Cash deposit in SBNs during demonetization not unexplained income if source is genuine; addition deleted.

Cash deposit in SBNs during demonetization not unexplained income if source is genuine; addition deleted.

Issue

Whether cash deposits made in Specified Bank Notes (SBNs) during the demonetization period can be treated as unexplained income under the Income Tax Act solely because they were accepted in violation of government notifications, even when the source of the funds (receipt from members) is not doubted by the Assessing Officer.

Facts

• Appeal: The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals), Gurgaon, for the Assessment Year 2017-18.

• Addition 1 (Contested): An addition of Rs. 12,00,000/- was made by the Assessing Officer (AO) on account of cash deposited during the demonetization period.

  • The amount was received by the assessee from its members on 15.11.2016 (during the demonetization window).

  • The AO did not doubt the source of the receipt (i.e., it came from members) but flagged the timing and the nature of currency used (demonetized notes).

• Addition 2 (Not Pressed): An addition of Rs. 4,14,248/- pertaining to provisions in the balance sheet was also challenged but was withdrawn (not pressed) by the assessee’s counsel during the hearing.

Decision

• Ground 2 Dismissed: The challenge to the addition of Rs. 4,14,248/- was dismissed as “not pressed.”

• Ground 1 Allowed (Deletion of Rs. 12 Lakhs Addition):

  • The Tribunal observed that the receipt of the amount from members was not doubted by the AO.

  • The Tribunal held that while accepting demonetized currency on 15.11.2016 might violate Government Circulars/Notifications regarding legal tender, it does not automatically transform the receipt into unexplained income for income tax purposes.

  • Since the source of the deposit was established and accepted by the lower authorities, the addition was held to be unsustainable.

  • The Tribunal ordered the deletion of the Rs. 12 lakh addition.

• Result: The appeal was partly allowed.

Key Takeaways

• Source vs. Legal Tender: The primary test for income tax addition is the explanation of the source of funds. A violation of RBI/Government notifications regarding the acceptance of demonetized notes (SBNs) is a separate regulatory issue and does not necessarily make the income “unexplained” under Section 68/69 of the Income Tax Act.

• No Automatic Addition: Mere deposit of cash during demonetization is not sufficient for addition if the assessee can prove the identity of the payer and the nature of the transaction.

• Strategic Withdrawal: Taxpayers often choose to “not press” weaker grounds of appeal to focus the Tribunal’s attention on the stronger, substantial additions (like the Rs. 12 lakh cash deposit in this case).

THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH
BENCH “SMC” CHANDIGARH
Chauntra Service Co-operative
Society Limited, Kohra, Sanithal
Joginder Nagar, Mandi.
बनाम The ITO,
Ward,
Mandi.