All deposits during demonetization should not be presumed unaccounted: ITAT Bangalore

Narayanappa Munikrishnappa Vs ITO (ITAT Bangalore)

This appeal, filed by the assessee Narayanappa Munikrishnappa, challenges the order issued by the National Faceless Assessment Centre (NFAC) under Section 250 of the Income Tax Act, 1961. The contested assessment pertains to the financial year 2017-18, with the NFAC’s order dated December 7, 2023. The appellant presented several grounds for appeal, primarily disputing the addition of Rs. 18,61,774/- to his taxable income as unexplained cash deposits.

Grounds of Appeal

1. Opposition to the NFAC’s Order: The appellant contends that the NFAC’s decision is both legally and factually flawed, thereby prejudicing the appellant’s interests.
2. Cash Sales and VAT Consideration: The appellant argues that the NFAC and the Assessing Officer (AO) failed to account for sufficient cash sales to justify the cash deposits, focusing solely on net sales in the Profit and Loss Account without considering the VAT collected along with these sales.
3. Creditworthiness of Lenders: The appellant disputes the NFAC’s rejection of the lenders’ creditworthiness based on the argument that ownership is essential to earning agricultural income.
4. Gifts to Spouse: The appellant challenges the NFAC’s non-acceptance of a gift received by his wife from her parents, asserting that the necessary evidence substantiating the agricultural income had been provided.
5. Additional Grounds: The appellant seeks permission to introduce, modify, or delete grounds of appeal as required during the proceedings.

Key Issue

The primary issue under scrutiny is the legitimacy of Rs. 18,61,774/- out of a total addition of Rs. 20,11,774/- to the assessee’s taxable income, attributed to unexplained cash deposits.

Facts of the Case

During the relevant assessment period, the assessee deposited significant cash amounts into his bank account. The onus was on the assessee to provide documentary evidence, such as cash books, ledgers, sale and purchase details, and records of stock and debtors, to verify the nature and source of these cash deposits. The authorities deemed that the assessee failed to provide a credible explanation for the cash deposits, thus treating the income as unexplained under Section 69A of the Income Tax Act.

NFAC’s Observations and Legal Precedents

The NFAC observed that under Section 69A, unexplained money, bullion, or other assets not recorded in the books of accounts can be deemed income if their nature and source are not satisfactorily explained. The NFAC cited the Supreme Court judgments in Chuharmal vs CIT (1988) 172 ITR 250 and Smt Srilekha Banerjee vs CIT, Bihar & Orissa (1964 AIR 697), reinforcing the position that unexplained deposits can be treated as income under Section 69A.

Tribunal’s Analysis

The Income Tax Appellate Tribunal (ITAT) Bangalore reviewed the appeal, considering submissions from both parties and examining the records. The tribunal noted that the disputed deposits occurred during the demonetization period in 2016, emphasizing the necessity for proper verification in line with Central Board of Direct Taxes (CBDT) instructions. The CBDT had issued several guidelines for assessing cash deposits during demonetization, detailing the type of investigations and evidence required.

Specific CBDT Instructions

• Instruction dated 09/08/2019: Emphasized comparative analysis of cash deposits and sales, examining month-wise data, and identifying anomalies suggestive of fictitious or backdated sales.
• Instruction dated 21/02/2017: Required monthly sales summaries, stock register entries, and bank statements to detect potential backdating or fictitious sales, especially noting abnormal jumps in sales or cash deposits during the demonetization period.

Tribunal’s Decision

The tribunal directed the assessee to provide detailed evidence supporting the legitimacy of the cash deposits, as per the specified CBDT instructions. It acknowledged that not all deposits during demonetization should be presumed unaccounted but placed the burden of proof on the assessee to establish the authenticity of these deposits.

The tribunal remitted the case back to the Assessing Officer for fresh consideration, instructing the AO to re-evaluate the evidence in accordance with the law and provide the assessee with a proper hearing opportunity, including physical hearings if necessary.

Conclusion

The appeal was partly allowed for statistical purposes, with the issue of unexplained cash deposits being sent back to the Assessing Officer for reassessment. The tribunal underscored the importance of adhering to CBDT guidelines in such cases and ensuring thorough verification before deeming cash deposits as unexplained income.