Tuesday, 18 February 2020

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 6  8, Section 6  9A and Section 2  (12A) of I-T. Act is reproduced below:

"Cash Credits.

68.  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.

1.       Any sum found credited in the books of accounts maintained by the assesse.
2.       Assessee offers no explanation about such credit,
3.       Explanation of the assessee 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 assessee 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:

1.       Assessee is found to be owner of any money, Bullion, Jewellery etc.
2.       Such Money is not recorded in the books of accounts, If any maintained by him for any source of income, AND
3.       Assessee offers no explanation or explanation is found not satisfactory by AO

As per language of section, Section 69A can be invoked only when the assessee 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 assessee 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 assessee for maintenance of books of accounts in following situation:
(a)       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.
(b)       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:
1.       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.
2.       Where     the     assessee     claimed      lower      profit      than      deemed      income u/s 4 4AE, 4 4BB and 4 4BBB.
3.       Where the provisions of section 4 4AD(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 assessee 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 assessee 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.

1.       Book of accounts maintained and addition made u/s 69A for unsatisfactory explanation: In various cases, It is observed that assessee 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 assessee but AO has not considered explanation of the assessee satisfactory and made addition u/s 69A.
In such a situation addition is not tenable in the eyes of law because assessee had recordedsuch 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 assessee 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.
2.       Book of accounts not maintained and addition made u/s 68 for unsatisfactory explanation: In various cases, It is observed that assessee 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 assessee has maintained books of accounts.
In a recent decision in the case of SMT. Teena Bethala v. 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 Dy.  CIT v. 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.
3.       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 assessee that mere bank statement is not books of accounts. Reliance can be placed to CIT v. Bhaichand
N.  Gandhi [  1982]  11  Taxman  59/[1983]  141  ITR  67  (Bom.).  After  this  decision  number  of tribunals had retrieved this stand.
When the assessee 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 assessee 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.
4.      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 assessee 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 v. Dy. CIT 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 assessee 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 Asstt. CIT v. Baldev Raj Charla [  2009] 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 v. Kulwant Rai [  2007] 163 Taxman 585/291 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. ITO [IT Appeal No 524/D/17, dated 25-11-2019]
5.       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. 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  assessee  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. v. 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 v. Devi  Prasad  Vishwanath  Prasad [  1969]  72  ITR  194 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 v. Durga   Prasad   More [  1969]   72   ITR   807 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 v. 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 Ltd. v. ITO [2005]  4  ITJ  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 v. Ghai Lime Stone Co. [  1983] 144 ITR 140. 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 v. Surana Traders [  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."
6.      Cash is directly deposited in the bank account of the assessee 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 assessee 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 assessee 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:
1.       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.
2.       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.
3.       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.
4.      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.
5.       One may also argue that retrospective changes in section 1 15BBE 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.

6.      In all such cases if transactions are genuine and it is firm belief that court will deliver his favour in the assessee 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.

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