ITAT Deletes Addition On Cash Deposits Before Demonetisation

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has directed the Assessing Officer (AO) to delete the addition made on account of cash deposits made before demonetization.

The bench of G. Manjunatha (an accountant member) has observed that as per Section 5 of the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, from December 31, 2016, no person shall, knowingly or voluntarily, hold, transfer, or receive any Specified Bank Notes. There was no prohibition on dealing with specified bank notes prior to December 31, 2016.

The appellant/assessee is an individual who files her return of income for the AY 2017–18, declaring total income and agricultural income. The case has been selected for limited scrutiny to verify cash deposits during the demonetization period. During the course of the assessment proceedings, the AO gathered information regarding cash deposits from Karur Vysya Bank, Kuniamuthur Branch, Coimbatore, and KVB Main Branch, Coimbatore.

As per the information submitted by the bank, the assessee has deposited a sum of Rs. 17,25,500 in specified bank notes of the denominations of Rs. 500 and Rs. 1,000 on various dates.

The AO asked the assessee to explain the source of cash deposits, for which the assessee filed a cash book, and for the balance amount. The assessee explained the source of cash deposits totaling Rs. 13 lakhs made from Vedhavathy's sale proceeds for the sale of the property on November 9, 2016. The AO accepted a source for cash deposits totaling Rs. 9,58,066 from the cash balance as of November 8, 2016. However, for the balance amount of Rs. 7,67,500, the AO rejected the explanation of the assessee regarding the source of cash deposits from November 8, 2016, on the ground that the assessee cannot accept the demonetized currency. The AO opined that the assessee has not proved a source for cash deposits to the tune of Rs. 7,67,500 and has thus made an addition.

The assessee attempted to appeal to the First Appellate Authority but was unsuccessful. The additions made by the AO were confirmed by the CIT(A) and NFAC.

The assessee claimed that CIT(A) and NFAC made an error in confirming additions to cash deposits by classifying them as unexplained money. The assessee can transact in specified bank notes up to the appointed date as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, and as per the Act, the appointed date was December 31, 2016.

The department contended that as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, which came into effect on December 31, 2016, the assessee is prohibited from dealing with Specified Bank Notes w.e.f. November 9, 2016, for all purposes except for the purpose of exchanging Specified Bank Notes, held on or before November 8, 2016. Further, assuming for a moment that the assessee can transact in specified bank notes up to December 31, 2016, the assessee could not prove the receipt of sale consideration of Rs. 13 lakhs in specified bank notes. Thus, the benefit of the source cannot be given to the assessee.

The ITAT reversed the CIT(A)'s order and directed the AO to remove the Rs. 7,67,500 addition made under Section 69A of the Income Tax Act.

Case Title: Mrs. Umamaheswari Versus The Income Tax Officer

Citation: ITA No.527/Chny/2022

Date: 14.10.2022

Counsel For Appellant: Advocate S.Sridhar

Counsel For Respondent: JCIT P.Sajit Kumar

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