On 19 th May, RBI issued a Notification (RBI/2023-24/32) wherein it was declared that ₹ 2000 denomination banknote is being withdrawn from Circulation with immediate effect and this reminded us of 2016 Demonetization. However, there are more differences than similarities between both the moves. This article is aimed at providing clarity about ‘Withdrawal from Circulation’ and ‘Withdrawal as a Legal Tender ’ and steps to be taken in Order to Avoid any Controversy from Income Tax Point of View.
What does it mean when RBI Says Withdrawal from Circulation?
The ₹ 2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934 primarily with the objective to meet the currency requirement of the economy in an expeditious manner after withdrawal of the legal tender status of all ₹ 500 and ₹ 1000 banknotes in circulation at that time. With fulfilment of that objective and availability of banknotes in other denominations in adequate quantities, printing of ₹ 2000 banknotes was stopped in 2018-19.
Withdrawal from Circulation essentially means that: –
- Printing of the Currency has been stopped
- No Currency which is withdrawn from will be issued by Banks to the General Public
- General Public can accept the said Currency for Regular Transactions and can deposit/exchange the same with the Banks within the time specified i.e. 30/09/2023.
In 2013-14 also, RBI had undertaken a similar withdrawal of notes from circulation of the Banknotes Printed before 2005.
2016 Demonetization: Withdrawal of Legal Tender Character of existing ₹ 500/- and ₹ 1000/- Banknotes
Gazette Notification No 2652 dated November 08, 2016 issued by Government of India says that ₹ 500 and ₹ 1000 denominations of Banknotes of the existing series issued by Reserve Bank of India shall cease to be legal tender with effect from November 09, 2016
Cease To Be Legal Tender means that: –
- No Currency Note which ceases to be a Legal Tender will be issued by Banks/ Financials Institutions to the General Public
- General Public cannot accept/use the said Currency for any Transaction (With a Few exceptions) and can only deposit/exchange the same with the Banks within the time specified i.e., 30/12/2016.
Controversies as a result of 2016 Demonisation from Income Tax Point of View
Thorough inquiries were made of the Income Tax Returns filed for the demonetization period. Additions were made to the Return of Income mainly due to the following reasons
- Abnormal jump in cash sales during the Demonetisation period
- Sudden increase in percentage of Cash Sales to un-identified persons
- Substantial Amount deposited over and above the Cash balance as on 31-03- 2016 in ITR for AY 2016-17
- Significant Difference between Opening Stock and Closing Stock
Following are a few Cases wherein Courts have ruled in Favour of Assessee in respect of Cash Deposits
- No Sec. 68 additions for cash deposited during demonetisation from available balance: – R. S. Diamonds India (P.) Ltd. v. ACIT – [2022] 145 taxmann.com 545 (Mumbai-Trib.)
- No additions if cash deposits during demonetization was actual cash sales of assessee supported with bills: – ACIT v. Hirapanna Jewellers – [2021] 128 taxmann. com 291 (Visakhapatnam – Trib.)
- Addition being made on the sole ground of deviation in ratio of cash sales and cash deposits during the demonetization period with that of earlier period, is not proper and lawful:
– Agsons Global Pvt Ltd vs. ACIT (Appeal Nos. 3741 to 3746/Del/2019
- No sec. 68 additions if assessee furnished evidence that cash deposits made during demonetization were cash sales: – ACIT Central Circle-2, Jaipur vs. Shri Chandra Surana (ITA No. 166/ JP/2022)
Measures to be taken to avoid Disputes as a result of 2023 RBI Notification
- Maintaining sufficient documentation in order to discharge initial onus to prove that Cash Deposited is out of Sales Proceeds/Cash in Hand.
- Maintaining Proper Books of Accounts (in case of Businesses) so as to reconcile Sales-Purchases-Inventory
- Rs.2,000/- Banknote is still a Legal Tender, so it can be accepted against sales and can be deposited in Current Account. However, anything disproportionate to the Nature of Business will be looked into by the Income Tax Department.
- It has not yet been declared that till what time Rs.2,000/- Banknote will be considered as a Legal Tender. But sooner after the expiry of time period given i.e., 30/09/2023, some announcement in this regard is expected.
Compilation of Relevant FAQs on 2023 Notification
- Does the legal tender status of ₹ 2000 banknotes remain?
Yes. The ₹ 2000 banknote will continue to maintain its legal tender status.
- Can ₹ 2000 banknotes be used for normal transactions?
Yes. Members of the public can continue to use ₹ 2000 banknotes for their transactions and also receive them in payment. However, they are encouraged to deposit and/or exchange these banknotes on or before September 30, 2023.
- What should the public do with the ₹ 2000 denomination banknotes held by them?
Members of the public may approach bank branches for deposit and/ or exchange of ₹ 2000 banknotes held by them. The facility for deposit into accounts and exchange for ₹ 2000 banknotes will be available at all banks until September 30, 2023. The facility for exchange will also be available at the 19 Regional Offices (ROs) of RBI until September 30, 2023.
- What if someone needs more than ₹ 20 , 000 /- cash for business or other purposes?
Deposit into accounts can be made without restrictions. The ₹ 2000 banknotes can be deposited into bank accounts and cash requirements can be drawn thereafter, against these deposits.
- Is there a limit on deposit of ₹ 2000 banknotes into a bank account?
Deposit into bank accounts can be made without restrictions subject to compliance with Know Your Customer ( KYC) norms and other applicable statutory / regulatory requirements.
Conclusion:
Overall objective and purpose seem to aim replacing high denomination notes which was majority brought in to meet cash shortage in 2016 demonetization. Announcing the withdrawal, the Reserve Bank of India (RBI) said evidence showed the denomination was not being commonly used for transactions. Some economists believe that it could boost bank deposits at a time of high credit growth. Similarly the race to spend India’s biggest pink note has been on since its central bank announced last month that they would be removed from circulation. However, a question remains to be answered whether this pull back has shaken consumer confidence and the trust on Indian rupees.
This is why we feel that democracy’s important: because democracy allows you to have small explosions and therefore avoid the bigger explosions.
— Indira Gandhi |