The Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to reassess the case involving the addition of Specified Bank Notes ( SBN ) deposits as unexplained cash credit under section 68 of the Income Tax Act, 1961. This decision was made because the AO failed to properly apply the CBDT guidelines in evaluating the deposits made during the demonetization period.
Chetana Financial Services Pvt. Ltd., (Assessee) is a Non-Banking Financial Company ( NBFC ) involved in micro-financing to rural, urban, and semi-urban households. The assessee filed its income tax return for the assessment year 2017-16 declaring Rs.43,94,580 as total income. The assessing officer scrutinized the case and issued statutory notices to the assessee regarding the verification of cash deposits during the demonetization period. The assessee filed all the relevant documents.
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The assessing officer found that the assessee-company deposited cash including ₹33,59,000 in Specified Bank Notes (SBNs) during the demonetization period (November 9, 2016, to December 31, 2016). The assessing officer noted that the assessee did not satisfy the ingredients of section 68 of the Income Tax Act, 1961 so the AO completed the assessment by adding the amount of Rs.27,37,957 as unexplained cash credits.
The assessee appealed before the First Appellate Authority (FAA) against the AO’s order. The FAA dismissed the appeal of the assessee after considering the written submissions. Aggrieved by the FAA decision, the assessee appealed before the Bangalore Bench of ITAT.
The assessee’s counsel submitted that the assessee-company received cash on loan repayments from customers in rural areas, where banking access is limited. The assessee-company had already instructed not to deposit SBNs but some were deposited directly into the company’s bank account. The counsel further submitted that the assessee-company maintains full records of these transactions, including customer details, which were provided to the authorities.
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On the other hand, the revenue counsel argued that the assessee was not authorized to accept any demonetized notes of Rs. 500 and 1000 from 09.11.2016 to 30.12.2016 despite being aware of the situation, the assessee accepted the currency. Thus, the decision of the lower authorities to make an addition was justified.
The two-member bench comprising Laxmi Prasad Sahu (Accountant Member) and Keshav Dubey (Judicial Member) observed that the assessee provided detailed submissions including the source of deposits and customer information, but the lower authorities had not properly examined these details. The tribunal referred to the CBDT instructions related to demonetization which includes the need for proper investigation into cash deposits, which the assessing officer failed to do.
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The tribunal further referred to the Banglore tribunal ruling in the case of Bhoopalam Marketing Services P. Ltd. Vs ACIT (2022) where the issue was remanded back to the AO for fresh examination due to not performing the instruction prescribed in the CBDT guidelines regarding the cash deposits. Therefore, the tribunal in the present case remands the matter back to the assessing officer for fresh adjudication. The appeal of the assessee was allowed for statistical purposes.
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