Demonetization is a government policy or economic measure where a specific currency is declared invalid as legal tender, typically to curb black money, corruption, and illegal financial activities. During demonetization, people must exchange or deposit their old currency notes for new ones or face the potential loss of their wealth.
In India, demonetization happened in November 2016 when the Indian government, led by Prime Minister Narendra Modi, announced the sudden invalidation of INR 500 and INR 1,000 banknotes, two of the highest denominations in circulation at the time. The aim was to combat black money, counterfeit currency, and corruption in the country.
The impact of demonetization on taxpayers was significant. Many individuals and businesses had to deposit their old currency notes into banks, which led to increased scrutiny by tax authorities. Numerous taxpayers received notices and are still in the process of appealing these cases.
There is a substantial number of pending appeals related to cash deposits after demonetization in India. For taxpayers, there are favourable case laws available to support their claims. These cases can be valuable references when dealing with income tax-related issues during demonetization.
Section 69A of the Income Tax Act, 1961, is a provision extensively employed by the tax department when issuing notices to taxpayers. It empowers the tax authorities to treat unexplained cash deposits as income that has not been disclosed or accounted for by the taxpayer.
In response to these notices and inquiries, many individuals have opted to utilize the provisions of Section 44AD, commonly referred to as the presumptive business scheme. Under Section 44AD, small businesses and professionals are allowed to declare a presumptive income based on a specified percentage of their total turnover. This scheme simplifies the tax calculation process for eligible taxpayers, offering them a more straightforward way to determine their taxable income.
Now, regarding Section 69A, it is essential to understand its functioning. This provision allows the tax authorities to initiate an inquiry into any substantial unexplained cash deposits and subsequently assess them as unexplained income.The onus is on the taxpayer to substantiate the legitimacy of the deposited cash through proper documentation and evidence.
In the context of favorable case laws, many revolve around taxpayers successfully demonstrating that their cash deposits are indeed linked to their legitimate business income. This often involves showcasing compliance with the presumptive business scheme under Section 44AD and offering compelling evidence that the cash deposits are accounted for within the framework of their business operations.
Such cases can serve as valuable precedents for individuals grappling with similar tax challenges. If you wish to explore specific case laws or delve deeper into any aspect of this topic, please feel free to inquire further.
The provisions of section 69A of the I.T. Act,1961 are reproduced as under:
“Section 69A Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year”
A straightforward interpretation of Section 69A of the Income Tax Act reveals that its provisions come into play when there is unaccounted money or assets that are not documented in the taxpayer’s books of accounts and are not linked to any reported source of income. However, if the taxpayer does not maintain books of accounts and has filed an income tax return under Section 44AD of the Act, then the provisions of Section 69A of the Act do not apply to that particular taxpayer’s case.
1. CIT v/s Surinder Pal Anand, Surinder Pal Anand, [20111 242 CTR 0061 (P&H HC)
Assessment being made under s. 44AD, the assessee was not under obligation to explain individual entry of cash deposit in the bank unless such entry had no nexus with the gross receipts and therefore no addition under s. 68 was called for.
2. Dinesh Kumar Verma v/s ITO, [20211 TaxPub (DT) 63 (Mum.Trib.)
Held-Maintaining books of account is since quo non for making addition under section 68. Since section 44AD does not obligate assessee to maintain books, provision of section 68 could not be invoked where assessee had filed return of income under provisions of section 44AD without maintaining books of account
3. Virender Kumar v/s ITO, ITA no.1100/Jp./2019, order dated 10.03.2021
Once under the special provision, exemption from maintaining of books of account has been provided and presumptive tax @8% of the gross receipt itself is the basis for determining the taxable income, the assessee was not under obligation to explain individual entry of cash deposit in the bank unless such entry had not nexus with the gross receipts. The stand of the assessee before Commissioner of Income Tax (Appeals) and the ITAT that the said mount of Rs. 14,95,300/- was on account of business receipts had been accepted. Learned counsel for the appellant with reference any material on record, could not show that the cash deposits amounting to Rs. 14,95,300/- were unexplained or undisclosed income of the assesse.
3. Kadigari Narasimha Reddy v/s ITO, ITA no.581/Hyd./2013, order dated 30.11.2015
The first condition is that assessee should maintain the books of account. In the present case assessee estimates the income and hence, there is no need to maintain books of account. It falls in the first condition itself.
4. Shri Thomas Eapen v/s ITO, ITA no.451/Coch./2019, order dated 19.11.2019;
The CIT(A) held that the provision of section 68 of the Act are not applicable to the case of the assessee. According to the CIT(A), the assessing officer gave a finding that the assessee was not maintaining books of account and therefore provisions of section 68 of the Act cannot be applied to tax the unexplained deposits in the Bank. However, the same can be taxed under section 69A of the Act. According to the CIT(A), quoting of wrong section is not fatal to the addition made and hence, it was held that the unexplained deposits in the bank account are assessable under section 69A of the Act Further, it is fact on record that the assessee had not maintained books of account that is why he opted for 8% income as per section 44AD of the Act. The section also does not put obligation on the assessee to maintain the books of account, more so in view of the fact that his income has been assessed as per section 44AD of the Act.
5. 4. Shri Thomas Eapen v/s ITO, ITA no.451/Coch./2019, order dated 19.11.2019;
The CIT(A) held that the provision of section 68 of the Act are not applicable to the case of the assessee. According to the CIT(A), the assessing officer gave a finding that the assessee was not maintaining books of account and therefore provisions of section 68 of the Act cannot be applied to tax the unexplained deposits in the Bank. However, the same can be taxed under section 69A of the Act. According to the CIT(A), quoting of wrong section is not fatal to the addition made and hence, it was held that the unexplained deposits in the bank account are assessable under section 69A of the Act Further, it is fact on record that the assessee had not maintained books of account that is why he opted for 8% income as per section 44AD of the Act. The section also does not put obligation on the assessee to maintain the books of account, more so in view of the fact that his income has been assessed as per section 44AD of the Act.
6. Kokkarne Prabhakara v/s ITO, ITA no.1239/Bang./ 2019, order dated 11.09.2020;
The similar issue also came for consideration before coaching bench of the tribunal in case of ThomosEapen in ITA No 451/Coch/2019 wherein it has been held that since scheme of presumptive taxation has been found in order to avoid long drawn crosses of assessment in cases of small traders or in cases of those businesses where incomes are almost are static quantum of all businesses assessing officer could have made addition under section 69A once he had carved out case out of glitches of provisions of section 44AD-In view of above decision once assessment of assessee was completed under section 44AD, there cannot be any application of section 68/69A. Being so court direct the AO to delete the addition made by the AO and confirmed by the CIT(A)- Assessee’s ground allowed.
7. Pradeep Jain v/s ITO, ITA no.8001/Del./2018, order dated 04.06.2019;
Since assessee is involved in small business activity and filed return of income under presumptive provisions under section 44AD of the I.T. Act, there was no justification to consider the sales of assessee to be bogus or to make addition of cash in hand as per details submitted by the assessee because A.O. did not bring any sufficient evidence on record to justify the ITA.No.8001/Del./2018 Mr.Pradeep Jain, Gurgaon. addition. I, therefore, do not find any justification to sustain the addition. I, accordingly, set aside the Orders of the authorities below and delete the entire addition.
8. Kiran Vallabhai Ahir v/s ITO, ITA no.65/Srt./2017, order dated 10.02.2020;
The assessee has not maintained any books of accounts, hence such situation only net profit as per
provisions of section 44AD of the Act is required to be estimated as net profit.
9. ACIT v/s Aggarwal Construction Co., [2007] 106 ITD 129 (Chd. Trib.);
Since the assessee has not maintained any books of account, hence, in such situation only net profit as per provisions of section 44AD of the Act is required to be estimated as net profit and not entire turnover or cash deposits reflected in the bank’s account. Therefore, following the ratio laid down in case of CIT v/s PradipShantilal Patel (2014), 42 taxmann com 002 (Guj.) wherein it was held that where the assessee admitted that the cash deposits pertains to his retail business but details and nature of business were not forthcoming from the record, considering the total turnover of the assessee, net income to be determined u/s 44AD of the Act, the AO is directed to estimate net profit @ 8% of the total turnover of Rs.53,32,345 being cash deposit in the bank account. Accordingly, ground 1, 2, 3 of the appeal are partly allowed. In the result, appeal of the assessee is partly allowed.
10. Om Prakash Karnani v/s ACIT, [2021] TaxPub (DT) 841 (Jp. Trib.)
It cannot be argued that statute has provided a rate which is not reasonable. Further, having regard to provisions of s. 44AD, which is overriding, it is not possible for the Revenue to argue that profit computed as per the section is not profit computed “in accordance with provisions of this Act” or that the legislature was unaware of provision of ss. 68, 69, 269SS, 269T, 140(3)metc, in the enactment of s. 44AD. Thus, reading entire scheme of the Act one has to hold that profit computed as per s. 44AD of the Act by application of flat rate in one recognized method of computation of total income or part of total income.
11. In Narendra Kumar Gupta, vs. DCIT, New Delhi – ITA No.1186/Del./2023 (ASSESSMENT YEAR: 2019-20)
The bench set aside the impugned order holding that it was a settled law that books of account & vouchers were not required in 44AD return. Hence, adverse inference could not be taken that cash book & vouchers had not been maintained.
12. In Anjali Roy Vs. Income Tax Officer – I.T.A. No. 516/KOL/2022 (Assessment Year: 2017-2018)
The bench observed that she had never been in a tax-payer category in itself is sufficient that she had no unexplained money, rather whatever may be saved from agricultural activity, her husband’s salary throughout her life might had been deposited in the bank account. The two-member bench comprising Rajpal Yadav (Vice-President) and Rajesh Kumar (Accountant Member) held that the assessee had not made any unexplained investment in the bank account and whatever deposits were made are either out of the past savings or from the loans taken from relatives and the addition made by the assessing officer was against the law and are liable to be deleted while allowing the appeal filed by the assessee.
Author: CA Brijmohan Lavaniya | Co-Author: Siddharth Sachan Adv.(Income Tax Professional)
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