of the appellant is hereby rejected.

5.4 Though briefly but it is worthwhile to mention here that with a view to curb the financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN)and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating Black Money, the Government of India decided to cancel the legal tender character of the High Denomination bank notes of Rs 500 and Rs1000 denominations issued by RBI on08.11.2016. During the demonetization period the government of India as well as the RBI has issued various Gazette Notifications time to time for the clarification regarding various issues, eligible businesses and other things for the general public of the country. The notifications issued by the Ministry of Finance (Department of Economic Affairs) Government of India are as under:-

5.5 After verification of all the above mentioned notifications, it is found that the appellant company was not in exempt category of the businesses to accept SBN, hence not eligible to accept the specified bank notes from customers in exchange of liquor & beer. It is very clear that once it was declared in Gazette by the RBI that Specified Bank Notes ceased to be legal tender, no person is allowed to use such SBN notes for transacting normal business activities or allowed to store for future usage.

5.6 Now the question arises that whether any activity which is prohibited by law can be accepted or condoned by any another Authority under the law. It is also pertinent to mention here that Hon’ble Supreme Court of India in the case of Apex Laboratories (P.) Ltd 200/442 ITR 1 (SC) faced an identical matter where the activities carried out were prohibited by law, wherein it was held that since acceptance of freebies by medical practitioners was punishable as per Circular issued by Medical Council of India under MCI regulations, 2002, gifting of such freebies by assessee-pharmaceutical company to medical practitioners would also be prohibited by law and thus, expenditure incurred in distribution of such freebie swould not be allowed as a deduction in terms of Explanation 1 to section 37(1). The relevant portion of the order is reproduced here as under:-

5.7 During the Demonetization period, the exchange of SBNs (Except in few eligible businesses) is prohibited by the Government of India. In the present case the appellant company during the demonetization period accepted the SBNs with no legal tender and in exchange supplied to its customers non-essential & non-perishable commodity like liquor & beer. By doing so, the appellant company had given asset back to well-intended and well thought policy of Government to curb the abovementioned ill elements, which ultimately deprived Government of its legitimate revenues which could have been otherwise used for the welfare and development activities. In addition, the appellant failed to produce any evidence from any of the designated authorities from the state of Tamil Nadu or from the Government of India that allowed the appellant to sell non-essential commodity like liquor against invalid bank notes (SBN). Hence it is crystal clear that the appellant company was prohibited by the law of the land to not to accept the SBNs after 08.11.2016. In view of the foregoing facts the addition made by the AO of Rs 57,29,00,000/- u/s 69 of the Act is hereby confirmed/Upheld. Accordingly grounds 2 to 8 are Dismissed.

6. In Ground no 9 to 11, the appellant contended that the provisions of section69A ought not to have been applied in the present case as the appellant has accounted the Cash deposit of Rs. 57.29 Crores in his books of accounts. The appellant during the appellate proceedings contended that the amount received of Rs.57.29,00.000/- had been duly accounted for in the books of accounts and these amounts were completely explained to the AO during the assessment proceedings and hence the AO ought not to have added these amounts as unexplained investments u/s 69 of the Act. Now the question arises as to whether any person who received such SBN notes after 9th November, 2016, can bring it into his books of accounts or not. Here, the basic principles of accountancy have to be relied upon. The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, i.e., the local currency monetary unit of measure. Since the SBNs were just a piece of papers and they bear no value on 9th Nov. Or after, as Central Government, the guarantor had withdrawn its guarantee. Therefore, it cannot be measured in money terms and hence, it can’t be journalized in books of account. Therefore, the transactions made in SBN on or after 9th November 2016 as prohibited by the law, cannot be entered into cash books. Hence the contention of the appellant is hereby rejected and accordingly Ground No 9 to 11 are Dismissed.

7. Ground No. 12 & 13 pertains to admission of additional grounds at the time of hearing. Since the appellant did not exercise its right to admit additional grounds of appeal, this ground does not require any adjudication. Accordingly Ground No. 12 &13 are Dismissed.

Aggrieved, now assessee is in appeal before the Tribunal.

5. Before us, the ld.counsel for the assessee filed details of opening cash balance as on 09.11.2016, sales made in cash from 09.11.2016 to 30.12.2016, cash deposited in bank account from 10.11.2016 to 30.12.2016 and closing balance as on 30.12.2016 as under:-

The ld.counsel explained that out of opening cash balance of Rs.84.23 crores consisting of SBNs amounting to Rs.81.57 crores and other denomination of notes amounting to Rs.2.66 crores. Further, he explained that out of total cash collection of Rs.3490.21 crores, the cash collection in SBNs during demonetization period i.e., 09.11.2016 to 30.12.2016 was Rs.57.29 crores. The ld.counsel explained that it was explained before AO that the demonetization was announced w.e.f. 09.11.2016 vide various notifications (which are mentioned in the above reproduced part of CIT(A)’s order at para 5.4 of this order) and the demonetization had come in a very sudden manner and individuals were not in a position to exchange their demonetized notes with legal tender money due to their unavailability. In view of the shortage in currency, each individual were permitted to exchange only a small amount of demonetized notes with legal tendered money. Going by the nature of small amount, which they could do in normal course, would have been permitted the exchange for new notes had it been available. Accordingly, the customers objected the shop employees for not accepting the SBNs and forced some of the shop personnel to accept demonetized currency under physical threat. Accordingly, out of 6200 retail vending shops, the acceptance of SBNs during demonetization period on sale of liquor has occurred in 3037 shops located throughout the state and that also to the extent of Rs.57.29 crores as narrated above. The ld.counsel for the assessee stated that the total cash collection made from 09.11.2016 to 30.12.2016 was Rs.3,490.21 crores out of which, a sum of Rs.57.29 crores, which is minuscule going by the turnover and this is negligible.

5.1 The ld.counsel also brought to the notice of the Bench that the Government of India (Extraordinary) Notification No.2652 dated 08.11.2016 declaring demonetization of Rs.500/- & Rs.1000/- notes seized to be legal tender w.e.f. 09.11.2016 was immediately brought to the notice of Senior Regional Managers and District Managers and instructions were immediately given not to accept demonetized currency. The above instructions were again reiterated to all the Senior Regional Managers and District Managers vide TASMAC letter dated 09.11.2016, which was also sent through email at 11 a.m. on 09.11.2016. The officers at Corporate Office also contacted the District Managers and Senior Regional Managers telephonically as well as in writing and instructed them to inform the shop personnel / employees not to accept the currency notes in SBNs/demonetized currency of Rs.500/- and Rs.1000/- from 09.11.2016. But despite the instructions sent to Senior Regional Managers and District Managers, in some of the retail shops of assessee, the shop personnel received demonetized currency notes of Rs.500/- and Rs.1000/-. The ld.counsel stated that the assessee has given complete information called for by the Department and he narrated the following:-

5.2 The ld.counsel explained that the AO added the amount received by assessee in demonetized currency of Rs.500/- and Rs.1000/- notes for sale of liquor (amounting to Rs.57.29 crores) u/s.69 of the Act as unexplained investment. Provision of section 69 of the Act states the investment which are not recorded in the books of accounts can be added as unexplained investment. He argued that in the instant case, the amount received were for sale of products at retail outlets and the amounts realized have all been accounted and have not been questioned by the Department. The entire position of stock, sales, realization, remittances into bank and closing stock was submitted before the AO as well as before the CIT(A). He explained that the source of demonetized cash is from public which the assessee’s retail shops received and accepted and it is again reiterated that this amount of Rs.57.29 crores is merely 1.64% of total remittances during the period 10.11.2016 to 30.12.2016 (09.11.2016 being bank holiday). He argued that the presumption of the AO and that of the CIT(A) that the demonetized currency has not been received out of sale of liquor but substituted for regular currency is without any evidence whereas the assessee has filed complete details for sale during this period were for valid currency in cash and apart from that this amount of Rs.57.29 crores which is in demonetized currency and this demonetized notes were received as consideration for sale, which were accounted in the books of accounts, especially given that all the details of stock and sale have been furnished and accepted by the Revenue. He argued that these amounts received in demonetized currency of Rs.57.29 crores form part of our accounted receipts on account of sale of liquor. Hence he argued that it is clear from the facts that these amounts of Rs.57.29 crores are accounted for and thus these accounts are not unexplained or investment to warrant addition u/s.69 of the Act as unexplained investment.

6. On the other hand, the ld.Senior DR argued that the assessee was found to have exchanged for value by deposit of Specified Bank Notes (SBNs) or the Demonetized currency notes totaling to Rs. 142.51 crores in its bank account during the permitted window period for such exchange commencing from 10.11.2016 to 30.12.2016. He argued that on examination of books of accounts, the assessee was found to have been in possession of cash balance of only Rs.81.57 crores (including all types of currencies) at close of 08.11.2016. When questioned on the source for the remaining 57.29 crore SBNs, the assessee claimed that such SBNs have been obtained from its customers in exchange of liquor sold to them during Demonetisation period.When the AO asked the assessee to substantiate its claim with valid verifiable evidence that it had indeed sold its goods to customers in exchange of SBNs during the period between 09.11.2016 and 30.12.2016, not a single iota of verifiable evidence was produced. Since the claimed source of possession of SBNs to the tune of 57 crore was not substantiated with valid and verifiable evidence, this sum of 57 crores was assessed as deemed income within the provisions of section 69 of the Act. The AO was right in not accepting the claim of the assessee that the assessee had indeed sold its goods against the SBNs for the following reasons:- (he narrated the reasons in writing as under) :-

Page No. 23, Para.4: The Management based on the scrolls and statements received from various banks, in respect of Non-operative collection, has disclosed in the Notes on accounts, Cash on hand as on 08th November 2016 and the acceptance of Specified Bank Notes and other notes between 9th November 2016 to 30th December2016. However, we are unable to obtain sufficient and appropriate audit evidence to report on whether the disclosures of Cash in hand as on specified dates, handling of specified bank notes (SBN), non-permitted transactions and its treatment in books of accounts (which as per the management ‘s statement is based on the scrolls and statements received from banks) are correct.

Page No.25, Para h(iv): The Company has provided requisite disclosures in Note No.42 to the financial statements as to holdings as well as dealings in Specified Bank Notes as defined in the Notification S.0. 3407(E) dated 8th November 2016 of the Ministry of Finance, during the period from 8th November 2016 to 30th December2016. However, we are unable to obtain sufficient and appropriate audit evidence to report on whether the disclosures are in accordance with books of account maintained by the Company (which as per the management ‘s statement is based on the scrolls and statements received from banks) and as produced to us by the Management.

6.1. Ld. Senior DR, further argued, in this background, that there is no reason for the AO to even remotely accept the claim of the assessee that the business turnover of the period from 09.11.2016 to 30.12.2016 had resulted in obtaining of SBNs that too from customers by Sale of liquor especially when there was an express Government of India bar on transacting business from 09.11.2016 in SBNs as evidenced in answer to Question Number2 of the FAQ issued by the RBI on 8th November. 2016 vide Circular No. DCM(Plg), No. 1226/10.27.00/2016-17, Since the assessee not having established the exact source of the Rs.57 crore SBNs exchanged with valuable currency, is correctly assessed by the AO as deemed income of the assessee within the meaning contained under section 69A of the Act. He pointed out various issues by raising questions and gave in writing as under:-

He pointed out that is there a legal bar in transacting business in SBNs by the Government from 9^th November 2016 onwards?

Yes, Government of India vide Gazette of India dated 08.11.2016 had declared the SBN as not a legal currency with effect from 09.11.2016. Further, RBI vide Circular No. DCM(Plg) No.1226/10.27.00/2016-17 dated 08.11.2016 had categorically barred transacting business from 09.11.2016 as evidenced in its answer to question No.2 of its FAQ. Only very few notified business transactions were permitted to transact in SBNs that too for a limited period ending on 24.11.2016 as far as Rs.1000 denomination is concerned and for denomination of Rs.500/- up to 15.12.2016.

He further argued that is the assessee covered under the limited notified entities to transact its business in SBN?

No. The assessee’s nature of business is not covered under the Gazette of India dated 08.11.2016.

He further posed a question, Has Government treated the SBNs as illegal tender?

No. The Government has not declared the SBNs as an illegal tender. However, since there is bar in transacting in SBNs for business purpose (as mentioned at Para-2 above), anybody transacting its business with SBNs for its goods and service, shall have to prove with verifiable evidence that it had indeed transacted its goods and service business against SBNs. Otherwise, any holding of SBNs during the period from 09.11.2016 to 30.12.2016 will be treated as SBNs held by the people/entities as though they have been holding the same as on the midnight of 08.11.2016.

5. Has Government treated possession of the SBNs as an offence?

No. Possession of SBNs from 09.11.2016 to 30.12.2016 is not treated as illegal or as an offence. It was only treated as not a legal tender for the purpose of any commercial or personal transaction. During this period, all the public who were deemed to have held the SBNS as on 08.11.2016 were permitted to exchange such holding against Valid currency notes, that too after meeting with stringent KYC norms which include obtaining of written authorization of the SBNs holder if such holder is using someone else as the person to get their notes exchanged in lieu of valid currency. Even such exchange was permitted only with limited RBI notified banks. However, from 31.12.2016 onwards, even possession of SBNS is treated as punishable offences vide Gazette of India Ordinance dated 30th December, 2016 released at 21.12.40 hours, subject to certain exemptions.

6. What happens when non-permitted person exchanges SBN with valid currency?

As evident from the answer given on 07.12.2021 by the Ministry of Finance, Government of India to a Rajya Sabha starred question no. 92, even District Cooperative Banks in Maharashtra had to forego its claim to Rs.112 crores of SBNs which was exchanged by them with valid currency to its customers beyond the permitted window ending 14.11.2016.

7. Under the above analogy, can assessee’s turnover to the extent of goods traded in SBNs be treated as a business loss?

No. As far as assessee is concerned, not an iota of evidence was furnished to establish its claim that its business turnover carried out between the period from 09.11.2016 to 30.12.2016 contained SBN notes of its customers. Whereas, the District Cooperative Banks in Maharashtra state had all evidence in the form of KYC to establish that the SBNs held by them where indeed of its customers. Further, in the case of assessee, the SBNs held by it were exchanged with valid currency, thus holding an asset for which the real source could not be established.

8. Is there any confusion created in transacting in SBNs notes till the appointed date 31.12.2016 on account of specific wordings used in Para.5 of the Gazette of India Ordinance dated 30t” December, 2016?

No. There is no room for any such confusion. The wordings used in Para.5 of the above referred ordinance are; (a) hold, (b) transfer (c) receive. It does not use the wordings transact’; exchange; deposit. For to hold, transfer or receive, there is no reciprocal consideration or action required from a third party whereas in respect of transact, exchange, deposit, there is a reciprocal action or consideration required from the other third party in such activity.

Further, this matter has been fully settled by the Hon’ble Supreme Court vide Para.290 to Para, 303 while deciding on the various Writ Petitions filed challenging the constitutional validity of various Gazette of India issued by the Government in connection with the Demonetization in the case of Vivek Narayan Sharma v. Union of India dated 02.01.2023. It had clearly held that “the interpretation which makes the textual interpretation match the contextual has to be preferred. A statute is best interpreted when the reason and purpose for its enactment is ascertained. The statue must be read first as a whole and then section by section, clause by clause, phrase by phrase and word by word. ” Thus significance of ‘appointment date’ is with respect to the deadline by which the SBN would seize to be the liability of the RBI (issuer) to even exchange it with valid currency or its worth. In other words, the SBN seized to be a valid tender from the midnight of 08.11.2016 (negotiable instrument) for carrying out any transaction between people or entities but would remain as a liability of the RBI (issuer) till the appointment date (31.12.2016) to exchange the same against a valid tender on deposit into the RBI recognized banks. Thereafter, even holding SBNs will be treated as illegal and punishable offence.

7. In reply, the ld.counsel for the assessee made argument that demonetization declaration of SBNs as “not a legal tender” stops with that. The declaration does not render the SBNs illegal, and the declaration does bar receiving or paying the notes in the course of business. When other documents like Cheques, Promissory Notes, Govt securities, which are not legal tender, can be freely exchanged, so can SBNs, when there is no statutory bar for exchanging SBNs. The Specified Bank Notes (cessation of liabilities) Ordinance, 2016(subsequently passed as an Act), was towards cessation of liability of Reserve Bank of India, in respect of SBNs,is from 31.12.2016. The Ordinance clearly specifies that on and from the specified date, being 31.12.2016, it is illegal for any person to hold, transfer or receive SBNs. This would mean that prior to 31.12.2016 there is no bar in any person holding, transferring or receiving SBNs if a currency is not a legal tender, only the recipient may refuse and cannot be forced to receive currency which is not legal tender. When both Parties to the transaction agree, there is no prohibition for one party to transfer (give) and the other party to receive SBNs in the course of a legal transaction prior to 31.12.2016. On receipt, the recipient bears the risk of realizing the value of SBNs received as sale consideration. TASMAC received SBNs in the course of sale of liquor prior to 31.12.2016 and such transaction of receiving SBNs prior to 31.12.2016 is not barred and is valid and legal. As RBI permitted crediting the value of SBNs to the Bank account, TASMAC accepted the SBNs at their face value in consideration of sale of Liquor and got the face value of SBNs credited to their Bank account. The sale of liquor in exchange of SBNs was in the course of a valid business transaction. Once the receipt of SBNs by TASMAC is not illegal or barred by any legal provision, the legality of receipt of SBNs should be considered on par with receipt of other currency notes which continue to be legal tender. Receipt of SBNs cannot be put on a different footing for the purpose of sec 68 or 69 of the Act from other currency as the source of SBNs are the same as the source for other currency. That the SBNs are not legal tender is of no consequence tor determining the source, because the SBNs can be encashed for their face value with the Bank without any question being raised. Neither the RBI circulars on demonetization nor any CBDT circular including various CBDT instructions (as to how the Department should examine the cash deposits during the demonetization), require any person to disclose the source of the SBNs. CBDT instructions to IT Authorities on the SOP for examination of deposits during demonetization period do not require the Assessee to disclose the source from whom the SBNs were received. When SBNs are deposited in Banks, RBI Circular does not require the depositor to disclose the particulars of persons from whom SBNs were received (and consequently the source of that person).

7.1 Having not required to obtain the particulars of persons from whom the SBNs were obtained, the Department cannot now seek the source of SBNs as long as TASMAC can explain the transactional source. At the time of receipt of SBNs, they are no different from other currencies in so far as legality is concerned. When out of the total deposit of Rs.2635.35 Crores in cash for the month of November 2016 has been accepted as the value of liquor sold, source of deposit of 2582.56 crores has been accepted as being out of sales of liquor, the balance of Rs. 52.79 Crores also can only be out of sale of liquor. There is no basis or evidence or examination of any person, for concluding that for Rs.52.79 Crores currency has been substituted. This is purely assumption and presumption. In all sale transactions, payment by SBNs were only towards part of the sale consideration as the total sale price for each customer will not be in exact multiples of Rs. 500/- Therefore when part of the sale consideration in currencies which are legal tender are accepted as explained, balance parts of very same sale consideration from the very same customer cannot be held as unexplained. During the period of Demonetization i.e. upto 31.12.2016, SBNs are not tainted money, as long as a person can explain the transactional source. Only when a person cannot explain the source, then not only SBNs but also currency which are otherwise valid legal tender, are to be added as unexplained income. Deposit of SBNs perse, cannot make them unexplained.

7.2 The purpose of examining deposits made during demonetization period was, in view of the window of period given for final utilization of SBNs upto 31.12.2016 beyond which it is illegal to hold SBNs, only to examine whether source of any deposits made during that period cannot be explained, which would mean that unexplained money held in the form of the SBNs is being brought as accounted money before 31.12.2016. The addition if any can be made only on account unexplained spike in cash sales or Cash deposits. In the present case sales and deposits have been accepted as normal compared to other years.The SOP given by CBDT requires Assessing Authority to make a comparative analysis of cash flow and cash deposits of all currencies with corresponding earlier periods to detect any unexplained spikes. There is no specific study of deposit of SBNs dehors the total deposits. Otherwise the CBDT would have given a simple instruction that unless particulars about the persons from whom SBNs were received are furnished, the deposit of SBNs should be added as unexplained income, which CBDT have consciously not done. The Observation of the AO that branch-wise details of deposits of SBNs were not available is not correct. Complete details of deposit of SBNs account-wise, branch-wise was submitted to the AO. AO or the CIT(A) had not taken any further steps to make any further investigation on this matter. A totally fresh stand that sale had been made against legal tender and later the same was substituted by SBNs is without any basis or documents or examination of any person to support the same. This contention made purely on assumption and presumption and cannot be accepted. There is no finding that there was unexplained spike in cash deposits compared to other years.In case, SBNs have no value, how they can be assessed as unexplained “income” of the assessee.

7.3 In every sale, both, SBNs and other currency would have been received from the same person (as the sale price is not exact multiple of Rs 500/-), one part of sale consideration received in SBNs cannot be considered as unexplained while the balance received in other currency from the same customer is treated as the source being explained. In case of TASMAC, AO has made the addition of unexplained investment under sec 69of the Act. Addition cannot be made under sec 69of the Act, which deal with unexplained investments made in the immediately preceding year, which is not the case of the department here.

8. We have heard rival contentions and gone through facts and circumstances of the case. The admitted facts are that the assessee is a company wholly owned by Government of Tamil Nadu and is conducting its retail business of IMFS and Beer through 6200 retail vending shops located all over Tamil Nadu (till November, 2016). These shops functioned under the control of 38 district managers. Admittedly, sale per day was ranging from Rs.80 crores to Rs.110 crores approximately and these shops are located across Tamil Nadu from remote villages to corporate areas. The shop personnel of the retail vending shops located in other areas are depositing the previous day sale proceeds on the following day into non operative collection accounts of designated bank branches. The assessee before AO and before CIT(A) and even now before us in its paperbook consisting of 238 pages filed complete details giving the branch-wise cash deposits, date-wise deposits of SBNs. Admittedly, during demonetization period from 09.11.2016 to 30.12.2016, all retail vending shops throughout the state have deposited a sum of Rs.3506 crores including closing balance as on 08.11.2016. These deposits are consideration received for sale of IMFS and beer sold to the ultimate customers as contended by assessee but contested by revenue. During the period 09.11.2016 to 30.12.2016, the assessee found to have exchanged for value by deposit of Specified Bank Notes or demonetized currency notes totaling to Rs.145.21 crores in its bank account during the permitted window period for such exchange commencing from 10.11.2016 to 30.12.2016. The assessee found to have been in possession of cash balance of Rs.81.57 crores (including demonetized currency and regular currency) at close of 08.11.2016. The balance sum of Rs.57.29 crores, the assessee claimed that such SBNs have been obtained from its customers in exchange of liquor sold to them during demonetization period i.e., 09.11.2016 to 30.12.2016. Admittedly, the Revenue has not rejected the books of accounts produced before the AO and CIT(A) and accepted the sales made by assessee including the sales made in demonetized currency from 09.11.2016 to 30.12.2016 and received demonetized currency of Rs.57.29 crores, which was added by AO u/s.69 of the Act as unexplained investment. Admittedly, the amount of Rs.57.29 crores is received by assessee on account of sale of liquor as no contrary evidence was produced by Revenue except a simple allegation that the assessee is unable to substantiate its claim with valid verifiable evidence that it had indeed sold its goods to customers in exchange of SBNs during the period between 09.11.2016 to 30.12.2016. The assessee has produced complete evidence giving the branch-wise and date-wise deposit of SBNs, even now before us which are enclosed in assessee’s paper-book at pages 19 to 238.

8.1 Now the question arises whether the demonetized currency received by assessee on account of sale of IMFS and beer to the customers and accepted demonetized currency in return is to be assessed u/s.69 of the Act or not as unexplained investment. The ld.Senior DR has raised a question on this that when there was an express bar by Government on transacting business from 09.11.2016 in SBNs in view of Question No.2 of FAQ issued by RBI on 08.11.2016 vide Circular No.DCM(Plg) No.1226/10.27.00/2016-17. The ld.Senior DR has argued that vide this very circular, the Government of India has declared the SBNs as not a legal currency w.e.f. 09.11.2016 except only from few notified business transactions were permitted to transact in SBNs and that too for a limited period upto 24.11.2016 as far as demonetized currency of Rs.1000/- and Rs.500/- and then it was extended upto 15.12.2016. The ld.Senior DR has also argued that the assessee’s nature of business is not covered under the notification of the Government of India exempting certain categories. We noted that the ld.counsel for the assessee in reply to the same referred to Ordinance issued by the Ministry of Law & Justice, Government of India in the Gazette of India, wherein the SBNs were declared or ceased to be liability of RBI or Central Government and penal provisions were incorporated in the same for holding the demonetized currency as well as transacting in the same. The relevant Ordinance No.10 of 2016, The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was brought in on 30.12.2016. We noted that vide this Ordinance dated 30.12.2016 i.e., Specified Bank Notes (Cessation of liabilities) Ordinance, 2016, No.10 of 2016 dated 30.12.2016, has clearly held the demonetized currency to have ceased to be legal tender as pointed out by ld.counsel, the provision of Section 5 very categorically states that no person shall knowingly or voluntarily hold or transfer any Specified Bank notes on or from the appointed day of 31.12.2016. The relevant provisions of section 5, 6, 7 & 8 reads as under:-

5. On and from the appointed day, no person shall, knowingly or voluntarily, hold, transfer or receive any specified bank note:

Provided that nothing contained in this section shall prohibit the holding of specified bank notes.

6. Whoever knowingly and wilfully makes any declaration or statement specified under sub-section (1) of section 4, which is false in material particulars, or omits to make a material statement, or makes a statement which he does not believe to be true, shall be punishable with fine which may extend to fifty thousand rupees or five times the amount of the face value of the specified bank notes tendered, whichever is higher. Penalty for contravention of section 5

7. Whoever contravenes the provisions of section 5, shall be punishable with fine which may extend to ten thousand rupees or five times the amount of the face value of the specified bank notes involved in the contravention, whichever is higher. Offences by companies

8. (1) Where a person committing a contravention or default referred to in section 6 or section 7 is a company, every person who, at the time the contravention or default was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contravention or default and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention or default was committed without his knowledge or that he had exercised all due diligence to prevent the contravention or default.

(2) Notwithstanding anything contained in sub-section (l), where an offence under this Ordinance has been committed by a company and it is proved that the same was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary, or other officer or employee of the company, such director, manager, secretary, other officer or employee shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation.-For the purpose of this section,-

This was further explained by the Central Government i.e., RBI vide Circular dated 26.05.2017 and the relevant reads as under:-

Why was the Scheme of Withdrawal of Legal Tender Character of the old Bank Notes in the denominations of Rs. 500 and Rs. 1000 introduced?

The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal tender character of the old Bank Notes in the denominations of Rs. 500 and Rs. 1000 was introduced.

2. What is this scheme?

The legal tender character of the bank notes in denominations of Rs. 500 and Rs. 1000 issued by the Reserve Bank of India till November 8, 2016 (hereinafter referred to as Specified Bank Notes) stands withdrawn. In consequence thereof these Bank Notes cannot be used for transacting business and/or store of value for future usage. The Specified Bank Notes (SBNs) were allowed to be exchanged for value at RBI Offices till December 30, 2016 and till November 25, 2016 at bank branches/Post Offices and deposited at any of the bank branches of commercial banks/Regional Rural Banks/Co-operative banks (only Urban Co-operative Banks and State Co-operative Banks) or at any Head Post Office or SubPost Office during the period from November 10, 2016 to December 30, 2016.

3. What is the Specified Bank Notes (Cessation of Liabilities) Act 2017?

On February 27, 2017 Government of India notified the Specified Banknotes (Cessation of liabilities) Act 2017. The Act repealed the Specified Banknotes (Cessation of liabilities) Ordinance 2016 providing for cessation of liabilities for the Specified Banknotes (SBNs) and for matters connected therewith and incidental thereto, with effect from December 31, 2016. The SBNs cease to be the liabilities of the Reserve Bank under Section 34 of the RBI Act and cease to have the guarantee of the Central Government.

8.2 The ld.counsel explained that till 31.12.2016, these notes i.e., SBNs in demonetized currency was not held to be illegal tender and there is no provision that holding these notes or transacting the same will amount to violation of any law. Before us, the ld.counsel compared the earlier demonetization scheme of 1978, i.e., The High Denomination Bank Notes (Demonetization) Act, 1978 with the present Demonetization Scheme, whereby the scheme was announced on 16.01.1978 wherein the high demonetization notes of value Rs.500/-, Rs.1000/- or Rs.10000/- was withdrawn from circulation and there was a clear bar in the Act for transfer or receipt of high denomination notes and that demonetized bank notes was ceased to be legal tender vide section 3 & 4 from 16.01.1978 only, which reads as under:-

“3. High denomination bank notes to cease to be legal tender.—On the expiry of the 16th day of January, 1978, all high denomination bank notes shall, notwithstanding anything contained in section 26of the Reserve Bank of India Act, 1934 (2 of 1934), cease to be legal tender in payment or on account at any place.

4. Prohibition of transfer and receipt of high denomination bank notes.— Save as provided by or under this Act, no person shall, after the 16th day of January, 1978, transfer to the possession of another person or receive into his possession from another person any high denomination banknote.”

The ld.counsel for the assessee also relied on one decision of Hon’ble Bombay High Court in the case of Narendra G. Goradia (HUF) v. CIT reported in (Bombay) and stated that the Hon’ble Bombay High Court has categorically held that where the assessee is required to prove source of money, in such case and once, he is successful in proving that source, he could not be asked to produce proof of acquisition of such amount in currency notes of particular denominations. The ld.counsel for the assessee relied on para 9 of the decision, which reads as under:-

“10. We have also perused the decision of A. Govindarajulu Mudaliar v. CIT, on which reliance is placed by learned counsel for the Revenue. We, however, fail to understand how the above decision helps the Revenue in the instant case. In that case, certain amounts appeared in the account books of a firm of which the assessee was a partner as credits for him. The assessee was asked for an explanation as to how he came to possess this amount. His explanation in regard to the source of this amount in part was not accepted. It was in that context that the Supreme Court observed that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Incometax Officer is entitled to draw the inference that the receipts are of an assessable nature. That is not the position in the case before us. In this case, the assessee could prove satisfactorily the source and nature of the amounts. Addition was made not for that reason. The assessee was further required to prove the receipt of the amount of Rs. 2 lakhs therefrom in high denomination notes. In other words, the assessee was asked to prove as to when and from whom he received the amount in high denomination notes. The assessee gave reasonable explanation for his inability to give detailed account of receipts and disbursements of amounts from time to time in currencies of various denominations including high denomination notes. He could, however, satisfy the authorities about the fact that he was often in possession of Rs. 1,000 denomination notes and the probability of high denomination notes of the value of Rs. two lakhs being included therein. In fact, the Revenue itself was satisfied about the inclusion of 96 notes of Rs. 1,000 each therein. The amount of Rs. 1,04,000 was added as income from undisclosed sources only because, according to the Revenue, the assessee failed to discharge the onus cast on him to prove the acquisition of each and every high denomination note encashed by him. This approach, as earlier indicated, is not correct. The assessee having proved the source and shown satisfactorily the possibility of the inclusion of Rs. 1,000 high denomination notes of the value of Rs. 2 lakhs therein, the addition of Rs. 1,04,000 to his income for his failure to furnish detailed particulars of the receipt of such notes each of the 200 notes of Rs. 1,000 denomination tendered by him for encashment, is not in accordance with law.”

This judgment was referred by the ld.counsel for meeting the argument made by ld. Senior DR that the demonetized currency received by assessee in the present case is not out of sale proceeds of liquor. We have gone through the scheme and noted that the Specified Bank Notes (cessation of liabilities) Ordinance 2016 (subsequently this was passed as an Act), was towards cessation of liability of RBI in respect of SBNs with effect from 31.12.2016. The Government of India vide Gazette of India Notification dated 8.11.2016 notified that the SBNs of Rs.500 and Rs.1,000 notes is not a legal tender w.e.f. 9.11.2016. We noted that even the Revenue admitted that the Government has not declared the SBNs as an illegal tender and even possessing of SBNs was not an offence till 31.12.2016. Between the period from 9.11.2016 to 31.12.2016,all the public, who were holding such SBNs were permitted to exchange such holdings against valid currency notes but the scheme itself does not render the SBN as illegal or declaration does not bar in receiving or paying through the SBNs in the course of business like other documents i.e., through cheques, promissory notes, Government securities, which are not legal tender can be freely exchanged so can the SBNs. The Ordinance of December 2016 clearly specifies that on or from 31.12.2016, it is illegal for any person to hold, transfer or receive SBNs. This would mean that prior to 31.12.2016 there is no bar on any person holding, transferring or receiving SBNSs prior to 31.12.2016 was not illegal. If a currency is not a legal tender, only the recipient may refuse or cannot force to receive currency which is not legal tender. When both parties to the transaction agrees, there is no prohibition for one party to transfer and the other party to receive SBNs in the course of a legal transactions prior to 31.12.2016. We noted that with the notification of ”The Specified Bank Notes (Cessation of Liabilities) Act, 2017″, even this liability to honour such exchange, transact, transfer or hold SBNs ceased to be operative from 31.12.2016, the appointed date.

8.3 In view of the above provisions, as in the present case, once the receipt of SBNs by assessee is not illegal or barred by any legal provisions the receipt of SBNs cannot be put on a different footing for the purpose of Section 68 or Section 69 of the Act from other currency as the source of SBNs are same as the source of other currency. The SBNs though are not legal tender, is of no consequence for determination of source, because the SBNs can be encashed for the face value with the bank without any question being raised. We further noted from the RBI circulars or CBDT circulars that neither the RBI circulars nor any CBDT circulars including any instructions on demonetization requires any person to disclose the source of SBNs. We noted from the facts of the case placed before us that out of total deposits of Rs.2635.35 Crores were in cash for the month of November 2016, which has been accepted as the value of liquor sold for a sum of Rs.2582.56 Crores, hence it can be easy presumed, unless disproved by Revenue, that the balance sum of Rs.52.79 Crores is out of sale of liquor. There is no basis or evidences or examination of any person for reaching a conclusion that this sum of Rs.52.79 Crores received by assessee has been substituted in demonetized currency. We noted from the evidences placed before us that the observation of the AO that branch wise details of deposits made in SBNs was not available is not correct for the reason that the complete details of deposits of SBNs account-wise, branch-wise was submitted before the AO as well as before the CIT and also before us.

8.4 We have gone through the notifications issued by the RBI and Government of India, to deal with specified bank notes. The only premise of the Revenue is mainly on the issue of notification issued by the RBI to deal with the specified bank notes and argument is that the assessee is not one of the eligible person to accept or to deal with specified bank notes and thus, even if assessee furnish necessary evidence, the assessee cannot accept specified bank notes after demonetization and the explanation offered by the assessee cannot be accepted. No doubt specified bank notes of Rs. 500 & Rs. 1000 have been withdrawn from circulation from 09.11.2016 onwards. The Government of India and RBI has issued various notifications and SOP to deal with specified bank notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes up to 31.12.2016. Further, the specified bank notes (cessation of liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact specified bank notes, and appointed date has been stated as 31.12.2016. Therefore, there is no clarity on how to deal with demonetized currency from the date of demonetization and up to 31.12.2016. Therefore, under those circumstances, some persons continued to accept and transact the specified bank notes and deposited into bank accounts. Therefore, merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with specified bank notes, the genuine explanation offered by the assessee towards source for cash deposit cannot be rejected, unless the AO makes out a case that the assessee has deposited unaccounted cash into bank account in specified bank notes.

8.5 We further noted that the Central Board of Direct Taxes had issued a circular for the guidance of the Revenue Officer to verify cash deposits during demonetization period in various categories of explanation offered by the assessee and as per the circular of the CBDT, examination of business cases, very important points needs to be considered is analysis of bank accounts, analysis of cash receipts and analysis of stock registers. From the circular issued by the CBDT, it is very clear that, in a case where cash deposit found in business cases, the AO needs to verify the explanation offered by the assessee with regard to realization of debtors where said debtors were outstanding in the previous year or credited during the year etc. Therefore, from the circular issued by the CBDT, it is very clear that, while making additions towards cash deposits in demonetized currency, the AO needs to analyze the business model of the assessee, its books of account and analysis of sales etc. In this case, if we go by analysis furnished by the assessee in respect of total sales, cash sales including the cash received in demonetized currency and cash deposits, there is negligible amount in demonetized currency. Therefore, we are of the considered view that when there is no significant change in cash deposits during demonetization period, then merely for the reason that the assessee has accepted specified bank notes in violation of circular/notification issued by Government of India and RBI, the source explained for cash deposits cannot be rejected. Simpliciter violation of certain notification issued by RBI or demonetization scheme announced by Government of India on 08.11.2016 will not entitle the Revenue to make addition u/s.69 or 69A of the Act. Because, the mandate of the provisions of Section 69 & 69A of the Act, i.e., unexplained investments and unexplained money etc., may be deemed to be the income of the assessee for the financial year relevant to assessment year concerned, in which the assessee is found to be the owner of such money, bullion, jewellery or valuable article or unexplained expenditure, if, the such expenditure or such money etc., are not recorded in the books of accounts, if any, maintained by assessee for any source of income and the assessee offers no explanation about the nature and source of such expenditure or acquisition of such money, etc., or the explanation offered by him, in the opinion of AO is not satisfactory. For violation of any RBI notification, etc., can have any civil or criminal liability and can be dealt with under any other provision of law by the concerned authority but for the purpose of bringing the amount under Income-tax, the provisions are very clear i.e., 69 & 69A of the Act. In our considered view, to bring any amount u/s. 69 or 69A of the Act, the nature and source of investment, needs to be examined. In case the assessee explains the nature and source of investment, then the question of making addition towards unexplained investment u/s. 69 of the Act does not arise. In this case, the source of deposits has not been disputed and has been created out of ordinary business sales which has been credited into books of accounts and profits has also been duly included in the return of income filed in relevant assessment year. Therefore, we are of the considered view that, additions cannot be made u/s. 69 of the Act and taxed u/s. 115BBE of the Act towards cash deposits made to bank account of demonetized cash in SBNs.

9. In the result, the appeal filed by the assessee stands allowed.