The Ahmedabad “A” bench of the Income Tax Appellate Tribunal ( ITAT ) in a recent case held that additions under section 68 of the Income Tax Act 1961 ( ITA ) are not to be attracted upon violation of RBI notifications, if the source and nature of the cash deposits are adequately explained.
The case at hand is an appeal filed by the Revenue/appellant challenging an order passed by the Commissioner of Income-tax (Appeals) [ CIT (A) ] on February 2, 2024. The appeal arose from an assessment order dated December 30, 2019, under section 143(3) of ITA concerning the Assessment Year (AY) 2017-18.
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The assessee in this case is Shivoham Sagar Co-Op Credit Society Ltd, a cooperative society registered under the Gujarat Co-operative Societies Act. The primary purpose of the society is to provide credit facilities to its members. The society filed its income tax return on July 15, 2017, declaring a total income of Rs. NIL, having claimed a deduction of Rs. 9,57,108 under Section 80P of the Income Tax Legislature. The return was selected for scrutiny, and notices under Sections 143(2) and 142(1) of ITA were issued and served.
During the scrutiny, the Assessing Officer (AO) noted that the society had claimed a deduction under Section 80P of ITA for interest earned from nationalized banks. The AO disallowed a portion of this deduction, amounting to Rs. 4,79,001. Additionally, the AO observed that the society had made substantial cash deposits in its bank accounts during the demonetization period, specifically in old currency notes of Rs. 500 and Rs. 1000 on November 10, 11, and 12, 2016, totaling Rs. 77,20,000.
Given that the old currency notes had ceased to be legal tender as of November 8, 2016, the AO questioned the legitimacy of these deposits. The AO issued a show-cause notice to the society, questioning why the excess deposit of Rs. 74,65,543 (the difference between the deposited amount and the opening balance) should not be treated as unexplained income and added to the society’s income.
In response, the society argued that it had accepted these cash deposits from its members before the RBI’s notification dated November 8, 2016, and had ceased accepting such deposits after that date.
The society provided the names, addresses, and KYC details of the depositors, asserting that the deposits were made in good faith, under the belief that they could still accept old currency notes. Despite this explanation, the AO remained unconvinced and added the amount of Rs. 74,65,543 to the society’s income under Section 68 of ITA. The AO’s rationale was that accepting old currency notes after the cessation of their legal tender status defeated the purpose of demonetization.
The society, dissatisfied with the AO’s decision, appealed to the CIT(A) , who upheld the AO’s decision regarding the disallowance under Section 80P but reversed the addition made under Section 68 of the tax legislature. The CIT(A) relied on a precedent from the Bangalore Tribunal in the case of Sri Bhageeratha Pattina Sahakara Sangha Niyamitha, which held that a contravention of RBI notifications should not necessarily trigger Section 68 additions if the nature and source of the funds are otherwise explained.
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The Revenue, disagreeing with the CIT(A)’s decision to delete the addition under Section 68 of the tax statute, appealed further before the ITAT.
Before the tribunal, the Revenue’s main arguments were that the CIT(A) erred in deleting the addition and that the society was not authorized to accept old currency notes post-demonetization as per the RBI notification.
The Departmental Representative (DR) contended that accepting demonetized currency was inherently illegal and thus should not be considered genuine. Conversely, the Authorized Representative (AR) for the society argued that the CIT(A)’s decision was justified and that the society had provided sufficient documentation to explain the source of the deposits.
The division bench of Ms Suchitra Kamble and Mr Makarand V Mahadeokar, upon reviewing the case facts, concluded that the facts of the case were similar to those in the Sri Bhageeratha Pattina Sahakara Sangha Niyamitha case, where it was determined that violations of RBI notifications do not necessarily correlate with the applicability of Section 68 of the income tax statute, provided the nature and source of the deposits are explained.
The tribunal noted that the society had adequately demonstrated the nature and source of the deposits as business collections from its members and had ceased accepting old currency notes following the RBI’s clarifications. Therefore, the tribunal upheld the CIT(A)’s decision to delete the addition under Section 68 of ITA.
The Revenue’s appeal was thus dismissed, affirming the CIT(A)’s order to exclude the disputed amount from the society’s income.
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