In a significant ruling, the Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the Assessing Officer (AO) erred in treating the cash deposits of Specified Bank Notes (SBNs) made by a Non-Banking Financial Company (NBFC) as unexplained without following the due verification procedure prescribed under the CBDT’s Standard Operating Procedure (SOP).
Case Details
During the demonetisation period, the assessee, an NBFC engaged in lending activities, deposited SBNs collected from its borrowers towards loan repayments. The AO, while framing the assessment, treated such deposits as unexplained money under section 69A of the Income Tax Act, alleging that the assessee failed to substantiate the source of cash.
The assessee contended that the deposits represented legitimate loan repayments received in the normal course of business and duly recorded in the books. It also argued that the AO had ignored the CBDT’s SOP which required verification of the genuineness of SBN deposits in the case of NBFCs before drawing adverse conclusions.
Upon appeal, the ITAT observed that the AO had not carried out any verification or cross-check with loan ledgers, daily collection registers, or borrower accounts. Instead, he mechanically treated the deposits as unexplained.
Tribunal’s Findings
The Tribunal noted that:
- The CBDT had specifically issued guidelines to field officers to verify demonetisation-period cash deposits of NBFCs and co-operative societies in a structured manner before making additions.
- The AO’s failure to adhere to the SOP constituted a violation of principles of natural justice.
- The assessee had maintained proper records, and the AO did not point out any discrepancy in the loan collection data.
Accordingly, the ITAT deleted the addition and held that the AO’s action was unjustified and arbitrary.
Key Takeaway
The decision reinforces that cash deposits during the demonetisation period by NBFCs cannot be treated as unexplained merely based on suspicion. The CBDT’s SOP mandates factual verification of the business nature of deposits, and any deviation by the AO can invalidate the assessment.
Case title
Spandana Sphoorty Financial Ltd. v. Assistant Commissioner of Income-Tax, Circle-3(1), Hyderabad.