Cash Deposits Cannot Be Treated as Unexplained Income Merely for Accepting Old Currency, Rules ITAT

The Income Tax Appellate Tribunal (ITAT) Ahmedabad held in favour of the taxpayer company in a case concerning cash deposits made during the demonetisation period of 2016.

The assessee, M/s Krishna Petroleum, had declared a total income of about Rs 3 lakh during the assessment year 2017-18. During return processing, the tax authorities made an addition to the assessee’s income on the grounds that the assessee had made cash deposits of Specified Bank Notes (SBN) amounting to Rs 63.96 lakh during the period of demonetisation, treating the same as unexplained money under Section 69A of the Income Tax Act. The addition amount was equal to the cash deposited, i.e., Rs 63.96 lakh.

The tax department claimed that the assessee, being a private petrol pump dealer, was not authorised to accept Specified Bank Notes (SBNs) after demonetisation. When approached, the Commissioner of Income Tax (Appeals) [CIT(A)] sustained the impugned addition.

Thereafter, when the assessee filed an appeal before the ITAT Ahmedabad, the tribunal observed that the tax authorities had never contested that the cash deposits were linked to the assessee’s regular business sales. The only objection raised was that the sales were made against old currency notes, which the assessee was allegedly not permitted to accept. Consequently, the tribunal held that even if accepting SBNs was considered unauthorised, it would only attract consequences under the relevant law governing demonetisation rules and not under the Income Tax Act.

Further held that once the source of cash deposits was explicitly identifiable as business sales, the amount could not be treated as unexplained income under Section 69A of the Income Tax Act merely because the transactions involved old currency notes. Accordingly, the ITAT deleted the entire impugned addition of Rs 63.96 lakh and allowed the assessee’s appeal.