In a major relief to the assessee, the Income Tax Appellate Tribunal (ITAT) Chennai Bench has deleted an addition of Rs. 40 lakhs made under Section 69A of the Income Tax Act, 1961, holding that the cash deposits during the demonetization period were sufficiently explained. The Tribunal also set aside directions issued by the Commissioner of Income Tax (Appeals) CIT(A) regarding an additional amount of Rs. 1.35 crores, ruling that such directions violated the principles of natural justice.
Rengasamy Asaithambi, a wholesale vegetable merchant, had filed an appeal against the order of CIT(A), for the Assessment Year 2017-18. The dispute arose when the Assessing Officer (AO) noted that the assessee had deposited Rs. 2.40 crores in his bank account during the demonetization period (November 9, 2016 – December 31, 2016). Upon scrutiny, the AO accepted that Rs. 62.62 lakhs were Specified Bank Notes (SBNs) forming part of the closing cash balance as of November 8, 2016.
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However, the AO questioned how the remaining Rs. 41.90 lakhs, consisting of valid legal tenders in denominations of Rs. 100, Rs. 50, Rs. 20, and Rs. 10, could have been held by a wholesaler with a turnover exceeding Rs. 16 crores. Based on mere suspicion, the AO treated Rs. 40 lakhs as unexplained money under Section 69A and taxed it under Section 115BBE.
The CIT(A) upheld the AO’s decision and also noted that Rs. 1.35 crores from the total deposits remained unverified in the assessment order. Consequently, the CIT(A) directed the AO to take remedial action on this additional amount.
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Before the ITAT, the assessee’s counsel, N. Arjun Raj, argued that the addition of Rs. 40 lakhs was unjustified as the AO had already accepted the assessee’s turnover and audited books of accounts. Since the deposited cash was part of trade receipts, treating it as unexplained was legally untenable.
Moreover, the AO did not reject the books of accounts, making the addition arbitrary. The counsel further contended that the CIT(A) exceeded his jurisdiction by issuing directions regarding Rs. 1.35 crores without issuing a show cause notice.
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The case was heard by a bench comprising Aby T. Varkey (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member). The ITAT ruled in favor of the assessee, stating that the AO’s rejection of valid currency denominations based on improbability was mere conjecture. The Tribunal held that since the cash deposits were accounted for in the assessee’s regular business activities and recorded in his books, the addition under Section 69A was unsustainable.
Additionally, the ITAT quashed the CIT(A)’s directions concerning Rs. 1.35 crores, noting that any such inquiry should have been initiated under Section 263 by the Principal Commissioner of Income Tax (PCIT), not CIT(A), in an appellate capacity.
In conclusion, the ITAT deleted the Rs. 40 lakh addition and set aside the CIT(A)’s directions, providing relief to the assessee. The Tribunal also dismissed the stay petition as infructuous, merging it with the final order.
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