ITAT Bangalore Grants Final Opportunity to Medical Store in Rs. 13.50 Lakh Demonetization Deposit Case

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, recently delivered a significant procedural ruling in the case of Sangameshwar Med Store Vs ITO, concerning the addition of cash deposits made during the 2016 demonetization period. The tribunal set aside an ex-parte appellate order that had confirmed an addition of Rs. 13,50,000 under Section 69A of the Income Tax Act 1961. Recognizing the principles of natural justice, the ITAT remanded the matter back to the first appellate authority for a de novo adjudication, providing the assessee with a final opportunity to substantiate its claim that the deposited Specified Bank Notes (SBNs) were derived from legitimate medical store sales.

This legal analysis breaks down the factual matrix, the statutory provisions invoked by the revenue authorities, the grounds of appeal, and the broader evidentiary requirements necessary to defend cash deposits under the stringent framework of the Income Tax Act 1961.

Factual Matrix of the Dispute

The dispute pertains to the Assessment Year (AY) 2017-18, a period characterized by heightened scrutiny of cash transactions following the withdrawal of the legal tender status of old Rs. 500 and Rs. 1,000 currency notes.

Failure to File Return and Data Analytics Detection

The assessee, operating a medical store, did not file the original return of income as mandated under Section 139 of the Income Tax Act 1961 for AY 2017-18. In the absence of a voluntary declaration, the Income Tax Department flagged the assessee's financial activities through data analytics deployed under "Operation Clean Money." The online verification process revealed that the assessee had made substantial cash deposits during the demonetization window.

Specifically, the data indicated that the assessee deposited an aggregate amount of Rs. 13,50,000 in cash between 09.11.2016 and 30.12.2016. Because no income tax return was on record to justify these deposits, the assessing authorities initiated formal inquiries.

Statutory Inquiries and Non-Compliance

To ascertain the source of the deposited funds, the Assessing Officer (AO) issued a notice under Section 142(1) of the Income Tax Act 1961, directing the assessee to file the return of income and provide a valid explanation for the cash deposits. The assessee failed to respond to this statutory communication.

To independently verify the transaction details, the AO exercised powers under Section 133(6) of the Income Tax Act 1961 and issued a notice to the Almel Urban Co-operative Bank. The information furnished by the bank corroborated the intelligence data, confirming that the assessee had indeed deposited Rs. 13.50 lakh using the old Specified Bank Notes.