Demonetisation Cash Deposits and Business Sales: ITAT Chennai Clarifies Scope of Section 69 & Section 115BBE

The Chennai Bench of the Income Tax Appellate Tribunal, in Karnam Rudrapillai Gunaseharan Vs ITO (ITAT Chennai), has delivered an important ruling on additions made for cash deposits during the demonetisation period. The Tribunal held that cash deposits representing sales or business receipts already recorded in the books of account cannot be treated as unexplained money under Section 69 / Section 69A and consequently cannot be subjected to the higher tax rate prescribed under Section 115BBE, merely because the deposits involved Specified Bank Notes (SBNs).

This decision is significant for assessees who faced scrutiny for demonetisation-related cash deposits despite having proper books of account, audited under Section 44AB, and where the corresponding turnover had already been offered to tax.

Background of the Dispute

The assessee, Karnam Rudrapillai Gunaseharan, is an individual engaged in the business of broiler integration (poultry) under the proprietorship concern “Sai Pooja Agro Farms”. For Assessment Year 2017-18, he filed a return of income on 26.03.2018 declaring a total income of Rs.3,00,29,070.

The case was taken up for scrutiny under CASS, mainly to examine cash deposits made during the demonetisation window. During assessment, the Assessing Officer (AO) noticed that the assessee had deposited cash aggregating to Rs.35,52,000 in SBNs into his bank account during the specified period.

As per the audited books of account, the cash balance as on 09.11.2016 was Rs.3,26,337. The assessee explained that:

  • He held Rs.3,26,337 as cash-in-hand as on 09.11.2016, and
  • The remaining Rs.32,26,000 represented cash collections from regular customers in the ordinary course of his poultry business during the demonetisation period, in the form of SBNs, which were then deposited into the bank.

The AO refused to accept this explanation and treated Rs.32,26,000 as unexplained money. Though the assessment order initially referred to Section 69, the AO ultimately invoked Section 69A and taxed the amount under Section 115BBE, also initiating penalty proceedings under Section 271AAC.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)-NFAC], by order dated 04.09.2024, upheld the addition, leading to the present appeal before the ITAT Chennai.

Before dealing with the merits, the Tribunal condoned a delay of 39 days in filing the appeal after being satisfied that there was a reasonable cause for the delay.

Issues Considered by the Tribunal

The central questions before the ITAT were:

  1. Whether cash deposits of Rs.32,26,000 made in SBNs during demonetisation, which were claimed to be out of recorded business receipts, could be treated as unexplained money under Section 69 / Section 69A.
  2. Whether such amounts could be subjected to tax under Section 115BBE despite being part of recorded turnover already offered to tax.
  3. Whether receipt and deposit of SBNs during the period 09.11.2016 to 31.12.2016 was legally prohibited, and whether such alleged illegality alone could justify additions under Section 69 / Section 69A.

Assessee’s Key Contentions

1. Cash Deposits Were from Recorded Business Transactions

The assessee contended that all the impugned cash deposits were fully supported by:

  • Cash book and ledger accounts
  • Sales register and purchase register
  • Month-wise breakup of sales, cash collections and cash deposits
  • Bank statements
  • Customer-wise details including names, addresses, PAN, and ledger extracts

He asserted that:

  • Total turnover for AY 2017-18 was Rs.32.87 crore.
  • Total cash collections from customers were Rs.11.81 crore.
  • Total cash deposited into bank accounts was Rs.9.38 crore.
  • Out of these deposits, Rs.8.19 crore had already been deposited before demonetisation.
  • Only Rs.1.18 crore was deposited after demonetisation, of which merely Rs.35,52,000 was in SBNs.