SCRUTINIZING CASH DEPOSITS DURING DEMONETIZATION PERIOD – ITAT CHENNAI

In a recent case of ITAT Chennai, M/S. Eagle Fleet Services versus The Asst. Commissioner of Income Tax, Non-Corporate Circle -2, Coimbatore, the addition under Section 69A of Income Tax Act, 1961 becomes a contention which resolves by legal jurisdiction. The dispute revolves around the cash deposits made during demonetization period, and, the Tribunal held partly in the favour of assessee. This article will delve into the aspects, intricacies and will exhibit the arguments presented during the contention.

Let’s revisit demonetization period. On 8th November 2016, the government of India took a landmark decision in history by demonetizing specified banknotes (SBNs) of Rs.500 and Rs.1000. The motive of demonetization was to curb black money, counterfeit currency and promote digital economy. During this period, individuals and business have to deposit old notes in their bank account.

In the case of M/S Eagle Fleet Services, the assessee is partnership firm engaged in business of car hiring. The primary source of income in transport business is cash which is quite common. The firm received income from customers in the form of cash and a significant portion of receipt is in cash. During the demonetization period, the firm claimed that the cash deposits made were out of business receipts, i.e., collected from customers.

However, the Assessing Officer did not find assessee’s explanation bona fide, particularly concerning the acceptance of SBNs a legal tender during the demonetization window. Consequently, the Assessing Officer made an addition of Rs. 72, 92,000 under Section 69A of Income Tax Act, 1961, towards the cash deposit made during demonetization period.

The taxpayer appealed the Assessing Officer’s decision to the Commissioner of Income Tax (Appeal). The CIT (A) rejected his appeal, thus, he approached to ITAT Chennai to solve the dispute.

The appellant argued that during the demonetization period, there was no specific prohibition on accepting or transacting SBNs until December 31, 2016. The firm further contended that it received SBNs from its customers in good faith, believing them to be legal tender until the specific date.

Moreover, the taxpayer referred to the Standard Operating Procedure (SOP) issued by Central Board of Direct Taxes (CBDT)  for Assessing Officer to verify cash deposits during demonetization period. According to appellant, the SOP does not find any discrepancies or deviations in firm’s cash deposit comparing to previous periods. The firm also claimed that cash deposits were properly accounted for in the audited financial statements submitted during the assessment proceedings, clinchingly establish the source of cash deposits from business receipts.

On the other hand, the Revenue asserted that the legal tender of SBNs of Rs. 500 and Rs. 1,000 was withdrawn by the Reserve Bank of India (RBI) from November 9, 2016. The Revenue argued that the taxpayer was not exempted under any specific clauses to deal with SBNs up to December 31, 2016.

Therefore, the Assessing Officer had rightfully made the addition towards the cash deposits during the demonetization period, as the taxpayer's explanation for the source of money was not satisfactory. According to the Revenue, the taxpayer's claim that the cash deposits were out of business receipts did not absolve them from the obligations under section 69A of the Income Tax Act.

Meticulously examining the factual matrix of the case and analyzing the arguments presented by appellant and revenue, the Tribunal held that accepting receipts in the form of cash from customers in transport industry is common. It acknowledges that the nature of taxpayer’s business involved a substantial amount of cash receipts. However, after 08/11/2016, Rs.500 and Rs.1000 was nor in circulation neither acceptable.

Furthermore, the Tribunal observed that the taxpayer failed to provide necessary analysis or receipts from business, including cash receipts and bank receipts, during the demonetization period and corresponding previous periods. In absence of such documentation and evidence of cash receipts, the ITAT could not fully accept the claim of taxpayer’s that the cash deposits were entirely out of business receipts.

However, the ITAT has also found that the AO has failed to find any deviation and discrepancies in cash deposits during demonetization period comparing to previous periods. Taking into this account, the ITAT decided to estimate 50% of the cash deposits during the demonetization period as business receipts of the taxpayer. The remaining 50% of the cash deposits were considered unexplained.

The ITAT rendered partial relief to the taxpayer by directing the Assessing Officer to treat 50% of the cash deposits during the demonetization period as business receipts, resulting in the confirmation of the balance 50% as unexplained.

This case highlights the significance of documentation and evidence to substantiate claims, especially business involved in cash. Taxpayers should be cautious and meticulous in maintaining financial records and transactions to save themselves from trouble. Providing clear legal documentation during assessment is essential for avoiding chaos and maintenance of sanctity of assessment.