Demonetised notes not unexplained money us 69A-No penalty 271(1)(c) for concealment warranted-High Court Judgment on 1978 Demnetisation
The recent demonetisation of high denomination bank notes Rs. 500/- and Rs. 1000/- is not new to India. In past also there has been demonetisation of High Denomination Notes in 1946 and 1978. In 1978 the then Janta Dal Government had demonetised high currency notes of Rs 1000, Rs 5000 and Rs 10,000/-. The High Denomination Notes Ordinance was issued by the President of India on 16-1-1978.
As per media reports, since 9th November, 2016, the Income Tax Department is actively conducting surveys/raids issuing notices and confiscating old denomination bank notes. Both the Prime Minister and the Finance Minister followed by CBDT Chairman are indicating stringent action on those found with black money.
However, the law would take its own course and additions and penalties shall be open to litigation at appropriate forum.
The frequently asked questions as to what actions can be taken by the Income Tax Department where the demonetised notes are found in possession are as under:
Question: 1 What possible action can be taken on demonetised bank notes found in possession and confiscated after midnight of 8th Nov, 2016 up to 30th December, 2016 (being the appointed date for exchange)
Answer: Since the bank notes would not loose their representative or intrinsic value before the expiry of the appointed day for exchange, additions can be made u/s 69A and penalty u/s 271(1)(c) can be imposed for concealment of income unless such cash is recorded in books of account and their source explained satisfactorily.
In my opinion, if cash is deposited in bank by a trader who pleads such cash was received against the sales effected after 08-11-2016, it could be rejected to be treated as such since those notes could not have been received after demonetisation for the reason as above. Treating the pleading as unsatisfactory, such cash can be added u/s 69A and subjected to tax @ 30% as per section 115BBE
At this point it is worth mentioning that the Hon’ble Supreme Court in the case of Govindarajulu Mudaliarvs CIT had disagreed with the contention of the assessee that it was the duty of the Department to adduce evidence to show from what source the income was derived and why it should be treated as concealed income. The Hon’ble Court opined that there is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature.
However, Peak credit theory can be pleaded by the assessee based on the facts and in the circumstances of the case.
Question:2 What possible action can be taken on demonetised bank notes found in possession and confiscated after 30th December, 2016 (being the appointed date for exchange)
Answer: Apparently none as those bank notes must have lost their intrinsic value and at best can be sold as piece of scrap unless the department can prove that such money was in the possession of the assessee before 30-12-2016.
An interesting judgment of the Karnataka High Court of 2006 which gives valuable insights to such circumstances is as under:
ABCAUS Case Law Citation:
1060 (2006) (11) HC
A.Y : 1978-79
The Grievance:
The appeal was filed by the Revenue against the order of the ITAT quashing penalty under Section 271(1)(c)
Brief Facts of the Case:
On 24-1-1978 one of the Directors of the assessee-company tendered 135 high denomination notes of Rs. 1,000 each before the RBI, New Delhi, filing the declaration on behalf of the assessee-company. During the course of the scrutiny, It was explained to the Income Tax Officer (ITO) that the amount represented refund of advance paid to a cotton broker for the purchase of ginned cotton.
The ITO noted by the ITO that no entry was passed through the books of account when the cash were, reportedly given as advance. He also observed that the usual practice of the company was to receive and send amounts in cheques or drafts only and there was no explanation for the company’s acceptance of the cash refund on 20-1-1978 in the denomination of 1000 rupee notes, 4 days after the High Denomination Notes Ordinance was issued by the President of India on 16-1-1978.
The ITO came to the conclusion that the version put forward by the company was not supported by entries whatsoever in the books of account of the company regularly maintained by it. The The ITO treated the amount of Rs. 1,35,000 found with the assessee in high-denomination notes to be unexplained money in the hands of the assessee-company and added back the same under Section 69A.
In the penalty order under Section 271(1)(c) again, the ITO held that there was no explanation about the possession of the above mentioned sum of Rs. 1,35,000 and hence the said amount represented funds from undisclosed sources. Accordingly, the ITO considered imposed a penalty u/s 271(1)(c). For concealment of income.
However, the Tribunal noted that the provisions of Section 69A would come into operation only when some valuable article be found to be under the ownership of the assessee. The article concerned was required to be valuable at the time when it is found.
It was observed that the assessee had tendered the high-denomination notes to the RBI on 24-1 -1978 only when in terms of the ordinance issued by the Government of India, these bank notes had already ceased to become legal tenders and it was impossible to get those notes exchanged through RBI inasmuch as the time period for doing so had already elapsed on 20-1-1978.
According to the ITAT, the high-denomination notes found in possession of the assessee, had been reduced merely to scraps of paper and had no value in the market at all. Therefore, it could not have been said that the assessee was the owner of any valuable article at that time.
The ITAT underlined that since the assessee was not the owner of those high-denomination notes even prior to 16-1-1978 when those notes were actually valuable. Nor the income tax department found out any evidence on its part about the assessee being the owner of such amount of money on 16-1-1978.
Thus ITAT opined opinion that the addition of Rs. 1,35,000 as unexplained money found with the assessee by applying the provisions of Section 69A itself was unsupportable. And the question of levying penalty for concealment on the said amount, could not arise.
On the request of the Revenue, the Tribunal referred the following question of Law to the High Court,
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 69A were not applicable to the present case inasmuch as when the high denomination notes of the face value of Rs. 135000/-were attempted to be encashed by the assessee by tendering the same to the RBI, they had cased to remain legal tenders and had thus become valueless and in that view, in cancelling the penalty levied under Sec. 271(1)(c)?”
Observations made by the High Court:
The High Court observed that it was not the case of the Revenue that the assessee had made investment of the reported amount prior to demonetisation which had not been recorded in the books. The specific case of the Revenue was that the assessee was found owner of specified demonetised currency notes on 24-01-1978 and that money was not recorded in the books of account (u/s 69-A related to unexplained money)
The Court observed that had the Revenue made the addition under section 69 (unexplained investment) it would have made substantial difference.
The High Court observed that the expression “money” has different shades of meaning, However in the context of the Income tax Act 1961, it can only be a currency /bank notes which has the representative value. Therefore the currency notes should have some representative value (it could be tendered as a money which has intrinsic value) on the date when found in the possession of the assessee.
Held:
The High Court upheld the ITAT judgment that the high denomination notes found in possession of the assessee after their demonetisation can not be said “unexplained money u/s 69-A” which the assesse had not declared in return of income and therefore it would not warrant levy of penalty u/s 271(1)(c)
Download Full Judgment
