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Executive Summary: Friends, in this Article, our Founder Director, Shri Mayank Mohanka, FCA, has made a humble and sincere attempt to analyse and explain the practical tax implications of cash deposits in Rs. 2000 denomination notes in the banks, following the RBI’s 19th May’s announcement of withdrawal of such notes from circulation, in the context of sections 68, 69A read with section 115BBE of the Income Tax Act.
It was 19th May, 2023, and the countrymen were still trying to understand the practical implications of the new TCS Rules on remittances done under Liberalised Remittance Scheme (LRS) and overseas tour packages, including the foreign spends made via international debit and credit cards.
The RBI made two big announcements on that day. Firstly, it announced a threshold exemption limit of Rs 7 lakhs for applicability of TCS @ 20% in respect of international debit and credit card spends, bringing some respite to the stakeholders.
The second announcement of RBI was quite surprising for majority of the citizens. The RBI announced the withdrawal of Rs. 2000 notes from circulation. The general public has been advised to deposit their Rs 2000 notes into their bank accounts and/or exchange them into bank notes of other smaller denominations at any bank branch until September 30, 2023. The exchange limit has been restricted to Rs 20,000 at a time.
The RBI announcement created an initial flurry and panic among the masses that Demonetisation 2.0 has come up. Demonetisation 1.0 was announced on 8.11.2016, wherein the ‘legal tender’ (valid currency) status of Rs 500 and Rs 1000 notes was discontinued with immediate effect, and a limited period window of until 30.12.2016, was being given to deposit such notes in the bank accounts.
However, this time, RBI in its Press Release, has categorically clarified that the exchange of Rs 2000 notes into smaller denominations is a part of the ‘Clean Note’ policy of RBI, towards currency management, and is not demonetisation. The Rs. 2000 notes will continue to remain legal tender even after September 30, 2023. The RBI Governor, in a Press Conference held on 22.5.2023, has categorically clarified that the four month window until 30.9.2023, for the exchange of Rs. 2000 notes, has been specified, only to ensure timely exchange of such currency notes, so that the exchange process may not become an infinite or a never-ending process.
It is important to understand that in Demonetisation 1.0, since w.e.f. 8.11.2016 midnight, Rs. 500 and Rs. 1000 notes were declared as invalid currency, therefore, any cash deposits in such notes in banks, beyond the specified limit of Rs. 2,50,000/-, attracted deeper scrutiny from the income tax authorities. Under the special drive of ‘Operation Clean Money’, several thousands of income tax notices were being issued to individuals and businesses, asking for the source of such cash deposits. The basic presumption was that any abnormal and disproportionate cash deposits, post demonetisation, was nothing but the unaccounted money of such persons.
However, this time, the RBI’s announcement is in respect of withdrawal of Rs 2000 notes from circulation only and it is not regarding their demonetisation. Unlike the Rs 500 and Rs 1000 denominated notes in Demonetisation 1.0, the Rs 2000 notes will continue to remain legal and valid currency even after September 30, as per RBI clarification.
Thus, this time, the genuine cash deposits in Rs 2000 denominated notes, being made by the countrymen, in their bank accounts, can very well be explained either out of regular household savings, or out of earlier cash withdrawals, or out of cash gifts from blood relatives (with no limit) and others (with limit of Rs. 50,000/-) or as gifts received on marriage occasions, or as cash sales in case of proprietor and other businesses, subject to such claims, being supported by authentic documentary evidences.
With this backdrop, let us understand the tax implications of the cash deposits being made in banks, in Rs 2000 denomination notes, following the RBI announcement on 19th May.
(I) Whether cash deposits made in bank account, on or after 19th May, 2023 and even after 30th September 2023, by non-business assessees, be treated as unexplained cash credits u/s 68 of the Income Tax Act?
The text of section 68 of the Income Tax Act is being reproduced as under:
“68. Cash Credits
Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year”
From the plain reading of the above section 68, it is abundantly clear that the essential and mandatory pre-requisite for making an addition under this section is that the unexplained sum must be found credited in the books of an assessee maintained by him for any previous year. If the assessee is not maintaining any books of accounts, then addition u/s 68 is unsustainable. The existence of books of account is a condition precedent for invoking of the power u/s 68 of the Act.
The reliance in this regard can be placed on the judgement of Hon’ble Guwahati High Court in the case of Anandram Raytani v. CIT, 223 ITR 544;
The relevant extract of the aforesaid judgement (para 8) is reproduced below for Your Honours’ ready reference,
“8. ............We have gone through Section 68 of the Act. The Assessing Officer before invoking the power under Section 68 of the Act must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account and if the assessee fails to satisfy the Assessing Officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking of the power. Discharging of burden is a subsequent condition. If the first point is not fulfilled the question of burden of proof does not arise.”
Whether Bank Pass Book can be considered as Books of Accounts u/s 68?
In several judicial pronouncements especially in the case of CIT v Bhaichand N. Gandhi [1983] 141 ITR 67 (Bom.), it has been held that the bank statement can’t be considered as books of accounts, for the purpose of making addition u/s 68 of the Income Tax Act.
Thus, the cash deposits in Rs 2000 denominated notes, made in the bank accounts, by assessees, not carrying on any business or profession, can’t be treated as unexplained cash credits u/s 68 of the Income Tax Act.
(II) Whether the assessee’s claim of cash deposits of Rs. 2000 notes, out of earlier cash withdrawals be rejected by the revenue authorities, due to time gap between such withdrawals and the cash deposits, as the circulation of Rs. 2000 notes have reduced over a period of time?
In a recent decision the Hon’ble ITAT Delhi, in the case of “Gordhan, Delhi v/s DCIT dated 19/10/2019, have held that no addition can be made u/s 68 on the sole reason that there was a time gap between the date of withdrawals from bank account and redeposit of the same in the bank account, unless the AO demonstrates that the amount in question has been used by the assessee for any other purpose.
Similarly, in the case of ‘ACIT vs Baldev Raj Charla 121 TTJ 366 (Delhi)’ also it has been held that merely because there was a time gap between withdrawal of cash and cash deposits, explanation of the assessee could not be rejected and addition on account of cash deposit could not be made particularly when there was no finding recorded by the assessing officer that apart from depositing this cash into bank as explained by the assessee, there was any other purpose, for which it was used by the assessee
One can also place his reliance on the decision of Ld. Delhi High Court in the case of CIT vs Kulwant rai in 291 ITR 36 wherein the honourable Delhi High Court has held as under:
“This cash flow statement furnished by the assessee was rejected by the AO which is on the basis of suspicion that the assessee must have spent the amount for some other purposes. The orders of AO as well as CIT(A) are completely silent as to for what purpose the earlier withdrawals would have been spent. As per the cash book maintained by the assessee, a sum of Rs. 10,000 was being spent for household expenses every month and the assessee has withdrawn from bank a sum of Rs. 2 lacs on 4th Dec., 2000 and there was no material with the Department that this money was not available with the assessee. It has been held by the Tribunal that in the instant case the withdrawals shown by the assessee are far in excess of the cash found during the course of search proceedings. No material has been relied upon by the AO or CIT(A) to support their view that the entire cash withdrawals must have been spent by the assessee and accordingly, the Tribunal rightly held that the assessment of Rs. 2.5 lacs is legally not sustainable under s. 158BC of the Act and the same was rightly ordered to be deleted.”
On the basis of the above judgement of the Hon’ble Delhi High Court, the Hon’ble ITAT Delhi have recently deleted the addition made for inordinate delay in cash deposit in the case of ‘NEETA BREJA v/s ITO in ITA No 524/D/17/25-11-2019).
Thus, the assessee’s claim of cash deposits of Rs. 2000 notes, out of earlier cash withdrawals can’t be rejected by the revenue authorities, solely due to time gap between such withdrawals and the cash deposits, as the circulation of Rs. 2000 notes have reduced over a period of time, and for doing so, the revenue authorities will have to establish any evidence the alternate use of such cash withdrawals by the assessees.
iii) Whether the Cash Deposit being made out of Regular Business Cash Sales in Rs. 2000 Notes, be disregarded and rejected merely on account of variation or deviation of the ratio of cash sales in the current period with that of an earlier period, and added u/s 69A of the Income Tax Act?
In Demonetisation 1.0, w.e.f. 8.11.2016 midnight, for the businesses, accepting of Rs. 500 and Rs. 1000 notes (specified bank notes with no legal tender status), for transacting business transactions, and booking of cash sales during post demonetisation period, was not permissible, so they had to explain the source of such cash deposits as cash in hand as on 8.11.2016 only and not beyond that.
However, this time, the RBI’s announcement is in respect of withdrawal of Rs 2000 notes from circulation only and it is not regarding their demonetisation. Unlike the Rs 500 and Rs 1000 denominated notes in Demonetisation 1.0, the Rs 2000 notes will continue to remain legal and valid currency even after September 30, as per RBI clarification.
Cash sales upto Rs 2 lakhs, from a person, in a day, are allowed u/s 269ST of the Income Tax Act. Infact, in reality, following the RBI announcement of 19th May, the cash sales in 2000 notes have increased substantially for all food delivery apps, petrol pumps, malls, grocery stores, hospitals, saraffa bazar etc, as the general public and the consumer is offloading the Rs. 2000 notes, if any, lying with them.
Once the businessman establishes the genuineness of cash sales in Rs. 2000 notes, being done on or after May 19 and even after September 30, with all supporting documents like sales invoices, bank statements, confirmations from buyers, GST Returns, co-relation of such cash sales with purchases and stock etc, then the authenticity of making cash deposits out of such cash sales can’t be disregarded and rejected by the tax authorities, merely on account of variation in the ratio of cash sales in the current period with that of an earlier period. There can’t be a fixed sales pattern in any business.
Also, once a businessman has offered his cash sales as his business income, then again taxing the cash deposits made out of his cash sales as unexplained cash credits amounts to double taxation, which is not permissible as per the canons of Income Tax Law.
The Hon’ble Delhi Tribunal in the case of AGSONS GLOBAL P LTD v/s ACIT (Appeal No 3741 to 3746/Del/2019 have held that the addition being made on the sole ground of deviation in ratio of cash sales and cash deposits during the demonetisation period with that of earlier period, is not proper and lawful.
The Hon’ble Indore ITAT Bench in the case of DEWAS SOYA LTD, UJJAIN v/s Income Tax in Appeal No 336/Ind/2012 has held that,
“the claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit & loss account) and on the other hand amounts received from above parties has also been added u/s. 68 of the Act. This view has been held by the Hon ‘ble Supreme Court in the case of CIT vs Devi Prasad Vishwnath Prasad (1969) 72ITR194 (SC) that “It is for the assessee to prove that even if the cash credit represents income, it is income from a source, which has already been taxed”. The assessee has already offered the sales for taxation hence the onus has been discharged by it and the same income cannot be taxed again.”
Recent Development: Very recently, in the matter of the ‘Ashwini Kumar Upadhyay vs. Union of India & ORS. in W.P.(C) 7129/2023 dated 29.5.2023, the hon’ble Delhi High Court has dismissed the Public Interest Litigation (PIL) filed against the clarification Notification issued by the RBI and the State Bank of India, clarifying that no request slip or identification proof is required for the exchange of Rs. 2000 notes by the public.
During the hearing the RBI’s representative has emphasised that the present decision of the RBI to dispense with Rs.2000 denomination banknotes is not a decision towards demonetisation and the current situation should not be equated with demonetisation, and it is only a part of the normal currency management statutory exercise of the RBI.
The concluding para of the said judgement of the hon’ble Delhi High Court is being reproduced below, for ready reference.
“14. The decision of the Government is only to withdraw Rs.2000 denomination banknotes from circulation for the reason that the purpose of issuing these denominations has achieved its purpose which was to meet the currency requirement of the economy in an expeditious manner in November, 2016 when all Rs.500 and Rs.1000 denomination banknotes were declared to be not legal tender and in order to meet the situation at that point of time, the Government took a decision to bring banknotes of Rs.2000 denomination to ensure adequate supply of money to meet the day-to-day requirements of the people. Six years after the said decision, the Government has now decided to withdraw Rs.2000 denomination banknotes from circulation which is not being used commonly. Banknotes of Rs.2000 shall continue to be a legal tender and this policy is only for exchange of banknotes having denomination of Rs.2000 with other banknotes. In order to facilitate the exchange of Rs.2000 denomination banknotes with other denomination banknotes, the Government has given a window of four months to the citizens and in order to avoid inconvenience to citizens, the Government is not insisting of providing any kind of identification. As stated earlier, this decision of the Government is purely a policy decision and Courts should not sit as an Appellate Authority over the decision taken by the Government.
15. In the considered opinion of this Court, the present PIL is devoid of merits. Resultantly, the PIL is dismissed, along with pending application(s), if any.”
Thus, following the RBI announcement on 19th May, those having valid and genuine explanation of sources of cash deposits of Rs 2000 notes, need not panic and should go ahead with depositing their hard-earned money in their bank accounts, and should keep intact all supporting documentary evidences in corroboration of such cash deposits.
Note: This Article has also been published in Taxmann with the Citation [2023] 150 taxmann.com 520 (Article).
CREDIT: Credit of the Cartoon Pictures goes to Mr. Uddhar & Mr. Govande.
[For any related queries, the author Shri Mayank Mohanka, FCA can be reached at his email id: mayankmohanka@gmail.com]
