Cash deposited during the 2016 demonetisation period cannot be treated as unexplained income merely because it involved old currency notes, the Appellate Tribunal (ITAT), Bangalore, has ruled. In relief for taxpayers facing scrutiny over demonetisation-era deposits, the Tribunal held that once a taxpayer furnishes a credible explanation backed by evidence, the burden shifts to the Income Tax Department to disprove it before invoking Section 69A of the Income-tax Act.
The ruling came in the case of Ramzan Mulla, a small trader from Vijayapura, Karnataka, who successfully challenged a ₹20.99 lakh addition made by the tax department after cash deposits in his bank account during the demonetisation period.
How the tax dispute arose
Mulla, proprietor of New Charandas Electricals & Engineers, filed his income tax return for Assessment Year 2017-18 under the presumptive taxation scheme of Section 44AD, under which eligible small businesses are not required to maintain detailed books of accounts.
During the demonetisation period, he deposited ₹20.99 lakh into his bank accounts. He explained that ₹8.73 lakh represented cash sales from his business, while ₹12.26 lakh belonged to five elderly relatives who had entrusted him with their old currency notes because they either did not have or were unable to visit the bank. To support his claim, he submitted VAT returns, sales registers, bank statements and affidavits from the relatives.
The Assessing Officer rejected the explanation, holding that the could not deposit old currency belonging to relatives into his own account and that old currency notes could not have been accepted from customers during the demonetisation period. The entire ₹20.99 lakh was accordingly treated as unexplained money under Section 69A.
On appeal, the National Faceless Appeal Centre (NFAC), acting as the Commissioner of Income Tax (Appeals), accepted only 50% of the business-related deposits as genuine while confirming the balance addition. It also upheld the addition relating to the deposits made on behalf of the relatives.
Why the ITAT deleted the ₹21 lakh addition
The Tribunal found that the taxpayer had adequately explained the source of both components of the deposits.
It noted that the business sales had been properly recorded in the sales register, disclosed in the quarterly VAT returns and matched the bank deposits. The Revenue had not pointed to any discrepancy in these records. The Bench also questioned the appellate authority’s decision to accept only half of the business receipts, observing that there was “no logic” in treating only 50% of the deposits as genuine when the supporting documents had established their authenticity.
The Tribunal also accepted Mulla’s explanation regarding the ₹12.26 lakh deposited on behalf of his relatives. It noted that affidavits had been filed explaining that the money belonged to elderly relatives who were unable to deposit the specified bank notes themselves. Importantly, neither the Assessing Officer nor the appellate authority had conducted any enquiry or produced evidence to disprove those affidavits.
The Bench further observed that merely because the were made in old currency notes did not automatically make them unexplained income. Once the taxpayer had correlated the deposits with business receipts and explained the remaining deposits, the burden shifted to the tax department to prove otherwise. Since the additions were based on assumptions rather than material evidence, the Tribunal deleted the entire ₹20.99 lakh addition.
What taxpayers should know
The ruling reinforces that Section 69A cannot be invoked solely because cash was deposited during the demonetisation period. Tax authorities must first examine the taxpayer’s explanation and supporting records before treating the money as unexplained income.
The order is particularly relevant for small businesses covered under Section 44AD, where maintaining detailed books of accounts is not mandatory. While the Income Tax Department can scrutinise cash deposits, additions cannot rest on suspicion alone. Where taxpayers are able to substantiate the source of funds with credible documentary evidence, the department must bring contrary material on record before raising a tax demand.