The Income Tax Returns for the Assessment Year 2017-18 were selected for scrutiny via e-proceedings for those Assessees, who have deposited more than Rs. 2 Lakhs in cash in Banks after 8th November 2016, being the date on which Demonetization was announced by our honourable Prime Minister of India.
Cash Books, Sales Invoices, Copies of Ledger Accounts of creditors from whom cash was received, Receipt Books were uploaded on the directions of the Assessing Officers. For ascertaining the level of cash transactions during the period, cash accruals throughout the year, cash accruals during the period of demonetization and cash transactions of the same period for the immediately preceding year etc., were called for by the Assessing Officers and Assessment Orders were passed which resulted in huge demands.
The deposits in SBNs (old Rs. 500 & Rs. 1,000 currency) in excess of the closing cash balance as on 08.11.2016 were added with the returned income either under section 68 of the Income Tax Act 1961, which reads as “Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the previous year” or under section 69A of the Income Tax Act 1961 which reads as “Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of the 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” even though such credits were genuine supported by cash memos/invoices, the parties from whom such cash was collected were identifiable etc., and the Assessing Officer has found nothing new other than the receipts found in Books of Account and subsequent deposits made in Banks.
The error or the blunder that has been committed by the Assessees is acceptance of SBNs, while such notes are not legal tender or in other words they are banned, since because they were allowed to be deposited in Banks on the genuine belief (in good faith) that as long as such cash is accounted in the books of account in the normal course of business there won’t be any problem in explaining source to the Assessing Officers at the time of assessment proceedings.
Since there is no provision in the Income Tax Act to tax the SBNs deposited in excess of the closing balance as on 08.01.2016, the officers have resorted to tax them @ 60% under section 115BBE and issued penalty notice under section 271AAC wherein the penalty can be levied @ 10% of the tax payable in spite of the fact that proviso to that section says that no penalty can be levied if the income is included in the Return of Income filed under section 139.
In certain cases due to interest under Section 234 the total demand exceeds the income added. The orders thus passed will not be upheld in appeals since assessing the deposits either section 68 or section 69A is basically wrong since the source of such credits were explained with supporting documents to the Assessing Officers and there is no provision in Income Tax Act to tax the deposits made in Banks in SBNs. It is suspected that such high pitched demands are made in order to give a picture to the public that the demonetization has resulted in huge collection of taxes, which will spoil the morale of the honest tax payer.