Demonetization – What the Courts have to say?

Need for maintenance of accounts?

The Supreme Court in a judgment pronounced in 1956 held that if there is no reason to doubt the genuineness of the financial statements of the taxpayer, the question of taxing such HDN deposits would not arise. Hence, it is imperative that the financial statements duly reflect the cash position along with the source of the same.

Courts have also taken a view that a taxpayer should explain the sudden increase in his cash balance. Hence, in the case of a sudden increase in cash balance, there is an exposure that the cash so deposited could be treated as undisclosed income. However, I am of the view that as long as the source of such income is well captured and duly explained, the mere increase in cash balance cannot be a ground for treating such HDN deposit as undisclosed income.

Should such ‘HDN’ be separately disclosed in the books of accounts?

The Patna High Court in a judgment pronounced in 1955 held that no penal consequence could emanate solely on the ground that the taxpayer did not separately disclose the HDN received. As mentioned above, as long as the source of the same is well substantiated and duly captured in the financial statements, such additional disclosure would not be required.

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