Assessee Must Prove Genuineness to Contest Section 68 Addition for Unexplained Cash Deposits During Demonetization

Veeranna Murthy Raghavendra Deekshith Vs ITO (ITAT Bangalore)

Conclusion: Addition under section 68 on account of large cash deposit made during the 2016 demonetization period was not justified and assessee was required to provide concrete evidence establishing the genuineness of the cash deposits in accordance with CBDT Circular wherein the various instructions had been issued. Tribunal remitted the case back to AO for a fresh assessment, instructing assessee to provide all necessary documents to prove the authenticity of the deposits.

Held: During the government’s demonetization drive in November 2016, when high-value ₹500 and ₹1,000 currency notes were withdrawn from circulation. Assesssee/appellant, a wholesale distributor of Cadbury products in Bangalore, had deposited ₹65,13,410 in cash into his bank accounts between November 9 and November 12, 2016. The deposits were made in both Canara Bank and ICICI Bank, with the amounts being part of his regular business transactions, according to assessee. However, during an assessment for the financial year 2016-17, AO flagged ₹50,25,540 of this amount as unexplained. While the department accepted that ₹14,87,870 of the deposits were legitimate, based on the assessee’s financial records and closing cash balances, the remaining sum was added to his taxable income as unexplained cash credits under Section 68. Assessee argued that AO had not verified demonetized currency as per the notification/circular issued by the CBDT from time to time and requested to remand back to AO for fresh consideration in the interest of justice. It was held that assessee to provide concrete evidence establishing the genuineness of the cash deposits in accordance with CBDT Circular wherein the various instructions had been issued by CBDT dated 21.2.2017, 3.3.2017, 15.11.2017 & 9.8.2019. Tribunal stressed the need for assessee to substantiate his claims with proper documentation, including bank statements, invoices, and proof that the deposits were indeed part of his business turnover and not an attempt to launder old currency. In result, Tribunal remitted the case back to AO for a fresh assessment, instructing assessee to provide all necessary documents to prove the authenticity of the deposits.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against the order of CIT(A) / National Faceless Appeal Centre, Delhi dated 30.03.2024 vide DIN & order No. ITBA/NFAC/S/250/2003-24/1063672689(1) passed u/s.250 of the Income-tax Act, 1961 (“the Act”) for Assessment Year (AY) 2017-18.

2. The assessee has raised the following grounds:-

“1. The Order of the learned Commissioner passed under section 250 of the Act is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant’s case.

2. The Appellant denies to be assessed to tax on total income as determined by the learned AO of Rs. 60,31,780/- as against the total income reported by the Appellant of Rs. 10,06,240/- on the facts and circumstances of the case.

3. The learned Commissioner of Income-tax (Appeals) erred in passing the order without giving adequate opportunities hence violated the principles of natural justice.

4. The Learned Commissioner of Income-tax (Appeals) erred in upholding the addition of Rs. 50,25,540/- as unexplained cash credit despite the fact that the same was attributed as part of turnover by reducing a net profit rate of 1.37%; hence the source stands explained to be business income in the facts and circumstances of the case.

5. The Learned Commissioner of Income-tax (Appeals) erred in law that the Appellant was not authorised to accept demonetised currency between 8.00 – 11.00 pm on 8 November 2016 despite the fact that it ceased to be legal tender from 9 November 2016 as per RBI notification in the facts and circumstances of the case.

6. The Learned Commissioner of Income-tax (Appeals) erred in upholding the addition of Rs. 50,25,540/- as unexplained cash credit just because cash was accepted during demonetisation which is against the intention of demonetisation which was not to penalise genuine business transactions in the facts and circumstances of the case.

7. Without prejudice, the Learned Commissioner of Income-tax (Appeals) erred in making an addition of Rs. 50,25,540/- without reducing the equivalent turnover as the cash deposit was considered as a part of the turnover to arrive at the net profit declared in the return of income in the facts and circumstances of the case.

8. The Learned AO erred in taxing the determined total income of the Appellant as per the provisions of section 115BBE on the facts and circumstances of the case.

9. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above.

10. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.”

3. Further, the assessee has also raised the following additional grounds of appeal:-

“1. The notice issued u/s.143(2) of the Act dated 24.09.2018 is bad at law as it is not accordance in the format prescribed by the Central Board of Direct Taxes as per Instructions (F No.225/157/2017/ITA.II) dated 23.06.2017; therefore all consequential assessment proceedings including the assessment order are rendered bad at law in the facts and circumstances of the case.

2. Without prejudice to the right to seek waiver with the Hon’ble Chief Commissioner of Income Tax/Director General of Income Tax, the Appellant denies itself liable to be charged to interest under section 234B and 234C of the Act which under the facts and circumstances of the case deserves to be cancelled. The calculation of interest under section 234B and 234C of the Act is not in accordance with law as the rate, amount and method for calculating interest is not discernible from the order of assessment.

3. The penalty proceedings initiated u/s 271AAC of the Act are contrary to the law in the facts and circumstances of the case.

4. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above.

5. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.”

4. Before us, the ld. AR of the assessee submitted that the additional grounds of appeal raised are pure question of law and further requested to dispose of the same on the merits for the advancement of substantial cause of justice. Reliance is also placed on the decision of the Hon’ble Supreme Court in the case of National Thermal Power Company Limited v. CIT reported in 229 ITR 383 (SC) and also on the ratio of the decision of the Hon’ble Karnataka High Court in the case of Gundathur Thimmappa and Sons v. CIT reported in 70 ITR 70 (Kar.) in support of his prayer.

5. The learned Departmental Representative, on the other hand, strongly opposed the admission of additional grounds of appeal at this stage.

6. We have heard both the parties on the admission of additional grounds. In our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of the above grounds. Further, we also find that as it is a pure question of law, and therefore, by placing reliance on the judgment of the Hon’ble Supreme Court in the case of NTPC Ltd. (supra), we inclined to admit the additional grounds for the purpose of adjudication as there is no investigation of any fresh facts otherwise than on record and the action of the assessee is bonafide.

7. Now coming to the merits of the case, the brief facts of the case are that the assessee is an Individual, who had filed his return of Income for the Asst. year 2017-18 on 02-11-2017 declaring a Taxable income of Rs.10,06,240/-. The assessee’s income comprised of Loss under the head House Property of Rs.3,90,981/- and Income from Profits and Gains of Business of Rs. 15,47,216/-. The assessee is a wholesale and retail distributor of Cadbury products manufactured by M/s Mondelez India Foods Private Limited for the entire region of North Bangalore. The distribution process carried out by the assessee entails order booking & delivery/ distribution to the Super markets, Departmental Stores, Stationary & Glossaries shops, petty shops, medical stores etc. Since the supply is in smaller quantities & majorly to the small retail outlets, 80% of the total sales as claimed are through cash and the remaining through credit facility. The business model of the assessee is such that the cash received through cash sales / collections from debtors are deposited into banks at regular intervals. The assessee’s return was selected for scrutiny and notice under section 143(2) of the Act dated 24-09-2018 was issued to the assessee. In reply to this notice, the assessee submitted a brief note of his sources of income, financial statements of FY 2016-17 and the relevant bank statements. Further, submissions were made in person to the Show Cause notices issued by the Department. The assessee has deposited a sum of Rs.65,13,410/- by the way of cash from 9th November, 2016 to 12t^h November, 2016, the details of such cash deposits are herewith tabulated:

Out of the above cash deposit of Rs.65,13,410/-, the Assessing Officer has added Rs.50,25,540/- as unexplained cash credit u/s 68 of the Income Tax Act 1961 to the Returned Income. While doing so the Ld. Assessing Officer has allowed deduction of Rs.14,87,870/-comprising of the following:-

The above cash deposit represents cash deposited in both demonetized & non-demonetized currency on 10th Nov.2016 & 12th Nov.2016. The Ld. Assessing Officer has added such cash deposits as unexplained cash credits to the Returned Income for the following reasons:-

a. Pay-in-slips/Certificate from banks was not furnished:

(i)The assessee had mentioned either demonetized currency and non-demonetised currency without any supporting proof either by way of pay-in-slips or certificate from the concerned bank before the AO.

(ii) As the Assessment is getting barred by limitation on 31-12­2019, the AO could not wait till the assessee produces details of demonetized currency.

b. Cash collections post 8:00 p.m. in demonetized currency was unauthorized:

The assessee has mentioned that he has collected from the customers cash of Rs.32,30,000/- towards the Old bills on 08­11-2016 post 8:00 p.m. in demonetized currency which in the opinion of AO was not authorized to do so as per RBI Rules on this. The said collections represent balances outstanding from the customers on credit supplies.

Further, considering the submissions regarding average cash deposits during the 3 FYs & value of sundry debtors a sum of Rs.9,89,748/- was accepted as collections of old bills post 8pm in non-demonetized currency. Thus out of total cash deposits made during the demonetization amounting to Rs. 65,13,410/-credit for closing cash of Rs.4,28,280/- & Rs. 9,89,784/- was given by AO and the balance of Rs. 50,95,346/- is added to the returned income U/s 68 as unexplained credits.

However taking into account that the said amount of Rs.50,95,346/- is credited to the bank account of the assessee even if it is to be taken as part of turnover, an amount of Rs.69,806/-is reduced from above addition @ 1.37% of net Profit as declared by the assessee. Hence total addition u/s 68 as unexplained credits comes to Rs. 50,25,540/- [ Rs. 50,95,346-Rs. 69,806 ] and accordingly the income tax on this addition shall be chargeable u/s 115BBE of the Act.

9. Aggrieved by the assessment completed u/s.143(3) of the Act, the assessee preferred an appeal before the CIT(A)/NFAC. The CIT(A)/NFAC affirmed the view of the AO with the following observations:-

“6.4 On 8th November 2016 Central Government, through Gazette Notification No 2652 dated 8,11.2016, declared that from 9th November 2016, Rs.500 and Rs. 1000 (Specified Bank Notes) ceased to be legal tender and the SBN Notes after 09.11.2016 are not valid. The appellant’s case does not come under the exempted category as notified by the RBI and therefore, the appellant is not allowed to receive he old SBN notes for doing the monetary transaction and enter the same into his books of account.

6.5 As the appellant continued to receive the illegal currency i.e., specified bank notes which ceased to be legal tender w.e.f. 09.11.2016 and deposited in the bank account, to that extent the AO rightly treated the same as an unexplained cash deposit u/s.69A of the Act and taxed the same u/s. 115BB of the Act.

6.6 Admittedly the appellant has deposited specified bank notes in the demonetized cash notes in the denomination of Rs.1000 & Rs.500. The appellant is barred from dealing in any illegal tender and the appellant cannot accept the demonetized specified bank notes even during his activity of sales because it is completely barred by the Central Government of India declaring that the bank notes of existing series of denomination of Rs.1000 & Rs.500 shall cease to be legal tender on or from 09.11.2016. This has been notified by the Central Government in the Gazette Notification of the Ministry of Finance vide No.2652 dated 08.11.2016. Once the Central Government has notified that the denomination of Rs.1000 & Rs.500 notes is not legal tender w.e.f. 09.11.2016, nobody can engage in any activity through this currency, hence, the AO has rightly added the amount to that extent of Rs. 35,51,000/- u/s.69A of the Act. Reliance is placed on the decision of Hon’ble ITAT in the case of Raju Ravichandran Namakkal Vs ITO, Ward-2, Namakkal vide ITA no 493/Chny/2023 dated 16.06.2023, regular bench decision in ITA No. 698/Chny/2022 dated 7/2/2023 and decision of Hon’ble ITAT Hyderabad in the case of Vaishnavi Bullion Pvt Ltd vs ACIT. In view of the facts of the case and position of law, I find justification to uphold the order of the assessing officer regarding deposits in SBNs. Moreover, the amount of Rs. Rs.50,25,540/- also remained unexplained even during the appellate proceedings as the appellant did not furnish the supporting documentary evidence. Hence, I am not inclined to interfere with the action of the AO in making the addition of Rs.Rs.50,25,540/-. Accordingly, the above grounds of appeal are dismissed.

6.7 Based on the material available on record, the appellant’s contentions are not acceptable because of specific findings in the assessment order about no evidence being adduced by the appellant to corroborate the claim made. The documents furnished by the appellant during assessment proceedings do not reflect the true and correct accounts to arrive at the total income of the appellant for the year by the AO. The explanations/details furnished by the Appellant during assessment proceedings are incomplete. In the absence of any cogent material to explain the nature and source of this money deposited in the form of cash in the bank account, the stand of the AO cannot be faulted. The appellant failed to explain the nature and source of the cash deposits during the assessment proceedings and even in the appellate proceedings. It is a trite law that once the appellant fails to discharge the onus cast on him to explain the nature and source of any sum of money and does not prove the identity and creditworthiness of the person along with the genuineness of the transactions, the amount is deemed to be the income of the appellant as per the deeming provisions of sections 68 of the | T Act. The genuineness of transactions could not be proved to the satisfaction of the AO during the assessment proceedings.

6.8 Based on the facts mentioned above, detailed discussion in the assessment order by the AO and in the absence of any written submission by the appellant, I am not inclined to interfere with the decision of the AO.”

10. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal.

11. Before us, the learned AR of the assessee vehemently submitted that the notice u/s 143(2) of the Act dated 24.9.2018 is bad in law as it is not in accordance with the format prescribed by the CBDT Instruction in F.No.225/157/2017/ITA.II dated 23.6.2017. Further, the ld. A.R. for the assessee submitted that ld. Authorities below erred in upholding the addition of Rs.50,25,540- as unexplained cash credit by not accepting the fact that the entire cash deposits are part of the Turnover. Further the ld. AR submitted that the AO has not verified demonetized currency as per the notification/circular issued by the CBDT from time to time.

12. The ld. D.R. on the other hand, supported the orders of authorities below.

13. We have heard the rival contentions and perused the materials available on record. Before going into the merit of the case, first we are considering the only legal issue raised by the assessee by way of additional grounds of appeal that whether notice issued not in accordance with the format prescribed by the CBDT is bad in law and therefore, all the consequential assessment proceedings including the assessment order are rendered bad in law?

13.1 First we take a note of the CBDT instruction in F.No.225/157/2017/ITA.II dated 23/06/2017 which are reproduced below for ease of reference as claimed by the assessee-

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13.1 Before proceedings further, it is also appropriate to take note of section 282A of the Act, which reads as follows:

Authentication of notices and other documents.

282A.

(1) Where this Act requires a notice or other document to be issued by any income-tax authority, such notice or other document shall be signed and issued in paper form or communicated in electronic form by that authority in accordance with such procedure as may be prescribed.

(2) Every notice or other document to be issued, served or given for the purposes of this Act by any income-tax authority, shall be deemed to be authenticated if the name and office of a designated income-tax authority is printed, stamped or otherwise written thereon.

(3) For the purposes of this section, a designated income-tax authority shall mean any income-tax authority authorised by the Board to issue, serve or give such notice or other document after authentication in the manner as provided in sub-section (2).

13.2 On plain reading of the above section, we find that where the Act requires notice to be issued by the Income Tax Authority, such notice shall be signed and issued in paper format or communicated in electronic format. Further the notice issued, served or given should be deemed to be authenticated if the name and office of the designated income tax authorities is printed, stamped or written thereon. In the present case it is not disputed that the notice is not signed. It is also not disputed that the notice is not issued in paper format or communicated in electronic format. Further the assessee is also not disputing that the name & office of the designated income tax authorities is not printed, stamped or written thereon. Therefore the notice issued u/s 143(2) of the Act shall be deemed to be genuine.

13.3 Now coming to Section 292BB of the Act which reads as follows:

[Notice deemed to be valid in certain circumstances.

292BB. Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was—

(a) not served upon him; or

(b) not served upon him in time; or

(c) served upon him in an improper manner:

Provided that nothing contained in this section shall apply where the assessee has raised such objection before the completion of such assessment or reassessment.]

13.4 On a plain reading of the above section, we find that assessee shall be precluded from taking any objection with regard to service of notice in an improper manner if he has appeared in any proceedings or co-operated in any enquiry relating to an assessment. In the present case, we find that during the course of assessment proceedings, the assessee had filed his reply and co-operated with the proceedings by way of filing submissions on different dates and therefore, the assessee is not entitled to take this ground before this Tribunal for the first time as he had not raised any objection before the AO before the completion of Assessment proceedings. Therefore, in our considered opinion, as the assessee had co-operated with the proceedings by way of filing various submissions on different dates as well as he had not raised any objection before the AO on or before the completion of the Assessment proceedings, the provisions contained in section 292BB of the Act shall not apply to the case of the assessee.

13.5 Now before proceeding further, we would also like to take note of the provisions of section 292B of the Act, which deals with return of income, assessment, notice, summons not to be invalid on certain grounds. The section 292B of the Act reads as follows:

292B. Return of income, etc., not to be invalid on certain grounds.

– No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.]

13.6 On going through the above section, we note that the notice issued in pursuance of any of the provisions of this Act shall not be invalid or deemed to be invalid merely by reason of any mistake, defect or omission in such notice if it is in substance and effect in conformity with or according to the intent and purpose of this Act. The purpose behind the introduction of section 292B of the Act was to ensure that technical pleas on the ground of mistake, defect, and omission should not invalidate the assessment proceedings, when no confusion or prejudice is caused due to non-observance of technical formalities. The assessee has challenged by way of additional ground that notice u/s 143(2) of the Act dated 24.9.2018 is not in accordance with the format prescribed by the CBDT Instruction cited (supra).

13.7 On going through the above, we are of the opinion that the primary requirement is to go into and examine the question of whether any prejudice or confusion was caused to the assessee. If no prejudice/confusion was caused, then the assessment proceedings and their consequent orders cannot and should not be vitiated on the said ground of mistake, defect or omission in the notice. It is undisputed fact that notice u/s 143(2) of the Act dated 24.9.2018 was served on the assessee and as we observed in the assessment order, the assessee had filed submissions/replies/explanations in response to notices issued by AO and accordingly, we are of the opinion that assessee has cooperated with the proceedings before the AO. The assessee had also not raised any objection before the AO with regard to the issue of notice not in the prescribed format as per the CBDT Instruction on or before the completion of the Assessment proceedings. Further it is also not disputed that the notice is not signed and issued in paper format or communicated in electronic format. It is also not disputed that the name & office of the designated income tax authorities is not printed, stamped or written thereon. Upon careful consideration of the arguments presented, it is evident that while the format of the notice is important the primary concern is whether the notice effectively communicated the necessary information to the respondent or not? We are of the strong opinion that notice even though not in the prescribed format if it serves the intent & purpose of the Act, i.e. to inform the assessee and when there is no confusion in his mind about initiation of proceedings under the Act, the defective notice is protected under section 292B. In the present case, we found that no prejudice/confusion was caused to the assessee and the assessee filed explanation/submission & co-operated during the course of assessment proceedings & therefore, merely because of the procedural irregularities, we cannot accept the plea of the assessee that notice not served as per format prescribed by the CBDT instruction cited (supra), the entire consequential assessment proceedings including the assessment order are to be rendered bad in law and accordingly dismissed.

13.8 Now the second additional ground of appeal is with regard to charging of interest u/s 234B & s234C of the Act, which in our opinion, is consequential in nature and accordingly dismissed.

13.9. With regard to Additional ground No.3 raised, i.e. initiation of the penalty proceedings u/s 271AAC of the Act, we are of the opinion that since the present appeal is filed against the quantum & not against any penalty and therefore we are refraining our self to adjudicate this issue on merits at this stage. We also note that Assessment proceedings & Penalty proceedings are two separate & distinct proceedings. Therefore the additional ground with regard to initiation of penalty u/s 271AAC are also dismissed.

14. In the result, all the additional grounds of appeal of the assessee are dismissed.

15. Now coming to the main grounds of appeal raised by the assessee relating to the addition of Rs. 50,25,540/- as unexplained cash credit U/s 68 of the Act. The AR’s contention is that the entire cash deposits was attributed as part of the turnover. Further the AR vehemently contended that during the course of assessment proceedings the ld. AO has not verified demonetized currency as per the notification/circular issued by the CBDT from time to time and requested to remand back to AO for fresh consideration in the interest of justice.

16. With regard to deposits during the demonetization period, we are of the opinion that it is required to be examined in the light of various circulars issued by CBDT. Admittedly, the issue herein is with regard to deposit of cash during the demonetization period in the year 2016, which were not verified by the ld. AO in accordance with CBDT Circular wherein the various instructions have been issued by CBDT dated 21.2.2017, 3.3.2017, 15.11.2017 & 9.8.2019. The ld. A.R. submitted that as the verification of cash deposit is not in accordance with instruction of CBDT, there is inadequate enquiry in respect of cash deposited during the demonetization period. These, CBDT instructions gives hint regarding what kind of investigation, enquiry, evidences that the assessing officer is required to take into consideration for the purpose of assessing such cases.

16.1 In one of such instructions dated 09/08/2019 speaks about the comparative analysis of cash deposits, cash sales, month wise cash sales and cash deposits. It also provides that whether in such cases the books of accounts have been rejected or not where substantial evidences of vide variation be found between these statistical analyses. Therefore, it is very important to note that whether the case of the assessee falls into statistical analysis, which suggests that there is a booking of sales, which is non-existent and thereby unaccounted money of the assessee in old currency notes (SBN) have been pumped into as unaccounted money.

16.2 The instruction dated 21/02/2017 that the assessing officer basic relevant information e.g. monthly sales summary, relevant stock register entries and bank statement to identify cases with preliminary suspicion of back dating of cash sales or fictitious sales. The instruction is also suggested some indicators for suspicion of back dating of cash sales or fictitious sales where there is an abnormal jump in the cases during the period November to December 2016 as compared to earlier year. It also suggests that, abnormal jump in percentage of cash trails to on identifiable persons as compared to earlier histories will also give some indication for suspicion. Non-availability of stock or attempts to inflate stock by introducing fictitious purchases is also some indication for suspicion of fictitious sales. Transfer of deposit of cash to another account or entity, which is not in line with the earlier history. Therefore, it is important to examine whether the case of the assessee falls into any of the above parameters are not.

16.3 The assessee is directed to establish all relevant details to substantiate its claim in line with the above applicable instructions. We are aware of the fact that not every deposit during the demonetization period would fall under category of unaccounted cash. However, the burden is on the assessee to establish the genuineness of the deposit in order to fall outside the scope of unaccounted cash. The Ld.AO shall verify all the details / evidences filed by the assessee based on the above direction and to consider the claim in accordance with law. Needless to say, that proper opportunity of being heard must be granted to the assessee. Accordingly, the issue in dispute is remitted to the file of ld. AO for fresh consideration.

17. In the result, the appeal filed by assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 18^th September, 2024.