Share Capital and Member Deposits Wrongly Clubbed: ITAT Remands Matter Back to AO for De Novo Verification [Read Order]

The assessee, Keezhuparamba Service Co-operative Bank Ltd., a co-operative society registered under the Kerala Co-operative Societies Act, had filed its revised return of income for AY 2022-23, declaring nil income after claiming deduction under Section 80P. The case was picked up for scrutiny to verify the genuineness of transactions relating to a purported substantial increase in capital.

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During assessment, the AO observed an increase of ₹35.05 crore in the assessee’s capital account, which he treated as unexplained cash credits under Section 68. The AO alleged that the assessee failed to explain the source and nature of the increase.

The National Faceless Appeal Centre (NFAC) subsequently confirmed the addition, holding that the assessee had not provided “bare minimum documents” to substantiate its claims.

After examining the records, the ITAT noted that the CIT(A)’s finding that no documents were filed was contrary to the material on record. The Tribunal pointed out that the AO’s own order clearly recorded receipt of the assessee’s return of income, computation statement, balance sheet, profit and loss account, and registration certificate.

The Bench further observed that the addition under Section 68 was made based on an incorrect understanding of facts, as the AO had mistakenly clubbed deposits from members with the share capital, leading to a wrongful assumption of an inflated capital figure.

The assessee had contended that deposits from members were wrongly included in the computation of share capital, which materially affected the AO’s conclusions.

The bench of Inturi Rama Rao (Accountant Member) and Rahul Chaudhary (Judicial Member) finding merit in the assessee’s contention, held that justice would be best served by giving the assessee another opportunity to clarify the factual position.

The ITAT set aside the NFAC’s order and remanded the matter to the AO for fresh examination. The AO has been directed to verify, de novo, the distinction between share capital and member deposits based on the assessee’s audited financials.

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The appellate tribunal also directed that the AO scrutinize the increase in share capital and deposits during the year, while giving the assessee full opportunity to furnish documentary evidence regarding the identity and creditworthiness of depositors and the genuineness of transactions.

Since the issues in both assessment years AY 2020-21 and AY 2022–23 were identical, the Tribunal’s findings were applied mutatis mutandis to both years. Accordingly, the appeals filed were allowed for statistical purposes, with the matter remanded to the Assessing Officer for fresh verification and adjudication in accordance with law.

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