Shernickraj Vs ITO (ITAT Chennai)
ITAT Chennai: Only Real Unexplained Portion of Cash Deposits Taxable; Section 115BBE @ 60% Not Applicable to Pre-1.4.2017 Transactions
The Chennai Bench of the ITAT, in Shri Shernickraj v. ITO (AY 2017-18), dealt with addition on account of cash deposits during the demonetisation period and the applicable tax rate under section 115BBE. The assessee, engaged in a small facilitation business of collecting cash from the public and making online payments on their behalf (electricity bills, ticket bookings, transfers, etc.), had deposited ₹8.50 lakh in cash. The AO treated the entire amount as unexplained u/s 69 and taxed it at the higher rate under section 115BBE.
The CIT(A) accepted the nature of business but sustained 50% of the addition. On further appeal, the Tribunal granted additional relief, holding that only ₹2,12,500 represented unexplained income, deleting another 50% of the sustained addition after considering the business realities and cash flow nature
On the crucial issue of tax rate, the Tribunal followed the Madras High Court ruling in S.M.I.L.E. Microfinance Ltd., holding that the enhanced 60% rate under section 115BBE applies only to transactions on or after 01.04.2017. Since the deposits related to the demonetisation period prior to that date, tax was directed to be computed at 30% on the sustained addition, relying also on the Supreme Court principle that the law as on 1st April of the assessment year applies.
The appeal was thus partly allowed, with substantial relief both on quantum and rate of tax.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals), Addl/JCIT(A)-3, Delhi dated 21.08.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.
2. Brief facts of the case are as follows: The assessee, an individual had filed his return of income for the assessment year 2017-18 on 31.03.2018 admitting total income of Rs.3,14,610/-. The case was selected for scrutiny and notice u/s.143(2) of the Act was issued on 09.08.2018. During the course of assessment proceedings, it was noticed that assessee has made cash deposits of Rs.8,50,000/-. The assessee was directed to explain the source of cash deposit of Rs.8,50,000/-. It was submitted that assessee receives money from general public and transfers money to their account, transacted on behalf of them like paying EB bills, booking trains and bus tickets etc. Accordingly, it was submitted that cash deposited were the amounts collected from the above small time business of the assessee. However, the submissions made by the assessee was rejected by the AO and assessment was completed u/s.143(3) of the Act vide order dated 09.12.2019, wherein the entire sum of Rs.8,50,000/- was brought to tax u/s.69 of the Act. The AO also applied special rate of taxation u/s.115BBE of the Act for computing the tax liability.
3. Aggrieved by the assessment completed, assessee filed appeal before the First Appellate Authority (FAA). The FAA partly-allowed the appeal of the assessee. The FAA took note of the assessee’s business of accepting money from persons and making payments on behalf of them for electricity bills, booking train & bus tickets, etc. The FAA held that only 50% of Rs.8,50,000/-need to be added as unexplained income. The relevant finding of the FAA for granting relief of 50% of the total addition made by the AO reads as follows:-
“Further, since the nature of business of the appellant is like that it has received cash on regular basis, it can’t be denied that out of cash deposited during demontization period i.e.8,50,000/- there isno cash balance in the hands of assessee days before 09-11-2016 (i.e. date of start of demonetization period).
Hence, taking a lenient view considering the nature of business and commission earned by the appellant during the year 50% of the cash deposited during demonetization period is considered out of cash balance available before the demonetization period and balance 50% of Rs.4,25,000/- is considered as out of unexplained sources. Hence, addition in the case of appellant is reduced to Rs.4,25,000/-, resultant appeal of the assessee is partly allowed.”
4. Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal. The assessee has raised nine grounds. The Ld.AR for the assessee has submitted that the FAA has erred in sustaining the addition of Rs.4,25,000/- as unexplained u/s.69 of the Act. The Ld.AR further submitted that for the relevant assessment year namely 2017-18, tax ought to be calculated at the rate of 30% instead of 60% u/s.115BBE of the Act. In support of his contention that tax ought to be calculated at the rate of 30% instead of 60%, the Ld.AR relied on the judgment of the Hon’ble Madras High Court in the case of S.M.I.L.E Microfinance Limited vs. ACIT in W.P(MD) No.2078 of 2020 and W.M.P.(MD) No.1742 of 2020 (judgment dated 19.11.2024).
5. The Ld.DR supported the orders of the AO and the FAA.
6. We have heard rival submissions and perused the material on record. It is an admitted fact that assessee is running a small business whereby, he was doing support services by collecting cash from public and doing online transactions on their behalf such as payment of electricity bills, making transfer to other accounts, booking online tickets and so on. This fact has also been accepted by the FAA. Taking into account the totality of facts, we are of the view that further reduction of 50% should be granted as regards the explanation of source of cash deposit. Accordingly, a sum of Rs.2,12,500/- is deleted and balance sum is sustained u/s.69 of the Act.
7. As regards the Ld.AR’s contention that tax ought to be calculated at the rate of 30% instead of 60% u/s.115BBE of the Act, we are of the view that it is well settled that Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment for that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force. In this context, we rely on the judgment of the Hon’ble Apex Court in the case of Karimtharuvi Tea Estate Ltd., vs. State of Kerala reported in 60 ITR 262 (SC).
8. The Hon’ble Madras High Court in the case of S.M.I.L.E Microfinance Ltd., supra had categorically held that higher rate of tax at 60% u/s.115BBE of the Act will apply only to transactions from 01.04.2017 onwards and not prior to the said cutoff date. It was further held by the Hon’ble Jurisdictional High Court that for the prior transaction the Revenue is empowered to impose tax only 30% rate of tax. The relevant finding of the Hon’ble Madras High Court in the case of S.M.I.L.E Microfinance Ltd., supra reads as follows:-
17. In the aforesaid objects and reasons nowhere it is stated that due to “demonetization” the unaccounted money ought to be charged 60% rate of tax. It only states that step had been taken to curb black money by withdrawing Specified Bank Notes of denomination of Rs.500 and Rs.1000. And also states the people may find illegal ways of converting their black money into black again, hence as per experts advice heavy penalty ought to be levied. From the language of the object “that instead of allowing people to find illegal ways of converting their black money into black again”, it is evident that the government is intended to impose the same for future transactions. Especially the use of word “again” in the object would clearly indicate it is for future transactions i.e. from 01.04.2017. Therefore this Court is of the considered opinion that the revenue is empowered to impose 60% rate of tax for the transactions from 01.04.2017 onwards and not prior to the said cut-off date. And for prior transaction the revenue is empowered to impose only 30% rate of tax.
9. In light of the aforesaid judgment of the Hon’ble High Court, we direct the AO to calculate tax at the rate of 30% on the amount sustained by us i.e., Rs.2,12,500/-. It is ordered accordingly.
10. In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 7th January, 2026 at Chennai.
