ITAT Hyderabad: Appeal Cannot Be Dismissed u/s 249(4)(b) Without Advance Tax Liability; Demonetisation Cash Deposits to Be Examined as Business Receipts

Shri Natraj Challa Vs ITO (ITAT Hyderabad)

ITAT Hyderabad: Appeal Cannot Be Dismissed u/s 249(4)(b) Without Advance Tax Liability; Demonetisation Cash Deposits to Be Examined as Business Receipts

In this case, the assessee, engaged in a medical agency business, had not filed a return and cash deposits (including during demonetisation) led to additions under section 69A and estimation of income @8% by the AO. The CIT(A) dismissed the appeal in limine under section 249(4)(b) on the ground that no return was filed and advance tax was not paid.

The ITAT held that section 249(4)(b) applies only where advance tax is payable. Since the assessee had not admitted any income, there was no liability to pay advance tax, and therefore dismissal of appeal was unjustified. The Tribunal set aside the CIT(A)’s order and restored the appeal.

On merits, the Tribunal observed that cash deposits were made throughout the year and not only during demonetisation, and that medical businesses were permitted to accept cash during that period. It directed the AO to verify monthly deposits and, if found normal, treat the demonetisation deposits as business turnover instead of unexplained income u/s 69A. The AO was further directed to estimate income on the entire turnover under section 44AD.

The appeal was thus allowed for statistical purposes with a direction for fresh examination.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal is filed by Shri Natraj Challa (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 11.10.2025 for the A.Y.2017-18.

2. The assessee has raised the following grounds of appeal:

“1. The learned Commissioner of Income-tax (Appeals) order is erroneous in facts and law.

2. That the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 11.10.2025, dismissing the appeal in limine under section 249(4)(b) of the Act, is erroneous both on facts and in law and deserves to be quashed.

3. That the Learned CIT(A) erred in dismissing the appeal without considering the merits of the case, despite that there is no requirement for payment of any advance tax.

4. That the Learned CIT(A) failed to appreciate that the appellant had commenced a new medical agency business (Sri Sai Nandini Vernary Medical Agency) during the relevant year and could not file the return due to the sudden demise of his father, which constitutes “good and sufficient reason” to exempt the appellant from the operation of section 249(4)(b).

5. That the Learned CIT(A) ought to have exercised discretion vested under the proviso to section 249(4)(b) of the Act by recording reasons and admitting the appeal on merits instead of summarily dismissing it.

6. That the Assessing Officer erred in making an addition of Rs.16,79,500/- under section 69A of the Act as unexplained money, ignoring the fact that all deposits represented business receipts from the appellant’s medical agency and were eligible for estimation under section 44AD.

7. That the Assessing Officer ought to have estimated the income at 5% of the cash deposits amounting to Rs. 67,11,410/- pertaining to the remaining period of the previous year, instead of adopting 8%, particularly since this was the appellant’s first year of business operations. Further, the appellant was unable to properly manage or concentrate on the business due to the demise of his father, who had been suffering from a brain tumor.

8. That the authorities below failed to appreciate that during the demonetization period, the appellant’s medical retail business was expressly permitted to transact in cash, and the cash deposits made were out of genuine business sales. This is duly supported by bank records reflecting corresponding payments made to pharmaceutical suppliers. Therefore, the Assessing Officer ought to have estimated the profit at 5% of the cash deposits during the demonetization period, considering that medical retail activity was exempt for accepting demonetized currency.

9. That the Commissioner of Income Tax (Appeals) ought to have deleted the addition made under Section 69A of the I.T. Act, as medical retail trading was an exempt category during the demonetization period. The CIT(A) should have directed the Assessing Officer to estimate the income in the same manner as was done for the remaining period of the previous year.

10. The learned commissioner of Income tax (Appeals) erred in confirming the order of the Assessing Officer in determining the total income at Rs. 22,16,413/- without proper justification and contrary to the facts of the case.

11. That the appellant prays that the Assessing Officer may kindly be directed to estimate a reasonable profit at the rate of 5% on all the cash deposits, including those made during the demonetization period, as the entire cash deposits represent receipts from his medical retail business and this is the first year of business.

12. That the Learned Commissioner of Income Tax (Appeals) erred in upholding the levy of interest under Sections 234A and 234B of the Income Tax Act, 1961, amounting to Rs.3,72,596 and Rs.4,25,824 respectively.

13. Any other ground/grounds that may be urged at the time of hearing.”

3. The brief facts of the case are that the assessee is an individual engaged in the business of medical agency. The assessee had not filed any return of income for Assessment Year 2017–18. Based on the information available with the Learned Assessing Officer (“Ld. AO”), it was noticed that the assessee had deposited cash of Rs.16,79,500/- in his bank account during the demonetization period i.e., from 09.11.2016 to 30.12.2016. Accordingly, notice under section 142(1) of the Income Tax Act, 1961 (“the Act”) was issued by the Ld. AO on 24.01.2018 requiring the assessee to file return of income. However, the assessee did not file any return of income in response to the said notice. The assessee also did not comply with subsequent notices issued during the course of assessment proceedings. The Ld. AO, on the basis of information gathered from the bank under section 133(6) of the Act, observed that during the year under consideration, total credits in the bank account of the assessee amounted to Rs.83,90,910/-, out of which cash deposits were Rs.69,88,000/-, including cash deposit of Rs.16,79,500/-during the demonetization period. In the absence of any explanation from the assessee, the Ld. AO treated the cash deposit of Rs.16,79,500/- made during the demonetization period as unexplained income under section 69A of the Act and added the same to the income of the assessee. Further, from the total credits of Rs.83,90,910/-, the Ld. AO reduced the cash deposit of Rs.16,79,500/- (already treated under section 69A of the Act) and treated the remaining amount of Rs.67,11,410/- as turnover of the assessee. The Ld. AO estimated the income at 8% of such turnover, which worked out to Rs.5,36,913/-, and added the same to the income of the assessee. Accordingly, the Ld. AO completed the assessment under section 144 of the Act vide order dated 30.11.2019, making addition of Rs.16,79,500/- under section 69A of the Act and estimating business income at Rs.5,36,913/-, thereby assessing total income of the assessee at Rs.22,16,413/-.

4. Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) at para nos. 4.5 and 5 of the order has observed that the assessee had mentioned “Not Applicable” in column No. 9 of Form No. 35 and had neither filed return of income nor paid the amount equal to advance tax payable. The Ld. CIT(A) further observed that the assessee had also not sought exemption from the applicability of section 249(4)(b) of the Act. Accordingly, the Ld. CIT(A) dismissed the appeal of the assessee in limine by invoking the provisions of section 249(4)(b) of the Act.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. In this regard, the Learned Authorized Representative (“Ld. AR”) invited our attention to the provisions of section 249(4)(b) of the Act and submitted that the said provision is applicable only in a case where no return has been filed and the assessee has failed to pay the amount of advance tax payable by him. It was submitted that in the present case, the assessee had not admitted any income before the lower authorities and therefore, there was no liability to pay any advance tax. Accordingly, it was contended that the provisions of section 249(4)(b) of the Act are not attracted in the present case and the Ld. CIT(A) erred in dismissing the appeal on this ground.

6. On merits, the Ld. AR submitted that the assessee is engaged in the business of medical agency and receipt of cash and deposit of cash in bank is a regular feature of such business. Inviting our attention to para no. 2 of the assessment order, it was submitted that the Ld. AO himself has recorded that the assessee had deposited total cash of Rs.69,88,000/-during the year under consideration, which clearly shows that cash deposits were made throughout the year and not only during the demonetization period. It was further submitted that persons engaged in medical business were permitted to receive cash during the demonetization period and therefore, there is no abnormality in the cash deposits made by the assessee during such period. It was contended that the treatment of cash deposit of Rs.16,79,500/- during demonetization period as unexplained income under section 69A of the Act is not justified. The Ld. AR further submitted that due to lack of proper opportunity, the assessee could not explain the cash deposits before the Ld. AO, which resulted in addition under section 69A of the Act. Accordingly, it was prayed that the cash deposits may be treated as part of normal business turnover and income may be estimated in accordance with the provisions of section 44AD of the Act, and separate addition under section 69A of the Act may be deleted.

7. Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the orders of the lower authorities.

8. We have considered the rival submissions and perused the material available on record. We have also gone through the provisions of section 249(4)(b) of the Act, which is to the following effect :

“249. (1) …………

(2) ……………

(3) …..

(4) No appeal under this Chapter shall be admitted unless at the time of filing of the appeal,—

(a) where a return has been filed by the assessee, the assessee has paid the tax due on the income returned by him; or

(b) where no return has been filed by the assessee, the assessee has paid an amount equal to the amount of advance tax which was payable by him:

Provided that, in a case falling under clause (b) and on an application made by the appellant in this behalf, the Commissioner (Appeals) may, for any good and sufficient reason to be recorded in writing, exempt him from the operation of the provisions of that clause.”

9. On perusal of above, it is evident that the said provision is applicable only in a case where no return has been filed and the assessee has failed to pay the amount of advance tax payable by him. We have also gone through para nos. 4.5 and 5 of the order of the Ld. CIT(A), which is to the following effect :

10. On perusal of the above we find that the Ld. CIT(A) dismissed the appeal of the assessee on the ground that the assessee had not filed return of income and had not paid the amount equal to advance tax payable. However, we find merit in the contention of the Ld. AR that the provisions of section 249(4)(b) of the Act are applicable only in cases where the assessee has admitted income and is liable to pay advance tax but has failed to do so. In the present case, the assessee has not admitted any income before the lower authorities. Therefore, there was no liability on the assessee to pay advance tax. Accordingly, the provisions of section 249(4)(b) of the Act are not attracted in the present case. Therefore, the action of the Ld. CIT(A) in dismissing the appeal of the assessee is not justified and the same is set aside.

11. Coming to the merits of the case, we have gone through para no. 2 of the of the assessment order, which is to the following effect:

12. On perusal of the above, we find that the Ld. AO has himself recorded that the assessee had deposited total cash of Rs.69,88,000/- during the year under consideration. Thus, it is evident that the assessee had deposited cash throughout the year and not only during the demonetization period. We further find that the assessee is engaged in the business of medical agency and the persons engaged in medical business were permitted to receive cash during the demonetization period. Hence, the cash deposits made during the demonetization period cannot be viewed in isolation without examining the overall business activities of the assessee. Therefore, considering the totality of facts and circumstances of the case, we deem it appropriate to set aside the issue to the file of the Ld. AO with a direction to examine the monthly cash deposits as well as monthly total credits in the bank account of the assessee during the year under consideration. If after verification, the monthly cash deposits as well as the monthly total credits in the bank account of the assessee during the year under consideration are found to be normal, the Ld. AO shall treat the cash deposit of Rs.16,79,500/- as business turnover and delete the separate addition of Rs.16,79,500/-made under section 69A of the Act. The Ld. AO is also directed to estimate income at the rate on the entire turnover as provided under the provisions of section 44AD of the Act. The assessee is also directed to furnish all relevant details and documentary evidence before the Ld. AO in support of his claim and shall cooperate in the remand proceedings without seeking unnecessary adjournments.

13. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the Open Court on 24th April, 2026.