Articles explains Whether accepting Specified Bank Notes (SBNs) post Demonetisation is illegal or not from Legal and Income Tax Perspective.
The Government of India issued a historic notification in The Gazette of India vide Notification No. 2652 dated 8th November 2016 stating – “the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November 2016”.
The Preamble of the said Notification states three reasons for such declaration:
1. Fake Currency have been hugely in circulation alongwith genuine currency;
2. SBNs being used for storage of unaccounted wealth;
3. Fake Currency being used for terrorism and other subversive activities threatening security of the country.
The huge volume of transactions in currency (cash transactions) was not the reason for the said exercise which is clear from the Preamble of the said Notification. The stand taken by the Income Tax Department in its action of OCM (Operation Clean Money) stating that the exercise was done with a view to discourage / stop cash transactions is contrary to the Preamble of the said Notification.
The Government had given various options to persons holding such SBNs to exchange / deposit and obtain new currency:
1. Exchange upto Rs. 4000 over the Bank Counter;
2. Deposit into Bank Account (KYC complaint) without any limit;
3. Allowed usage at exempted institutions, ex. Petrol Pumps, Hospitals, Govt. Departments with certain restrictions.
However, did the Government intend to disallow the use of such SBNs for regular transactions upto 31st December 2016? For understanding the same, it is pertinent to understand the meaning of ‘legal tender’ and also understand the provisions of law introduced pursuant to Demonetisation.
1. Dictionaries define legal tender as ‘coins or banknotes that must be accepted if offered in payment of a debt’.
The word ‘Legal tender’ has not been defined in any of the Banking / RBI Acts and Rules. Generally speaking, ‘Legal Tender’ is understood to mean anything that has the ability to discharge debt, or is a valid medium of payment recognized or backed by law. A legal tender can also be used interchangeably with bank note or currency note.
The main concept revolving around ‘legal tender’ is not on the person tendering it but the person accepting, that is to say, every person / institution has to accept payment in legal tender and it simply cannot refuse to accept legal tender. The antonym of legal tender cannot be ‘illegal tender’, but simply, ‘barter’.
The common law requires that a person shall always make a tender in the current coin or currency i.e. the currency recognized in law as a medium of exchange. However, there is nothing stopping parties to a contract from digressing from the requirement of common law. Therefore, while in absence of any specific terms governing the payment mechanism in a contract, one is bound to offer legal tender there is nothing in law stopping the party from accepting payment in the form of non-legal tender. As the Delhi High Court quotes Scheldon’s Practice and Law of Banking 10th Ed., “unless accepted unconditionally, any payment except in legal tender, is a conditional payment”.
In other words, a person can enforce payment made in legal tender but cannot enforce payment in non-legal tender. Payment made in modes other than legal tender is solely upon the discretion of the person accepting such payment.
For eg.: In exchange of payment of Rs. 40,000, a person may accept gold offered by customer in exchange of cash, solely at its own discretion. Here, ‘gold’ is not a legal tender, but at the same time it is not illegal tender. The said transaction is valid and can be valued and brought into the Books of Accounts.
Hence simply understood, pursuant to 8th November 2016, a person could not enforce payment to other person in SBNs but only in the new legal tender. However, if offered, the other person is at liberty and discretion to accept such payment in SBNs.
2. The above view regarding acceptability of SBNs for the purpose of transactions can also be derived from the Notifications enacted pursuant to Demonetisation:
a. Point No. 2 of the Notification No. 2652 states that the specified bank notes held by a person other than a banking company referred to in sub-paragraph (1) of paragraph 1 or Government Treasury may be exchanged at any Issue Office of the Reserve Bank or any branch of public sector banks, private sector banks, foreign banks, Regional Rural Banks, Urban Cooperative Banks and State Cooperative Banks for a period up to and including the 31st December, 2016.
b. The words used are ‘may be’ and not ‘shall be’. Thus, the person is allowed to use SBNs other than exchanging at the modes specified.
c. Further the Notification does not explicitly prohibit holding, transferring or receiving any specified bank note upto 31st December, 2016.
3. The above view attains finality from plain reading of the Specified Bank Notes (Cessation of Liabilities) Act, 2017, implemented pursuant to the Demonetisation exercise:
a. Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 states that “On and from the appointed day, no person shall, knowingly or voluntarily, hold, transfer or receive any specified bank note.”
b. Section 2(1)(a) in Specified Bank Notes (Cessation of Liabilities) Act, 2017 states that “appointed day” means the 31st day of December, 2016.
c. Further Section 3 of Specified Bank Notes (Cessation of Liabilities) Act, 2017 states that “On and from the appointed day, notwithstanding anything contained in the Reserve Bank of India Act, 1934 or any other law for the time being in force, the specified bank notes which have ceased to be legal tender, in view of the notification of the Government of India in the Ministry of Finance, number S.O. 3407(E), dated the 8th November, 2016, issued under sub-section (2) of section 26 of the Reserve Bank of India Act, 1934, shall cease to be liabilities of the Reserve Bank under section 34 and shall cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act.”
From the above, it is clear that use of Specified Bank Notes (SBN) pursuant to 8th November, 2016 upto 31st December, 2016 was always allowed. It was never the intention of the Law to prohibit its use for transaction upto 31st December, 2016.
Income Tax Perspective
In many cases, the Assessing Officers have made huge demands in the OCM cases for use of SBN post 8th November, 2016. The reasons given generally by the Officers are as under:
1. Specified bank notes cannot be used for transacting business and/or store of value for future usage. Thus, it is very clear that once it was declared in Gazette by the RBI that Specified Bank Notes ceased to be legal tender, no person is allowed to use such SBN notes for transacting normal business activities or allowed to store for future usage.
2. Question arises as to whether any person who received such SBN notes after 9th November 2016, can bring it into his books of accounts. Here, the basic principles of accountancy have to be relied upon. The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, i.e., the local currency monetary unit of measure. Since the SBNs were just a piece of papers and they bear no value on 9th Nov. or after, as Central Government, the guarantor, had withdrawn its guarantee. Therefore, it cannot be measured in money terms and hence, it can’t be journalized in books of account. Therefore, the transactions made in SBN on or after 9th November 2016 cannot be entered into cash books.
3. It is to be examined whether any provisions of Income Tax Act, 1961 is to be applied in circumstances, where the assessee has received SBN notes after 09.11.2016 for any monetary transactions and brings the same into his books of accounts. It is to be noted that from 09.11.2016, only legal tender currencies like Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500 and Rs. 2000 only can be accepted by the assessee for any transactions. Therefore, if the assessee has received any SBN notes after 09.11.2016 on account of any monetary transactions and utilizes the same for making cash deposits into the bank account, then the credit of the same into the books of accounts is not valid. Therefore, the same has to be treated as unexplained money u/s 69A and brought to tax.
The above contentions of the Income Tax Department are entirely contrary to the abovementioned provisions of law, for the reasons mentioned below:
1. 3 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 clearly states that the specified bank notes shall cease to be liabilities of the Reserve Bank under section 34 and shall cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act from the appointed date, i.e. 31st December, 2016.
2. Therefore, the contention that SBNs were just pieces of papers and they bear no value on or after 9th November is incorrect in law.
3. The expression ‘money’ has different shades of meaning. In the context of income-tax provisions, it can only be a currency token, bank notes or other circulating medium in general use, which has representative value. Therefore, the currency notes on the day when they were found to be in possession of the assessee should have had the representative value, namely, it could be tendered as money, which has intrinsic value. The RBI is bound to exchange the SBNs when they were tendered for exchange until 31st December 2016. Hence these notes cannot be termed as pieces of papers that bear no value.
4. The SBNs of 500 and 1000 rupee denominations can be measured in monetary terms since the guarantee of Central Government and liability of Reserve Bank of India does not cease to exist until 31st December 2016 in lieu of the 500 and 1000 rupee SBNs. Since the RBI is obligated to exchange the SBNs of 500 and 1000 and the liability can be measured with certainty amounting to the values imprinted on these bank notes, these bank notes do possess value and be recorded in the books of accounts. Hence the contention that it cannot be journalized in the books of accounts based on the SBNs having no monetary value is not valid. Therefore the same cannot be treated as unexplained money u/s 69A and brought to tax.
About the Article and Author:
The conclusions reached and views expressed in this article are matters of opinion. My views/comments are based on my understanding of the law and regulations prevailing as of the date of this article. However, there can be no assurance that the Revenue Authorities may not take a position contrary to my views. The Author, CA Rohan Navin Dedhia, is a practicing member of the ICAI and can be reached on firstname.lastname@example.org.