8 Income Tax Judgements and Cases on Previous Demonetisation

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PM Narendra Modi may have shocked the nation with his 8 PM, 8 Nov 2016 announcement , but the Prime Minister’s move was not a step which was not known or never done before. India has pulled back selected denominations of its currency twice before on 12th Jan 1946 and 16th Jan 1978.

The first was when the Governor General of India promulgated the High Denomination Bank Notes (Demonetisation) Ordinance, 1946. It declared that the high denomination bank notes of Rs 500, Rs 1,000, and Rs 10,000, issued by the RBI would cease to be legal tender on expiry of January 12, 1946 a year and a half before the country won independence from the British. The Rs 10,000 notes were the largest currency denomination ever printed by the Reserve Bank of India, introduced for the first time in 1938. However, all three notes were reintroduced in 1954.

The next event of demonetisation happened under the Janata Party government in 1978. The Ordinance was subsequently repealed and replaced by the High Denomination Bank Notes (Demonetisation) Act, 1978 on March 30, 1978.

As a consequence of recent Demonetisation in Nov 2016, people all over the country have received assessment notices pertaining to cash deposits during demonetization period. Many cash deposits during demonetisation made were genuine but still have to go through the proceedings to prove the source of such deposits and pass the test of satisfaction to the Assessing Officer. It seems that many Assessing Officers in pursuance to follow the SOPs on Operation Clean Money Project have made unreasonable additions in some cases. They have failed to realize that not every cash deposit represents unaccounted income resulting into huge tax liability u/s 115BBE at the rate of 77.25%.

It is observed that while passing order for scrutiny assessment for cash deposited during demonetisation period, various Assessing officer have made addition under different sections ie Section 68 or Section 69A or in many cases even without mentioning the section. The following Case Laws have been scouted and compiled particularly relating to previous demonetisation which can help the taxpayers to argue their case before appellate authorities and act as a precedent against this unprecedented event for issue peratining to cash deposited during demonetisation.

Sr. No. Case Law Issue where the case law can be used
1. Narendra G. Goradia vs. CIT [1998] 234 ITR 571 (Bombay) (HC)
 
“Section 68 of the Income-tax Act, 1961 – Cash credits – Assessment year 1979-80 – In relevant period assessee had tendered notes of Rs. 1000 denomination valuing Rs. 2 lakhs for encashment – There was no dispute about source of money nor about fact that there was sufficient balance on date of deposit – Assessing Officer, however, made additions of part of amount for want of details of receipts of some of high denomination notes – Whether there was no justification for adding a portion of amount tendered by assessee for encashment of high denomination notes as income of assessee from undisclosed sources for alleged failure of assessee to furnish source of acquisition of amount in such notes – Held, yes”
Sufficient balance in cash book as on date of deposit during demonetization.      
2.
Lakshmi Rice Mills vs. CIT [1974] 97 ITR 258 (Pat.) (HC)

“It is a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination notes subsequently demonetised and even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within the meaning of the law. What has to be disclosed and established is the source of the income or the receipt of money, not the source of the receipt of the high denomination notes which were legal tender at the relevant time. Thus, the so-called findings of fact by the Tribunal were based upon placing a wrong onus of proof and applying not the correct principles of law governing such cases. On the facts, no tangible material had been brought on the record to take the shape of any legal evidence for the purpose of recording a finding that the assessee’s explanation was not worthy of acceptance. This by itself was a question of law arising from the Tribunal’s decision. Therefore, the Tribunal erred in coming to the conclusion that the cash balance did not include 140 high denomination notes when they were presented to the bank for encashment.”
Addition made without rejection of books  
3.
Lakhmichand Baijnath V. CIT [1959] 35 ITR 416 (SC)

“Amount credited in business books can normally be presumed as business receipt. When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business, if the explanation given by the assessee as to how the amounts came to be received is rejected by all the income-tax authorities as untenable”
Cash Sales
4.
Gur Prasad Hari Das vs. CIT [1963] 47 ITR 634 (All.) (HC)

Income from undisclosed sources—Burden of proof—Value of high denomination notes found in assessee’s possession must prima facie he presumed to form part of cash balance and the burden is on the Department to prove that it constituted assessee’s undisclosed income on the basis of material in the possession of Department—Tribunal having accepted that some of the high denomination notes belonged to assessee, it could not have treated the value of balance notes as assessee’s undisclosed income on the material on record
Burden of Proof on Department
5.
Kanpur Steel Co. Ltd. v. CIT [1957] 32 ITR 56 (ALL.) (HC)

“Income from undisclosed sources—Burden of proof—Burden of proof that the high denomination notes encashed on their demonetisation constituted suppressed income of assessee, is on the Department—Assessee encashing 32 notes of Rs. 1000 on their demonetisation and explaining the IT authorities that it formed part of cash balance of Rs. 34,000—Tribunal, after examination of the accounts, holding that only seven notes could form part of that cash balance in the state of transactions performed by the assessee and making an addition of Rs. 25,000—Not justified in the facts and circumstances of the case
Burden of Proof on Department
6.
Sri Sri Nilkantha Narayan Singh vs. CIT [1951] 20 ITR 8 (Pat.) (HC)

“Income from undisclosed sources—Addition—Encashment of high denomination notes—There was no material before Tribunal to presume that a Home Chest Account was maintained—Tribunal ought not to have drawn an adverse inference because no such account was produced—No onus upon assessee to indicate from whom each note was received—No material to justify the assessment of amount representing the value of high denomination notes”
No onus upon assessee to prove from whom each note received
7.
Lalchand Bhagat Ambica Ram vs. CIT [1959] 37 ITR 288 (SC)

“Section 143 of the Income-tax Act, 1961 – Assessment – Addition to income – Assessment year 1946-47 – Assessee carried on extensive business in grain as merchant and commission agent – Assessee maintained its books of account according to mercantile system and there were maintained in its cash books two accounts: one showing cash balances from day to day and other known as “Almirah account” wherein were kept large balances which were not required for day-to-day working of business – It filed its return showing loss in business – However, ITO noticed that assessee had encashed high denomination notes of value of Rs. 2.91 lakhs on 19-1-1946 – Assessee’s explanation that those notes formed part of its cash balances including cash balances in Almirah account was rejected by ITO who took into account several surrounding circumstances and included said sum in its total income – ITO also found that portions of entries in assessee’s accounts to effect that money’s had been received in high denomination notes were subsequent interpolations – Before Tribunal assessee stated that said entries were made in nervousness after coming into force of High Denomination Bank Notes (Demonetization) Ordinance, 1946 on 12-1-1946, as it did not know it had specific proof in its possession of having high denomination notes as part of its cash balances – Tribunal accepted assessee’s explanation in respect of said interpolations and held that there was no other reason to suspect genuineness of account books – It was also found that as per book entries cash balance on 12-1-1946 aggregated to more than Rs. 3.1 lakh – However, examining cash book and taking into account all circumstances adverted to by ITO, Tribunal held that assessee might be expected to have possessed as part of its business cash balance of at least Rs. 1.5 lakhs in shape of high denomination notes on date when said ordinance was promulgated but nature of source from which it derived remaining high denomination notes remained unexplained – Accordingly, Tribunal reduced addition – Whether when entries in books of account in regard to cash balances were held to be genuine, there was no escape from conclusion that assessee had offered reasonable explanation as to source of all high denomination notes which it encashed on 19-1-1946 and it was not open to Tribunal to accept genuineness of those books and accept assessee’s explanation in part and reject same in regard to balance sum – Held, yes – Whether, therefore, it was clear that Tribunal in arriving at its conclusion indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of facts which could not reasonably be entertained or finding was perverse which could not be sustained and Supreme Court was entitled to interfere with such finding – Held, yes – Whether, therefore, addition made was liable to be deleted – Held, yes”
En-cashed high Denomination notes form part of cash balances and books of accounts considered genuine.
8.
Sri Sri Nilkantha Narayan Singh vs. CIT [1951] 20 ITR 8 (Pat.)

Where the assessee did not maintain and hence did not produce any Home Chest Account though it was his case that the high denomination notes were savings from his personal allowance, there was no warrant for drawing an adverse inference. Assessee produced details of withdrawals for past 7 years, and claimed the amount encashed on demonetization as to be out of savings from such withdrawals, such an explanation can not be rejected by AO.”
No books of accounts maintained: Cash from past accumulated savings

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