SBN Deposits During Demonetisation: Addition u/s 69A Cannot Be Solely Based on Violation of Notification, Must Follow CBDT's SOP: ITAT Hyderabad

ITAT Remands ₹39.66 Cr Demonetisation Case, Says Tax Dept Can't Ignore CBDT's SOP for Cash Deposits

Hyderabad: In a significant ruling concerning cash deposits during the 2016 demonetisation period, the Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, has set aside an addition of ₹39.66 crore made against Share Microfin Limited. The Tribunal held that tax authorities cannot reject an assessee's explanation for the source of Specified Bank Notes (SBNs) solely on the grounds that accepting them violated the demonetisation notification. It directed the Commissioner of Income Tax (Appeals) to conduct a fresh adjudication after properly verifying facts as per the Standard Operating Procedure (SOP) issued by the Central Board of Direct Taxes (CBDT).

The division bench, comprising Vice-President Shri Vijay Pal Rao and Accountant Member Shri Manjunatha, G., allowed the appeal for statistical purposes, emphasizing that a failure to follow prescribed verification procedures by the Assessing Officer (AO) and CIT(A) warranted a re-examination of the case.

Case Background

The case pertains to the Assessment Year 2017-18. Share Microfin Limited, a Non-Banking Finance Company (NBFC) engaged in micro-finance, deposited ₹39,66,15,500 in SBNs (demonetised ₹500 and ₹1000 notes) between November 9 and December 30, 2016. The Assessing Officer treated the entire amount as unexplained money under Section 69A of the Income Tax Act, 1961. The AO’s reasoning was that since SBNs ceased to be legal tender from November 9, 2016, the company was not permitted to accept them, rendering its explanation for the source invalid. This decision was subsequently upheld by the CIT(A).

Arguments of the Parties

Appellant's Contentions (Share Microfin Ltd): -

The deposited cash was not new income but collections from loan repayments made by its borrowers, primarily poor women in rural areas. -

The company operates a highly regulated business through 700 branches, and all transactions are recorded in its books of accounts, which are duly audited. -

The source of the deposits—loan receivables—was identifiable, supported by agreements, and not disputed by the tax authorities. -

The cash collection patterns during the demonetisation period were not abnormal compared to previous months or years. The SBNs constituted only 20% of the total collections during this period. -

The AO ignored specific instructions and SOPs issued by the CBDT for handling cases of cash deposits during demonetisation, which require verification of business patterns.

Respondent's Contentions (Income Tax Department): -

The department argued that since the SBNs were no longer legal tender, the assessee's claim of receiving them as loan repayments was untenable. -

The CIT(A) had concluded that the company's explanation "defies logic and common sense," as no prudent person would transact in banned currency notes. -

The acceptance of SBNs was a direct contravention of the government's notification dated November 8, 2016.

Tribunal's Analysis and Ruling

The ITAT observed that the core of the dispute was the rejection of the assessee's explanation by the lower authorities. The bench noted that this rejection was based entirely on a legal interpretation of the demonetisation notification, without a factual verification of the assessee's claims.

The Tribunal's key findings were:

"The AO as well as the CIT (A) has made the addition by rejecting the claim of the assessee that the source of the said cash is the collection made by the assessee from the borrowers during the demonetisation period solely on the basis of the notification issued by the Govt. and without verifying the relevant record and particularly, the correctness of the claim of the assessee in the light of SOP issued by the CBDT."

The judgment highlighted that the CBDT had issued as many as six circulars providing a Standard Operating Procedure for tax authorities to follow when examining substantial cash deposits post-demonetisation. The lower authorities, however, failed to adhere to these guidelines.

The ITAT found merit in the assessee's argument that the source of funds was its business receivables, a fact not disputed on merits by the AO. The Tribunal reasoned that the genuineness of the source needed to be examined before dismissing the explanation.

Final Decision and Implications

Concluding that the matter required proper verification, the Tribunal set aside the CIT(A)'s order and remanded the case for a fresh hearing. The CIT(A) has been directed to re-adjudicate the matter after a thorough examination of records and the assessee's claims, specifically in the context of the CBDT's SOP.

This ruling underscores the principle that a violation of a government notification (like demonetisation) does not automatically render the source of funds "unexplained" under income tax law. It reinforces the duty of tax authorities to conduct a factual inquiry and follow procedural guidelines before making additions, especially in complex scenarios like the demonetisation period.