Analysis of assessment of demonetisation cases
In its ongoing Operation Clean Money drive (OCM), Various cases were selected for scrutiny assessment for AY 2017-18 where large amount of CASH was deposited during demonetisation period i.e. 9th November 2016 to 31st December 2016.
It is observed that while passing order for scrutiny assessment for cash deposited during demonetisation period, Various Assessing officer had made addition under different section.
At a time when large chunk of Assessing officers used section 68 whereas on other side various Assessing officers had used section 69A of the Act. Both the section has been elaborately discussed with reference to maintenance of Books of accounts and prima facie maintainability of addition made under these two sections. Apart from these two sections. Addition made under other scenario is also discussed briefly:
In this regard, Definition of Section 68, Section 69A and Section 2(12A) of I-T. Act is reproduced below:
- 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 assessee of that previous year:”
“Unexplained money, etc.
69A. 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.”
“Books of accounts”
(12A) ‘Books or Books of account’ includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;”
Analysis of language of section 68 and 69A
As per plain reading following condition must be fulfilled for applicability of section 68.
- Any sum found credited in the books of accounts maintained by the assesse.
- Assesse offers no explanation about such credit,
- Explanation of the assesse is not found satisfactory by AO.
As per language of section, Maintenance of books of accounts is MUST for invoking of section 68. There may be situation where the assesse was required to maintain books of accounts as per section 44AA but NO books of accounts was maintained then provision of section 68 can-not be invoked.
Like-wise, As per plain reading following condition must be fulfilled for applicability of section 69A:
- Assesse is found to be owner of any money, Bullion, Jewellery etc.
- Such Money is not recorded in the books of accounts, If any maintained by him for any source of income, AND
- Assesse offers no explanation or explanation is found not satisfactory by AO
As per language of section, Section 69A can be invoked only when the assesse has not recorded such money in the books of accounts and offers no explanation or unsatisfactory explanation. Both the condition given in point no 2 and 3 are cumulative and satisfaction of either of condition does not automatically triggers rigours of section 69A.
In other words, We can say that when the assesse has recorded such money in his books of accounts then no explanation is required to be offered for the purpose of section 69A. Addition u/s 69A can be made only when such money is not recoded in the books of accounts and not offered satisfactory reply.
Provisions regarding maintenance of Book of accounts: Section 44AA of the Income Tax Act cast responsibility on the assesse for maintenance of books of accounts in following situation:
- In case of Specified Profession:- In case of specified profession, Certain books of accounts are required to be maintained as per Rule 6F of the Income Tax Rule.
- In case of business and non-specified Profession:- In following situations every persons shall require to maintained such books of accounts as enable the Assessing officer to compute total income of an assesse:
- If total income exceeds Rs 1,20,000/- or sales, Gross receipts exceeds Rs 10,00,000/- in any One of the THREE Years Immediately preceding financial year. In case of new set up it is likely to exceed such threshold limit.
- Where the assesse claimed lower profit than deemed income u/s 44AE, 44BB and 44BBB.
- Where the provisions of section 44AD(4) applicable and his income exceeds maximum amount which is not chargeable to income tax in any previous year. Looking to the language of clause 3 and cumulative reading of section 44AD (4) and (5), It is applicable only when income of the assesse never exceeds threshold limit hence practically applicable to first time filers only. In my view a first timer businessman shall not require to maintain books of accounts if he declare lower profit than deemed income u/s 44AD and income does not exceeds Rs 2.50 Lacs.
In above situations, Every assesse is required to maintain books of accounts. It is not specifically given in the Act about name of books of accounts but definition is inclusive one and systematic maintenance of any records can be considered as books of accounts.
Now let us take different situation and analyse addition made under different section.
- Book of accounts maintained and addition made u/s 69A for unsatisfactory explanation: In various cases, It is observed that assesse had explained to the AO that amount deposited during demonetisation period is from cash sales, receipts from debtors etc and such transaction is duly recorded in the books of the assesse but AO has not considered explanation of the assesse satisfactory and made addition u/s 69A.
In such a situation addition is not tenable in the eyes of law because assesse had RECORDED such transaction in his books of accounts and once it is recorded then no explanation is required to be made for section 69A. It is fair chances that such addition may be quashed by the courts.
If AO would have made addition u/s 68 then situation would have been different. If addition is made u/s 68 in such a situation then assesse has to prove genuineness and credential of the transaction to the satisfaction of AO and case would be decided by appellate authorities on merits and facts.
- Book of accounts not maintained and addition made u/s 68 for unsatisfactory explanation: In various cases, It is observed that assesse had not maintained any books of accounts but addition is made u/s 68 of the Act.
In such a situation, such type of addition is not tenable in the eyes of Law because provisions of section 68 can be invoked only when the assesse has maintained books of accounts.
In a recent decision in the case of SMT. Teena Bethala v/s ITO (ITA No 1383/Bang/2019) dated 28/08/2019 The Ld. Begalore branch had delivered that : On a reading of section 69A (supra), it is clear that the onus is upon the AO to find the assessee to be the owner of any money, bullion, jewellery or valuable article and such money, bullion, jewellery or valuable article was not recorded in the books of account, if any, maintained by the assessee for any source of income. In these circumstances, the AO can resort to making an addition under section 69A of the Act only in respect of such monies / assets / articles or things which are not recorded in the assessee’s books of account. In the case on hand, the cash deposits are recorded in the books of account and are reportedly made on the receipt from a creditor Further, the PAN and address of the creditor as well as ledger account copies of the creditor in the assessee’s books of account have also been field before the AO. In these circumstances, it is evident that the AO has not made out a case calling for an addition under section 69A of the Act. Probably, an addition under section 68 of the Act could have been considered; but then that is not the case of the AO. The assessee, apart from raising several other grounds, has challenged the legality of the addition being made under section 69A of the Act. In support of the assessee’s contentions, the learned AR placed reliance on the decision of the ITAT – Mumbai Bench in the case of DCIT Vs. Karthik Construction Co. in ITA No.2292/Mum/2016 dated 23.02.2018, wherein the Bench at para 6 thereof has held that addition under section 69A of the Act cannot be made in respect of those assets / monies / entries which are recorded in the assessee’s books of account. In ITA Nos.1383 and 1384/Bang/2019 my considered view, the aforesaid decision of the ITAT – Mumbai Bench (supra) is squarely applicable to the facts of the case on hand, where the entries are recorded in the assessee’s books of account. In this view of the matter, I am of the opinion that the addition of Rs.6,30,000/- made under section 69A of the Act is bad in law in the facts and circumstances of the case on hand and therefore delete the addition of Rs.6,30,000/- made thereunder. The AO is accordingly directed.
- Whether Bank Pass Book is Books of accounts: Some-times it is argued by the department that definition of books of accounts is inclusive hence bank statement can be considered as books of accounts. In such a situation various court has rendered decisions in favour of the assesse that mere bank statement is not books of accounts. Reliance can be placed to CIT v Bhaichand N. Gandhi  141 ITR 67 (Bom.). After this decision number of tribunals had retrieved this stand.
When the assesse is not require to maintain any books of accounts and no such books is maintained then it can be argued that mere pass book or bank statement can-not be construed as book of accounts and addition made u/s 68 is not justified.
Though if the assesse had maintained bank book then situation will be different but in such a situation addition made u/s 69A is technically correct and will be decided by the court of law on the facts and merits of the case.
- Inordinate delay in deposit of cash from withdrawals i.e. 5-6 months from withdrawals from bank: In various cases, It may have been argued by the assesse that cash deposited during demo period sourced from withdrawals from the banks i.e.1-6 months prior to deposit. In most of cases, Department has not considered the said arguments and made addition on the ground that what was the use of money in intervening period and where it was kept etc.
In a recent decision the Ld Delhi Tribunal in the case of Gordhan, Delhi v/s DCIT dated 19/10/2019 held that “ no addition can be made u/s 68 on the sole reason that there is a time gap of 5 months between the date of withdrawals from bank account and redeposit the same in the bank account , Unless the AO demonstrate that the amount in question has been used by the assesse for any other purpose. In my view addition is made on inferences and presumptions which is bad in law.”
Like wise I the case of ACIT vs Baldev Raj Charla 121 TTJ 366 (Delhi) also held that merely because there was a time gap between withdrawal of cash and cash deposits explanation of the assessee could not be rejected and addition on account of cash deposit could not be made particularly when there was no finding recorded by the assessing officer or the Commissioner that apart from depositing this cash into bank as explained by the assessee, there was any other purposes it is used by the assessee of these amounts. In view of above facts, the ground number 1 of the appeal of the assessee is allowed and orders of lower authorities are reversed.
One can also place his reliance on the decision of Ld. Delhi High Court in the case of CIT vs Kulwant rai in 291 ITR 36 wherein the honourable Delhi High Court has held as under:-
“ This cash flow statement furnished by the assessee was rejected by the AO which is on the basis of suspicion that the assessee must have spent the amount for some other purposes. The orders of AO as well as CIT(A) are completely silent as to for what purpose the earlier withdrawals would have been spent. As per the cash book maintained by the assessee, a sum of Rs. 10,000 was being spent for household expenses every month and the assessee has withdrawn from bank a sum of Rs. 2 lacs on 4th Dec., 2000 and there was no material with the Department that this money was not available with the assessee. It has been held by the Tribunal that in the instant case the withdrawals shown by the assessee are far in excess of the cash found during the course of search proceedings. No material has been relied upon by the AO or CIT(A) to support their view that the entire cash withdrawals must have been spent by the assessee and accordingly, the Tribunal rightly held that the assessment of Rs. 2.5 lacs is legally not sustainable under s. 158BC of the Act and the same was rightly ordered to be deleted.”
On the basis of these judgement the Ld Delhi tribunal recently deleted the addition made for inordinate delay in cash deposit in the case of NEETA BREJA v/s ITO (ITA No 524/D/17/25-11-2019)
- Regular Cash sale converted as unexplained cash credit: In various cases, It is observed that regular cash sale just before demonetisation period is also not accepted and addition were made on the basis of deviation in ratio as set out in various SOP issued by CBDT.
The Ld. Delhi Tribunal in the case of AGONS GLOBAL P LTD v/s ACIT (Appeal No 3741 to 3746/Del/2019 has held that mere addition made on this ground that there is deviation in ratio is not proper. When the assesse had regular cash sale and deposit of cash in bank accounts and if nothing incrementing is found contrary then addition u/s 68 of such cash sale would tantamount to double taxation.
The Ld. Indore Bench in the case of DEWAS SOYA LTD, UJJAIN v/s Income Tax (Appeal No 336/Ind/2012 has held that “ The claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit & loss account) and on the other hand amounts received from above parties has also been added u/s. 68 of the Act. This view has been held by the Hon ‘ble Supreme Court in the case of CIT vs Devi Prasad Vishwnath Prasad (1969) 72ITR194 (SC) that “It is for the assessee to prove that even if the cash credit represents income, it is income from a source, which has already been taxed”. The assessee has already offered the sales for taxation hence the onus has been discharged by it and the same income cannot be taxed again.
Reliance can also be placed on the decision of Hon’ble Supreme Court in the case of CIT vs Durga Prasad More (1969) 72ITR807 (SC) in which it was held “If the amount represented the income of the assessee of the previous year, it was liable to be included in the total income and an enquiry whether for the purpose of bringing the amount to tax it was from a business activity or from some other source was not relevant”.
Reliance can be placed on the decision of Hon ‘ble Rajasthan High Court in the case of Smt. Harshila Chordia vs ITO (2008) 298 ITR 349 in which it was held that “Addition u/s 68 could not be made in respect of the amount which was found to be cash receipts from the customers against which delivery of goods was made to them”.
In the decision of Hon’ble ITAT, Nagpur Bench in the case of Mis Heera Steel Limited vs ITO (2005) 4 IT J 437 is also worth to be mentioned here that wherein it was held that “Both the lower authorities failed to appreciate the case of the assessee that these were the trade advances and not cash credits and against such advance, the assessee has supplied the material in due time as per details available on record. In view of the above, there is no justification for the revenue authorities to treat these cash advances as unexplained cash credit u/s 68″.
Reliance can also be placed on the decision of Hon’ble M.P. High Court in the case of Addl. CIT vs. Ghai Lime Stone Co. (1983) 144 ITR 140(MP).It is evident from these judicial rulings that trade advances or cash received against which goods is supplied subsequently is not a cash credit as contemplated by section 68.
Reliance can further be placed on the decision of the ITAT, Mumbai Bench in the case of ITO vs. Surana Traders, (2005)93 TTJ 875: (2005)92 ITD 212, the relevant observation of the Mumbai Bench were as under :_ ” So merely because for the reasons that the purchaser parties were not traceable, the assessee could not be penalized. In the sales documents, the assessee has made available all necessary details, i.e. the total weight sold as well as the rate per kilogram. Undisputedly, the assessee has maintained complete books of accounts along with day to day and kilogram to kilogram stock register. These were produced before the A 0 by the assessee. The assessee also submitted stock tally sheet along with the audited accounts. The audit report of the assessee also bears ample testimony in favour of the assessee. The factum of the assessee having maintained stock register and quantitative details have been mentioned by the A 0 in the assessment order. No mistake were pointed out by the AO in these records maintained by the assessee—-Since the purchases have been held to be genuine, the corresponding sales cannot, by any stretch of imagination be termed as hawala transaction———– It is the burden of the department to prove the correctness of such additions. When, in such like cases, a quantitative tally is furnished, even if purchases are not available no addition is called for.”
- Cash is directly deposited in the bank account of the assese in another city by debtors or cash sale by medical stores, Milk sellers, Petrol Pumps etc on wrong interpretation of notification. : It is also happened in a few cases that cash is directly deposited in the bank accounts of the assesse by purchase parties in SBN but now purchase parties refused to provide confirmation and such deposit is treated as unexplained cash credit.
In various cases, It is also seen that small time medical shop keepers, Milk Sellers, Private Petrol Pumps and grocery stores had accepted cash after demonetisation also in SBN and deposited such SBN in their bank accounts but faced the heat of tax department and addition were made on various grounds out of which main ground is that an assesse cannot deal in non-legal tender.
For this purpose, one may say that demonetisation of high value notes were not first time in India. The government had exercised demonetisation in 1946 and 1978 before 2016 and following arguments can be placed:
- Earlier demonetisations were through ordinances and because of this reason it became a law of land at that point of time. In Ordinance of 1978, It was specifically mentioned in section 4 that any transactions after a specified date in demonetised currency shall be illegal accordingly made punishable under IPC and other applicable Law but this is not the position of current demonetisation. Demonetisation in 2016 was made through notification and certain power vested in section 26 under RBI Act was exercised.
- RBI Act nowhere states that a person cannot deal in illegal tender. Section 26 and 39 of RBI Act is very important for this purpose.
- The government has introduced demonetisation through notification in RBI Act and subsequently various modification were made in the said notification but no such changes were made in Income Tax Act. IN various cases it has been decided that income from illegal activities is also taxable under Income Tax Act as regular Income of the assesse. On the same analogy one can argue that acceptance of illegal tender is prohibited by the RBI but it can not be taxed under section 68 if other parameter and genuineness of the transactions are proved.
- It can also be argued that sale purchases of goods and services are governed by Indian Contract Act and when both the parties are eager to execute those contract and they do not have to go court for execution of contract then consideration paid in illegal tender should not be questionable.
- One may also argue that retrospective changes in section 115BBE through taxation law amendment bill 2016 cannot be made retrospective and high tax rate can be made applicable after the date of taxation law bill promulgated in the gazette of India and cannot be made applicable to the transaction made prior to amendment. It is worth while to mention here that section 115BBE was amended on 15/12/2016 with retrospective effect.
- In all such cases if transactions are genuine and it is firm belief that court will deliver his favour in the assesse and get them relief from rigours of section 115BBE.
Therefore in demonetisation cases though addition is generally made by the Income Tax department but it is very hard for them to stick in appellate proceeding.