Fate of Industry experts who took early retirement from job to venture into Startups but faced huge tax demands for cash deposited during demonetisation

The Indian citizens will never forget the historic day when the Indian Prime Minister announced demonetisation and declared that the use of all existing Rs. 500 and Rs.1000 bank notes would be invalid post-midnight of 08.11.2016. The general Public was allowed to deposit the specified bank notes between the period 08.11.2016 to 30.12.2016 and the selected cases were scrutinized by the Income tax Department and most of the scrutiny orders were passed in the month of December 2019 resulting into huge tax demands.

It is observed that in some cases, the taxpayer have received money from Employees' Provident Fund Organisation and Gratuity as credit in their bank account which have been withdrawn before demonetization and later on bound to be redeposited due to demonetisation, however as the taxpayer was a salaried individual and not maintaining any books of accounts including cash book, the Income tax Officer has not accepted the explanation of the taxpayer and has treated the genuine cash deposit as unaccounted income. Many of these persons are industry experts who have taken early retirement from job to venture into Startups and have suffered huge tax demand because the then Government resorted to resptrospective amendment in law raising the normal tax rate from 30% approx to 77.25% on such cash depsoits by amending the provisions of Section 115BBE.

The only resort available to these industry experts is to file an appeal before appellate authorities online and argue their case before CIT(A). The challenge here is that the cash leaves no trail and hence it is difficult to prove that the cash which was withdrawn from bank was infact deposited into the bank during demonetization and hence the past judicial pronouncement becomes very important on this issue. 

We have scouted few cases from Income tax Case Laws Archives where the taxpayers have withdrawn money and have deposited the same and the Courts have ruled in favour of the taxpayer. 

1. ACIT vs. Baldev Raj Charla [121 TTJ 366 (Delhi)] 

The Honourable Tribunal Delhi Bench held that -

“Where there were sufficient cash withdrawals to cover cash deposits in question, merely because there was time gap between withdrawal of cash and cash deposits, explanation of assessee could not be rejected and addition on account of cash deposit could not be made [In favour of assessee].”

2. Gordhan vs. ITO [ITA No. 811/DEL/2015] dated 19.10.2015

The Honourable Tribunal Delhi Bench held that -

“Applying the proposition as laid down by the Tribunal to the facts of the case, I have to hold that no addition can be made u/s 68 of the I.T. Act on the sole reason that there is a time gap of 5 months between the date of withdrawal from bank account of the cash in question and the redeposit of the same in the Bank account , unless the Assessing Officer demonstrated that the amount in question has been used by the assessee for any other purpose. In my view the addition is made on inferences and presumptions, which is bad in law. Hence, the addition in question is deleted and the appeal of the assessee is allowed.”

Full judgement link: https://itatorders.in/appeal/ita-811-del-2015-14-shri-gordhan-delhi-ito-gurgaon

3. DCIT vs. Nikhil Nanda [I.T.A.No.3644/Del/2013] dated 18.03.2015

The Honourable Tribunal Delhi Bench held that -

“Perusal of the above shows that the Hon'ble ITAT has clearly held that simply because there was a time gap between the cash withdrawal and cash deposits in  bank the explanation of the assessee cannot be rejected, unless there is a finding that the amount was used somewhere else.

In the instant case also it is observed that there is no finding by the AO that the cash withdrawals had been used anywhere else by the appellant. Moreover, the appellant has also submitted details from which it can be observed that the appellant had substantial withdrawing for its household expenses.

In view of the findings above that the appellant had substantial cash withdrawals from which the cash deposits had been made in the bank account and also in view of the fact that the AO has not brought any evidences on record to show that the money withdrawn was used for any other purpose other than being re deposited in the bank account, the addition made by the AO cannot be sustained. Respectfully following the decision of the Hon'ble ITAT Delhi in the case of Baldev Raj Charla and Ors. discussed above and other judicial decisions discussed above and the facts of the case the addition made by the AO is deleted."

Full judgement Link: https://itatorders.in/appeal/ita-3644-del-2013-14-dcit-new-delhi-shri-nikhil-nanda-new-delhi

A Techno-Legal startup itatorders.in helps to file an appeal against such cases online and do a case research on such issues. A lot of taxpayers must have received notices of cash deposited during demonetization and they can use the services of legal experts. And now in the advent of the new initiative by Income Tax Department of mandatory faceless assessment, such online research service from legal expert shall help the taxpayer to reduce litigation costs, as there is no requirement of physical interaction between taxpayer and Income Tax Authorities and hence a good online submission from Legal expert shall suffice.