Cash deposited in the bank out of the sale Proceeds and its Taxation u/s 68

There are a lot of cases wherein the cash is deposited in the bank out of the sale proceeds. However, the AO has done the addition of the same u/s 68 treating as unexplained cash credit.

Here is one such issue decided by the ITAT Bangalore which may be relevant for lot of the taxpayers.

The citation of the case is as under:

ITAT BANGALORE

ANANTPUR KALPANA

VERSUS

ITO,

WARD – 1,

KOPPAL.-

ITA No.541/Bang/2021

Dated.- December 13, 2021

Short Overview of the case:

– The case was with regard to the addition towards unexplained cash deposits in two bank accounts

– AO culled out that the deposits that was made of bank notes that were declared as not legal tender owing to demonetization of currency .

 

ITAT Bangalore observed as under:

1. Both AO and CIT(A) accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee.

2. Addition has been made only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender.

3. Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation.

4. Assessee was having only one source of income from trading in beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources.

5. As in the case of CIT Vs. Associated Transport Pvt. Ltd. [1994- CALCUTTA HIGH COURT] on identical facts took the view that when cash sales are admitted and income from sales are declared as income, wherein the Hon’ble Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources.

6. When cash receipts represent the sales which the assessee has offered for taxation and when trading account shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assessee already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE –

7. The court also relied on M/S HIRAPANNA JEWELLERS AND (VICE-VERSA) [2021 – ITAT VISAKHAPATNAM]  wherein it has been held that the addition made is not sustainable and the same is directed to be deleted. Appeal of the assessee is allowed.

The copy of the order is as under:

IN THE INCOME TAX APPELLATE TRIBUNAL  

“SMC-B” BENCH : BANGALORE  

BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT 

ITA No.541/Bang/2021

Assessment Year : 2017-18

Anantpur Kalpana,   1/1/1, Mahalaxmi Enterprises,   Hosakeri, Building Bamboo Bazar,   Gangavathi – 583 227, Karnataka.   PAN : CLEPK 8005 L

Vs.

ITO,   Ward – 1,   Koppal.

Assessee by		: Shri. Raghavendra Chakravarthy, CA
Revenue by		: Shri. Ganesh R. Ghale, Standing Counsel for the Department

Date of hearing		: 09.12.2021
Date of Pronouncement :		13.12.2021

O R D E R  

er N. V. Vasudevan, Vice President  

This is an appeal filed by the assessee against order dated 16.08.2021 of  CIT(A) National Faceless Appeal Centre (NFAC), Delhi, relating to  Assessment Year 2017-18.  

2. The assessee is an individual. She is proprietrix of a business in the  name and style of Mahalaxmi Enterprises. The business consists of dealing in  beedi, tea powder and pan masala. For Assessment Year 2017-18, the  assessee filed return of income declaring total income of Rs.4,49,520/-. In the  course of assessment proceedings, the AO noticed that there were several cash  deposits in the two bank accounts of the assessee. Out of the aforesaid cash  deposits, the AO culled out, the deposits that was made of bank notes that  were declared as not legal tender owing to demonetization of currency.  The details of the total cash deposits made by the Assessee in her bank  account and the cash deposits of cash/currency notes that were declared as not  legal tender that were deposited by the Assessee in his two bank account are  as follows:

Total deposits of cash in bank account by the Assessee:  

Sl. No.	Name of the Bank / Acct  No	Total Cash deposited  (Amount in Rs)
1	CBS Bank, Gangavathi /  000886	41,80,000/-
2	Axis Bank, Gangavathi /  79196	3,00,000/-

Deposit of cash in the form of notes that were declared as not legal tender  owing to demonetization of currency:  

CBS Bank, Gangavathi:  

Date	Total amount   deposited	Total   amount of  SBNs	Total amount of  other   denominations
10/11/2016	75,000/-	73,000/-	2,000/-
12/11/2016	2,00,000/-	1,98,500/-	1,5001-
13/11/2016	2,25,000/-	2,25,000/-	0
14/11/2016	3,25,000/-	3,25,000/-	0
16/11/2016	2,00,000/-	1,13,000/-	87,000/-
19/11/2016	1,25,000/-	1,000/-	1,24,000/-
Total	11,50,000/-	9,35,500/-	2,14,500/-

Axis bank, Gangavathi: 

Date	Total amount   deposited	Total   amount of  SBNs	Total amount of  Other   denominations
18/11/2016	2,25,000/-

06-12-2016	50,000/-
19-12-2016	25,000/-	2,500/-	2,97,500/-
Total	3,00,000/-	2,500/-	2,97,500/-

 

3. The AO found that as on 08.11.2016, the closing balance in the cash book  was Rs.4,90,673/-. The total of cash deposit of Specified Bank Notes (SBN) by the  Assessee was Rs.9,40,500. After reducing the closing cash balance of Rs.4,90,673  from the total cash deposited in the Bank accounts of Rs.14,50,000/-, the AO made  an addition of Rs.4,49,500/- to the total income of the assessee with the following  observations:  

“As per the cash book the closing balance as on 08/11/2016 was Rs  4,90,673/-. After reducing Rs 4,90,673/- from total deposit of Rs  14,50,000/-, the balance is Rs 9,59,327/-. Out of Rs 9,59,327/, the old  SBNs are totaling to Rs 4,50 ,500/- which stands unexplained. Hence, the  same is treated as unexplained cash credits u/s 68 of the Act in the books  of account of the assessee and the same is required to be brought to tax.  The assessee has accepted for the addition of the same to the return  income. Accordingly, a sum of Rs.4,49,500/- is brought to tax u/s 68 of  the Act and to tax as u/s 115BBE of the Act.”  

4. Aggrieved by the aforesaid addition, assessee preferred appeal  before the CIT(A) and submitted that the cash deposits of Rs. 4,50,500/- in  question was the cash collection from the small and medium class traders  collected on various dates out of the business of the Assessee which were  deposited in the bank account of the Assessee between 10/11/2016 and  19/12/2016 in CBS Bank and Axis Bank. Since the deposit of Rs.  4,50,500/- in her bank account are from the sale proceeds from  distribution of FMCG goods relating to her business concern ‘M/s.  Mahalakshmi Enterprise’ from small and medium class traders collected  on various dates in discharge of their liability in 1000 rupee and 500 rupee  notes. It was submitted that old demonetized notes could be accepted till  30-12-2016 and a payee can continue to accept old demonetized notes of  Rs 500 or Rs 1000 since those notes can be accepted as valid tender and  there is no prohibition or lawful direction not to pay or accept old notes.  The old notes still continue to be convertible into money since any person  who is validly in possession of the old notes can get them converted into  egal tender from banks or can tender it for payment to specified  transactions. There are no rules forbidding the payments in old notes.  Therefore it is not correct to say that the old notes do not carry any value.  It was submitted that the Assessee’s nature of business involves dealing  with small and medium class traders and is predominantly cash oriented.  The Assessee is maintaining regular books of accounts and the said books  are subject to compulsory audit under the provisions of section 44AB of  the Act. The Assessee is also filing its VAT Returns in connection to the  purchases and sales made by it to the concerned authority. It was  submitted that the impugned addition made is nothing but the sales made  by the Assessee. The Assessee relied on decision of ITAT Indore Bench  in the case of DEWAS SOYA LTD, UJJAIN v/s Income Tax (Appeal No  336/Ind/2012 wherein on identical facts of the case it was held that the  claim of the assessee that such addition resulted into double taxation of  the same income in the same year 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.

5. The CIT(A) however did not accept the contention of the assessee.  He held that once the Rs.500 and Rs.1000 notes are declared as not valid  legal tender on 09.11.2016, the assessee cannot accept cash payments after  09.11.2016 that are demonetized and doing so was patently illegal. The  CIT(A) therefore held that the plea of the asessee cannot be accepted and  accordingly dismissed the appeal of the assessee. Aggrieved by the order  of the CIT(A), the assessee is in appeal before the Tribunal.

6. I have heard the rival submissions. Learned Counsel for the assessee  submitted that both the AO and CIT(A) accepted the fact that the cash  receipts are nothing but sale proceeds in the business of the assessee. The  addition has been made only on the basis that after demonetization, the  demonetized notes could not have been accepted as valid tender. He  submitted that the sale proceeds for which cash was received from the  customers was already admitted as income and if the cash deposits are  added under section 68 of the Act that will amount to double taxation once  as sales and again as unexplained cash credit which is against the principles  of taxation. It was also submitted that the assessee was having only one  source of income from beedi, tea power and pan masala and therefore  provisions of section 115BBE of the Act will have no application so as to  treat the income of the assessee as income from other sources. It was also  submitted that the government permitted all to deposit old demonetized  notes upto 31.12.2016. Since the amounts deposited were sale proceeds of  business and the income from the business have already been taxed, the  impugned addition should be deleted. Our attention was also drawn to  section 26(2) of the RBI Act, 1934 which provides that government can  specify certain notes as not legal tender. It was argued that if there is any  violation of the statutory provisions, the consequences will be only under  the relevant provisions of RBI Act, 1934 and those violations cannot lead to  any addition under section 68 of the Act. The learned Counsel also placed  reliance on the following judicial pronouncements rendered on identical  facts of the case as that of the assessee. Hon’ble Kolkata Tribunal in the case  of CIT Vs. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 wherein  the Hon’ble Tribunal found that the assessee had sufficient cash in hand in the  books of account of the assessee, therefore, held that there was no reason to  treat this amount as income from undisclosed sources and it was not a fit case  for treating the said amount as concealed income of the assessee. The revenue  moved to Hon’ble Calcutta High Court against the order of the Hon’ble  Tribunal and the Hon’ble High Court has confirmed the order of the Tribunal  while deleting the penalty; the Hon’ble High Court of Calcutta held as under:

“8. The Tribunal was of the view that the assessee had  sufficient cash in hand. In the books of account of the  assessee, cash balance was usually more than Rs.81,000/-.  There is no reason to treat this amount as income from  undisclosed sources. It is not a fit case for treating the  amount of Rs.81,000/- as concealed income of the assessee  and consequently imposition of penalty was also not  justified in this case.”  

7. Further reliance is placed on the decision of the Hon’ble Vishakapatnam  Tribunal in the case of ACIT Vs. Hirapanna Jewelers in ITA No.  253/Viz/2020 wherein, the Hon’ble Tribunal while considering the issue of  implication of Sec. 68 of the Act during demonetization held as under:  

9. In view of the foregoing discussion and taking into  consideration of all the facts and the circumstances of the  case, we have no hesitation to hold that the cash receipts  represent the sales which the assessee has rightly offered for  taxation. We have gone through the trading account and find  that there was sufficient stock to effect the sales and we do  not find any defect in the stock as well as the sales. Since,  the assessee has already admitted the sales as revenue  receipt, there is no case for making the addition u/s 68 or tax  the same u/s 115BBE again. This view is also supported by  the decision of Hon’ble Delhi High Court in the case of  Kailash Jewellery House (Supra) and the Hon’ble Gujarat  High Court in the case of Vishal Exports Overseas Ltd.  (supra),Hence, we do not see any reason to interfere with  the order of the Ld.CIT(A) and the same is upheld. 

10. The assessee filed cross objections supporting the  order of the Id. CIT(A). Since, the appeal of the revenue is  dismissed, the cross objection filed by the assessee becomes  infructuous, hence, dismissed.

11. In the result, appeal of the revenue as well as the  cross objection of the assessee are dismissed.”  

8. Learned DR reiterated the stand of the Revenue as reflected in the  order of the CIT(A).  

9. I have carefully considered the rival submissions. Both the AO and  CIT(A) accepted the fact that the cash receipts are nothing but sale  proceeds in the business of the assessee. The addition has been made only  on the basis that after demonetization, the demonetized notes could not  have been accepted as valid tender. Since the sale proceeds for which cash  was received from the customers was already admitted as income and if the  cash deposits are added under section 68 of the Act that will amount to  double taxation once as sales and again as unexplained cash credit which is  against the principles of taxation. It is also on record that the assessee was  having only one source of income from trading in beedi, tea power and pan  masala and therefore provisions of section 115BBE of the Act will have no  application so as to treat the income of the assessee as income from other  sources. Hon’ble Kolkata Tribunal in the case of CIT Vs. Associated  Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the view  that when cash sales are admitted and income from sales are declared as  income, wherein the Hon’ble Tribunal found that the assessee had sufficient  cash in hand in the books of account of the assessee, that there was no reason  to treat the cash deposits as income from undisclosed sources. The Hon’ble  Vishakapatnam Tribunal in the case of ACIT Vs. Hirapanna Jewelers in ITA  No. 253/Viz/2020 on identical facts held that when cash receipts represent  the sales which the assessee has offered for taxation and when trading  account shows sufficient stock to effect the sales and when no defects  are pointed out in the books of account, it was held that when Assessee  already admitted the sales as revenue receipt, there is no case for  making the addition u/s 68 or tax the same u/s 115BBE again. I am of  the view that in the light of the facts and circumstances of the present  case, the addition made is not sustainable and the same is directed to be  deleted.

10. In the result, appeal of the assessee is allowed.  

Pronounced in the open court on the date mentioned on the caption  page. 

Sd/-  

(N. V. VASUDEVAN) 

Vice President 

Bangalore.  

Dated: 13.12.2021.  

/NS/ 

Copy to:  

1. Appellants 2. Respondent 

2. CIT 4. CIT(A) 

3. DR 6. Guard file 

By order  

 Assistant Registrar,  

 ITAT, Bangalore.