When Your Demonetized Cash Deposit Faces Legal Scrutiny: Understanding the ITAT's Stance

Imagine you're a business that has accepted a significant amount of demonetized currency. What legal implications might you face? The recent case involving SAP Medicals (P) Ltd provides some insights.

SAP Medicals deposited Rs. 39,74,500 in demonetized currency during the demonetization period. SAP accepted this amount from various hospitals.

Depositing in this way violates the extant provisions regarding dealing in demonetized currency.

The Assessing Officer, however, failed to investigate this aspect and accepted the income returned under Section 143(3) of the Income Tax Act.

The Pr.CIT examined the record and noted the discrepancy.

He issued a notice to SAP under Section 263 of the I.T. Act, asking why he shouldn't set aside the 143(3) assessment order...leading to a detailed examination of the case.

SAP explained that it accepted the money in demonetized currency because of prevailing circumstances. SAP also said that it was under an impression that it can accept the currency.

The learned PCIT didn't accept the assessee's explanation. So he restored the ₹39,74,500 deposit issue for verification to assessing officer's file.

So SAP appealed before the ITAT.

The ITAT, in its final judgment, upheld the invocation of Section 263 of the I.T. Act.

The failure to investigate the huge cash deposit in demonetized currency rendered the order erroneous and prejudicial to the interest of the Revenue.

What does this mean for you and your business?

It underscores the importance of adhering to legal provisions, even in extraordinary circumstances like demonetization. Any deviation from the law, no matter how justified it may seem at the moment, can lead to legal scrutiny and potential penalties.

Always consult with your tax professional and ensure that your financial transactions are in line with the prevailing laws. In the complex world of taxation, a misstep can have far-reaching consequences. Stay informed, stay compliant, and protect your interests.

Court Name : ITAT Hyderabad

Parties : SAP Medicals (P) Ltd Vs ITO 

Decision Date : 07 July 2023

Judgement ref : ITA No.128/Hyd/2023

Per R.K. Panda, Vice-President

This appeal filed by the assessee is directed against

the order dated 24/03/2022 of the learned Pr.CIT-1 Hyderabad,

relating to A.Y.2017-18.

2. There is a delay of 277 days in filing of this appeal by

the assessee for which the assessee has filed a condonation

application along with an affidavit explaining the reasons for the

delay. After considering the contents of the condonation petition

filed along with the affidavit and after hearing the learned DR, the

delay in filing of this appeal by the assessee is condoned and the

appeal is admitted for adjudication.

3. Although a number of grounds have been raised by the

assessee, however, these all relate to the order of the learned PCIT

passed u/s 263 of the I.T. Act setting aside the order passed by

the Assessing Officer u/s 143(3) with a direction to the Assessing

Officer for proper verification.

4. Facts of the case, in brief, are that the assessee is a

private limited company engaged in the business of dialysis

consumables and equipments. It filed its return of income on

31.10.2017 declaring total income of Rs. 19,68,660/. The case

was selected for scrutiny and statutory notices u/s 143(2) and

142(1) were issued from time to time calling for certain

information. After considering the submissions filed by the

assessee from time to time, the Assessing Officer completed the

assessment u/s 143(3) on 17.12.2019 accepting the returned

income.

5. Subsequently, the learned PCIT examined the record

and noted that the assessee has deposited cash of Rs.39,74,500/-

during demonetization period. From the details furnished by the

assessee as available on record, he noted that the assessee had

cash balance of Rs.10,73,295/- as on 8.11.2016 and has

accepted Rs.39,74,500/- from its debtors who are all private

hospitals which were deposited into his bank account. According

to the learned PCIT, the Assessing Officer has accepted the

contention of the assessee which is contrary to the extant

provisions during the demonetization period. He was of the

opinion that the same amount should have been brought to tax.

Since the same has not been done, the learned PCIT held that the

order passed by the Assessing Officer u/s 143(3) on 17.12.2019 is

erroneous and prejudicial to the interest of the Revenue.

Accordingly, a notice u/s 263 of the I.T Act dated 15.2.2022 was

issued to the assessee asking the assessee to explain as to why

the order passed by the Assessing Officer should not be set aside.

The assessee explained that the money was accepted in

demonetized currency from its debtors due to the prevailing

circumstances at that time as they were under the belief that they

can accept the demonetized currency. It was further submitted

that the Assessing Officer accepted the submission, therefore,

addition was not made. It was accordingly requested to drop the

proceedings initiated u/s 263 of the I.T. Act.

6. However, the learned PCIT was not satisfied with the

arguments advanced by the assessee and set aside the order

passed u/s 143(3) by invoking the provisions of section 263 of the

Act observing as under:

“4.1 The submissions of the taxpayer that the issue of deposit of

demonetized currency into its bank account was accepted by the

Assessing Officer is not correct as the same is not borne out of record.

Assuming without accepting, even if the same was considered by the

Assessing Officer, even then the same is not correct as it is violation of

the extant provisions regarding dealing with receipt of demonetized

currency, as the same was allowed to specified entities Ike banks,

petrol pumps, public transport, government hospitals etc. into which

category the tax payer does not fall, therefore, the view of the

Assessing Officer will not be legally sustainable. In view of the same,

the objections of the taxpayer with-regard to proceedings u/s 263 are

rejected.

4.2 Coming to the issue of deposit of Rs.39,74,500/- of money received

from its debtors, the sum and substance of the arguments of the

taxpayer is that the transactions on the nature of trade transactions.

The issue is the taxpayer could have received the money. on transfer

from its debtors instead of taking the cash in demonetized notes and

depositing the same in its bank account, for which, the reason being

given Was that the money was received from the debtors for sales

made prior to demonetization period and if it did not accept cash at

that point of time, it could not have realized the sale proceeds as most

of them would have turned bad debts. ln addition to the above, it also

submitted license issued by the Drugs Control Administration, Govt. of

Telangana which permits the assessee to sell, stock or exhibit or offer

for sale or distribute drugs. Therefore, Therefore, the deposits should

be considered for acceptance.

5. As already mentioned above, objections on revision u/s 263 has

been rejected. foregoing additional information like license issued by

the Drug Control Authority and other related issues which have not

been examined by the Assessing Officer, require necessary factual

verification. Therefore, the issue of the deposit of Rs.39,74,500/- is

restored to the file of the Assessing Officer for his/her verification as

per law, by giving two effective opportunities and pass an order as per

law”.

7. Aggrieved with such order of the learned CIT (A) the

assessee is in appeal before the Tribunal.

8. We have heard the rival arguments made by both the

sides and perused the record. It is an admitted fact that the

assessee has made cash deposit of Rs.39,74,500/- during the

demonetization period which was accepted by him from various

hospitals in demonetized currency in violation of the extant

provisions regarding dealing in demonetized currency. However,

the AO in the instant case has failed to investigate this aspect and

passed the order u/s 143(3) accepting the income returned. In

our opinion, the order passed by the Assessing Officer in the

instant case without enquiring the huge cash deposit of

Rs.39,74,500/- in demonetized currency in violation of the extant

provisions regarding dealing in demonetized currency has

rendered the order erroneous and prejudicial to the interest of the

Revenue. Therefore, the learned PCIT, in our opinion, is fully

justified in invoking the provisions of section 263 of the I.T. Act.

The various decisions relied on by the learned Counsel for the

assessee are distinguishable and not applicable to the facts of the

present case since there is no application of mind at all by the

Assessing Officer to this vital aspect of huge cash deposit during

the demonetized period. Accordingly, the grounds raised by the

assessee are dismissed.

9. In the result, appeal filed by the assessee is dismissed.

Order pronounced in the Open Court on 7th July, 2023.