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The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal tender character of the old Bank Notes in the denominations of ₹ 500 and ₹ 1000 was introduced.

8.2 The ld. counsel explained that till 31.12.2016, these notes i.e., SBNs in demonetized currency was not held to be illegal tender and there is no provision that holding these notes or transacting the same will amount to violation of any law. Before us, the ld. counsel compared the earlier demonetization scheme of 1978, i.e., The High Denomination Bank Notes (Demonetization) Act, 1978 with the present Demonetization Scheme, whereby the scheme was announced on 16.01.1978 wherein the high demonetization notes of value Rs.500/-, Rs.1000/- or Rs.10000/- was withdrawn from circulation and there was a clear bar in the Act for transfer or receipt of high denomination notes and that demonetized bank notes was ceased to be legal tender vide section 3 & 4 from 16.01.1978 only, which reads as under:-

"3. High denomination bank notes to cease to be legal tender.--On the expiry of the 16th day of January, 1978, all high denomination bank notes shall, notwithstanding anything contained in section 26of the Reserve Bank of India Act, 1934 (2 of 1934), cease to be legal tender in payment or on account at any place.

4. Prohibition of transfer and receipt of high denomination bank notes.--Save as provided by or under this Act, no person shall, after the 16th day of January, 1978, transfer to the possession of another person or receive into his possession from another person any high denomination banknote."

"10. We have also perused the decision of A. Govindarajulu Mudaliar v. CIT, on which reliance is placed by learned counsel for the Revenue. We, however, fail to understand how the above decision helps the Revenue in the instant case. In that case, certain amounts appeared in the account books of a firm of which the assessee was a partner as credits for him. The assessee was asked for an explanation as to how he came to possess this amount. His explanation in regard to the source of this amount in part was not accepted. It was in that context that the Supreme Court observed that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature. That is not the position in the case before us. In this case, the assessee could prove satisfactorily the source and nature of the amounts. Addition was made not for that reason. The assessee was further required to prove the receipt of the amount of Rs. 2 lakhs therefrom in high denomination notes. In other words, the assessee was asked to prove as to when and from whom he received the amount in high denomination notes. The assessee gave reasonable explanation for his inability to give detailed account of receipts and disbursements of amounts from time to time in currencies of various denominations including high denomination notes. He could, however, satisfy the authorities about the fact that he was often in possession of Rs. 1,000 denomination notes and the probability of high denomination notes of the value of Rs. two lakhs being included therein. In fact, the Revenue itself was satisfied about the inclusion of 96 notes of Rs. 1,000 each therein. The amount of Rs. 1,04,000 was added as income from undisclosed sources only because, according to the Revenue, the assessee failed to discharge the onus cast on him to prove the acquisition of each and every high denomination note encashed by him. This approach, as earlier indicated, is not correct.