ITAT Chennai Clarifies Tax Treatment of Cash Deposits During Demonetisation: Enhanced Rate Under Section 115BBE Not Applicable to Transactions Before 01.04.2017

Case Background and Facts

The Chennai Bench of the Income Tax Appellate Tribunal recently adjudicated a matter concerning Shri Shernickraj v. ITO for Assessment Year 2017-18. The core issues revolved around the addition made on account of cash deposits effected during the demonetisation phase and the determination of the appropriate tax rate applicable under Section 115BBE of the Income Tax Act, 1961.

The assessee operated a small-scale facilitation enterprise wherein he collected cash amounts from members of the public and executed online payment services on their behalf. These services encompassed payment of electricity bills, reservation of train and bus tickets, electronic fund transfers, and similar transactions. During the demonetisation period, the assessee deposited cash aggregating to ₹8.50 lakh in his bank account.

Assessment Proceedings and Initial Determination

The assessee submitted his return of income for Assessment Year 2017-18 on 31.03.2018, declaring total income of Rs.3,14,610/-. The case was subsequently selected for detailed scrutiny, and notice under Section 143(2) of the Act was issued on 09.08.2018.

Upon examination of the bank statements, the Assessing Officer (AO) observed the cash deposits of Rs.8,50,000/- and called upon the assessee to substantiate the source of these deposits. The assessee explained that his business model involved receiving cash from the general public and facilitating various online transactions and payment services on their behalf. The assessee contended that the deposited amounts represented collections from this business activity.

The AO, however, rejected the explanation furnished by the assessee. In the assessment order dated 09.12.2019 passed under Section 143(3) of the Act, the AO treated the entire sum of Rs.8,50,000/- as unexplained cash credit under Section 69 of the Income Tax Act, 1961. Additionally, the AO applied the special enhanced rate of taxation prescribed under Section 115BBE of the Act for computing the tax liability on this addition.

First Appellate Authority's Findings

Dissatisfied with the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The first appellate authority examined the matter afresh and granted partial relief to the assessee.

The CIT(A) acknowledged the nature of the assessee's business operations, which involved accepting cash from various persons and executing payments on their behalf for electricity bills, railway and bus ticket bookings, and other similar services. Recognizing the cash-intensive nature of this business model, the CIT(A) adopted a pragmatic approach.

The CIT(A) observed that given the regular cash receipts in the assessee's line of business, it could not be entirely denied that a portion of the cash deposited during the demonetisation period might have represented cash balances accumulated before 09.11.2016, the date when demonetisation was announced. Taking a lenient view and considering the nature of business operations and the commission income earned by the assessee during the year, the CIT(A) held that 50% of the cash deposited during the demonetisation period could reasonably be considered as arising from cash balances available prior to the demonetisation period.

Consequently, the CIT(A) sustained the addition to the extent of 50% only, reducing it to Rs.4,25,000/-. The balance 50% was considered to be from unexplained sources. Thus, the appeal was partly allowed by the first appellate authority.

Grounds of Appeal Before the Tribunal

Aggrieved by the order of the CIT(A), the assessee filed an appeal before the Income Tax Appellate Tribunal, Chennai. The assessee raised nine grounds of appeal, primarily challenging:

  1. The sustaining of addition of Rs.4,25,000/- as unexplained income under Section 69 of the Act
  2. The application of the enhanced tax rate of 60% under Section 115BBE instead of 30% for the relevant assessment year

The learned Authorized Representative appearing for the assessee submitted that the CIT(A) erred in sustaining the addition to the extent of Rs.4,25,000/- as unexplained under Section 69. The counsel further contended that for Assessment Year 2017-18, the applicable tax rate should be 30% and not 60% as prescribed under the amended provisions of Section 115BBE.