ITAT Chennai Grants Relief on Section 69A Addition for Demonetisation-Period SBN Deposits: DSA Motors vs ITO

Background and Case Overview

The Income Tax Appellate Tribunal (ITAT), Chennai, delivered a significant ruling in the case of DSA Motors Vs ITO (ITAT Chennai) pertaining to Assessment Year 2017-18. The core dispute revolved around an addition of ₹50,33,000 made under Section 69A read with Section 115BBE of the Income Tax Act, 1961, treating cash deposits made in Specified Bank Notes (SBNs) during the demonetisation window as unexplained money. The Tribunal ultimately ruled in favour of the assessee, setting aside the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi.

This ruling carries considerable significance for assessees who faced similar additions during the demonetisation period, particularly those who had legitimate and documentable sources for their SBN deposits but were nonetheless subjected to harsh taxation under Section 115BBE.

Facts of the Case

Background of the Assessee

DSA Motors is a partnership firm comprising three partners, incorporated on 09.03.2015 with the stated object of operating a two-wheeler dealership. However, the business never actually took off. The principal reason cited was the failure of the vehicle manufacturer — based in Andhra Pradesh — to supply vehicles as stipulated under the dealership agreement. This contractual breakdown effectively prevented the firm from commencing commercial operations.

To facilitate the intended business, the firm had availed a loan from Tamilnadu Mercantile Bank. With no vehicles supplied and no revenue generated, the firm defaulted on its loan repayment obligations, which led to significant pressure from the bank. To address this financial stress, the firm borrowed funds from relatives and friends, and these borrowings — partly in the form of SBNs — were deposited into the firm's bank account during the demonetisation period.

Additionally, the assessee filed a criminal complaint against the vehicle manufacturer for breach of the dealership agreement, further corroborating the stated sequence of events.

Assessment Proceedings

The assessee did not file its return of income for AY 2017-18. The case was selected for scrutiny under the OCM (Online Compliance Monitoring) module, and statutory notices were duly issued. The assessee, however, did not participate in the assessment proceedings, which led the Assessing Officer (AO) to frame the assessment ex parte under Section 144 of the Income Tax Act, 1961 on a best judgment basis.

The AO made two additions:

  1. ₹50,33,000 treated as unexplained money under Section 69A read with Section 115BBE on account of SBN deposits.
  2. ₹14,25,412 estimated as business income at 8% of the alleged total turnover of ₹1,78,17,654.

Proceedings Before CIT(A)

Assessee's Submissions

Before the CIT(A), the assessee came forward with a comprehensive explanation and supporting documentation. Key submissions included:

  • A copy of the dealership agreement with the vehicle manufacturer
  • Details of the criminal case filed against the manufacturer for breach of agreement
  • Cash loan entries recorded in the books of accounts
  • Consent letters, identity proof, and PAN details of the lenders (relatives and friends)
  • Explanation of the source of cash deposits, including dishonoured cheques and loan transfer entries

The assessee further clarified that out of the total deposits of ₹1,78,14,654 (which the AO had erroneously treated as turnover), ₹1,17,00,000 pertained to cheques issued by the vehicle manufacturer that were deposited by the assessee but subsequently dishonoured and reversed in the bank account. The AO had conveniently overlooked these reversal entries. The remaining ₹61,17,654 represented genuine borrowings from friends and relatives.

Additionally, supplementary evidence was filed under Rule 46A, which was forwarded to the AO who submitted a remand report dated 17.05.2024.