Chhattisgarh High Court Sets Aside ITAT Order on Demonetisation Cash Deposit | Closing Balance of Previous Year Cannot Be Taxed as Unexplained Money Under S.69A IT Act
Isabella Mariam
The High Court of Chhattisgarh Division Bench of Justice Sanjay K. Agrawal and Justice Deepak Kumar Tiwari held that the amount of ₹20,50,000 cannot be treated as unexplained money under Section 69A of the Income Tax Act, 1961. The court set aside the orders passed by the Assessing Officer, the Commissioner of Income Tax (Appeals), and partly by the Income Tax Appellate Tribunal, which had treated the amount as unexplained and subjected it to tax under Section 115BBE of the Act. The Division Bench directed that the addition made by the authorities is unsustainable and that the substantial question of law is answered in favour of the assessee and against the Revenue.
The case arose out of an appeal filed under Section 260A of the Income Tax Act, 1961, questioning the legality of the order passed by the Income Tax Appellate Tribunal (ITAT), Raipur Bench “SMC.” The ITAT, by its order dated 1 November 2023, had partly dismissed the appeal of the assessee by sustaining an addition of ₹20,50,000 as unexplained money under Section 69A, while granting relief of ₹2,50,000 based on a circular of the Central Board of Direct Taxes (CBDT).
The original assessee had filed her return of income for the assessment year 2017-18 on 9 January 2018, declaring a total income of ₹12,83,090. During the relevant assessment year, which coincided with the demonetization period announced by the Government of India on 8 November 2016, she deposited ₹23,00,000 in Specified Bank Notes in her bank account with the Bank of Baroda on 1 December 2016. The deposits were reflected in the return of income filed in ITR-1S under Part-E, Column D14(a). The case was selected for scrutiny by the Assessing Officer, who sought details regarding the nature and source of the cash deposits.
In response, the assessee submitted that she had encashed fixed deposits with Bank of Baroda in the financial year 2014-15 and thereafter withdrew ₹1,24,00,000 in April and May 2014. Subsequently, in February and March 2015, she deposited ₹1,02,31,000 back into the bank account and advanced the same to M/s. Mangal Tyres, Dhamtari. The balance sheets for the years 2015-16 and 2016-17 reflected cash-in-hand of ₹21,60,301 and ₹23,45,301 respectively. The assessee contended that the deposit of ₹23,00,000 during demonetization had a direct nexus with the closing cash-in-hand shown as on 31 March 2016, which was carried forward as opening balance for the financial year 2016-17.
The Assessing Officer, however, by order dated 14 November 2019 under Section 143(3), treated the deposit as unexplained money under Section 69A and taxed it under Section 115BBE. The AO stated that the purpose of cash withdrawal in 2015-16 and holding it for 32 months was not explained. Further, discrepancies in the treatment of interest income, non-furnishing of details of borrowers, and the fact that the return for AY 2016-17 showing sufficient cash balance was filed only after the deposit during demonetization were cited as reasons. The AO concluded that the declaration of cash balance was an afterthought to cover up the deposits.
The assessee appealed before the Commissioner of Income Tax (Appeals), who concurred with the findings of the Assessing Officer and dismissed the appeal on 23 March 2023. The ITAT, in turn, partly allowed the appeal, granting relief of ₹2,50,000 but sustaining the balance addition of ₹20,50,000. The ITAT held that the simultaneous utilization of cash withdrawals for making deposits and for advancing loans was incomprehensible, and in absence of supporting documents, the explanation could not be accepted. It further observed that the assessee had failed to discharge the onus of proving the nature and source of deposits.
The assessee, through her legal heir, preferred an appeal before the High Court. The substantial question of law framed was whether the assessment in respect of closing balance of cash-in-hand shown in the preceding year and brought forward as opening balance of the succeeding year could be treated as unexplained money under Section 69A of the succeeding year and taxed under Section 115BBE.
The Division Bench examined Section 69A of the Act, which states: “Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”
Referring to the Supreme Court judgment in D.N. Singh v. Commissioner of Income Tax, the High Court recorded: “In the case of Section 69-A, the assessee must be found to be the owner of the money, bullion, jewellery or other valuable articles. In both cases, if the assessee is able to offer an explanation for the nature and the source…and it is not found unsatisfactory, there can be no deemed income under either section.”
The Bench observed that the source of deposits during demonetization had an immediate nexus with cash withdrawals made in AY 2015-16, which were advanced as loans, returned, and shown as closing balance in the balance sheet of 31 March 2016. “By offering plausible explanation tracing the source of money to closing balance of preceding year, the assessee was found to be the owner of the asset/cash in the assessment year 2016-17 and hence, the explanation of nature and source of such money and invocation of deeming fiction…could have been sought/examined…in the assessment year 2016-17 and could not have been done in the assessment year 2017-18 going by the express language contained in Section 69A and not otherwise.”
The court further recorded: “The Assessing Officer has made addition on pure guess. It is well settled principle of law that while making an assessment…the Income Tax Officer is not entitled to make a pure guess and…suspicion howsoever strong cannot take the place of proof beyond reasonable doubt.” It referred to Dhakeswari Cotton Mills Limited v. CIT and Lalchand Bhagat Ambica Ram v. CIT, noting that suspicion, conjectures, and surmises cannot replace evidence.
The court held that the AO failed to appreciate that the return for AY 2016-17 filed on 2 December 2016 was within the statutory timeline and processed under Section 143(1)(a). Since no scrutiny notice under Section 143(2) was issued within the stipulated time, the return had attained finality. Therefore, the explanation offered could not be disregarded in the subsequent assessment year.
The Division Bench concluded: “We are of the considered opinion that the learned ITAT is absolutely unjustified in dismissing the appeal partly upholding the addition of ₹20,50,000 treating it as unexplained money invoking the deeming fiction engrafted under Section 69A of the IT Act charging the same to higher rate of tax as prescribed under Section 115BBE of the IT Act.” The court held that ₹20,50,000 cannot be treated as unexplained money. “As such, the impugned order passed by the Assessing Officer affirmed by the CIT (Appeals) and further partly affirmed by the ITAT is hereby set aside.”
The court directed: “It is hereby held that ₹20,50,000 cannot be said to be unexplained money under Section 69A of the IT Act. Accordingly, the substantial question of law is answered in favour of the assessee and against the Revenue. The appeal is allowed to the extent indicated herein-above, leaving the parties to bear their own cost(s).” The court also placed on record its appreciation for the assistance rendered by amicus curiae.
Advocates Representing the Parties:
For the Petitioners: Mr. S. Rajeswara Rao, Advocate
For the Respondents: Mr. Ajay Kumrani, Advocate on behalf of Mr. Amit Chaudhari, Standing Counsel for the Income Tax Department
Amicus Curiae: Mr. Nikhilesh Begani, Advocate
Case Title: Nanakchand Agrawal, L/h of Kalawati Agrawal v. The Income-tax Officer
Neutral Citation: 2025: CGHC:43944-DB
Case Number: Tax Case No. 8 of 2024
Bench: Justice Sanjay K. Agrawal and Justice Deepak Kumar Tiwari
