MALLADIHALLY PRATHAMIKA KRUSHI PATTINA SAHAKARA SANGHA NIYAMITA DOGGANAL,CHITRADURGA vs. INCOME-TAX OFFICER, WARD - 1, CHITRADURGA, CHITRADURGA

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ITA 1031/BANG/2026Status: DisposedITAT Bangalore22 June 20265 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the assessee is entitled to deduction under section 80P(2)(a)(i) on profits attributable to its eligible business, even with nominal members, and directed the Assessing Officer to grant the deduction. The issue of provision for expenditure was restored to the Assessing Officer for verification. The addition for cash deposits was also restored to the Assessing Officer for verification of member details and KYC.

What were the facts?

The assessee, a primary agricultural credit co-operative society, filed its return declaring nil income. The Assessing Officer denied deduction under section 80P, disallowed a provision for expenditure, and treated cash deposits during demonetization as unexplained cash credit.

What were the issues?

Whether the denial of deduction under section 80P was justified, and whether cash deposits during demonetization constituted unexplained cash credit.

Which sections of the Income-tax Act were involved?

Section 80P,Section 68,Section 115BBE,Section 234A,Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘SMC’ BENCH : BANGALORE

Before: SHRI PRASHANT MAHARISHI

IN THE INCOME TAX APPELLATE TRIBUNAL ‘SMC’ BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT ITA No. :1031/Bang/2026 Assessment Year : 2017-18

Malladihally Prathamika Krushi Pattina Sahakara Sangha Niyamita Dogganal Income-tax Officer, Ward – 1, Dogganahallu Village and Post, Chitradurga Vs. Holalkere TQ Chitradurga, Karnataka 577526 PAN: AACAM2275J APPELLANT RESPONDENT

Assessee by : Sri Narendra Sharma, Advocate : Sri. Ganesh R Gale, Revenue by Standing Counsel for Department

Date of Hearing : 25-05-2026 Date of Pronouncement : 22-06-2026

ORDER PER PRASHANT MAHARISHI, VICE PRESIDENT 1. This appeal by Malladihally Prathamika Krushi Pattina Sahakara Sangha Niyamita, Dogganal (“the assessee” or “the appellant”), is directed against the Appellate order dated 23 January 2026 passed by the Joint Commissioner of Income-tax (Appeals)-1, Visakhapatnam [“the learned CIT(A)”], for assessment year 2017-18. By the said order, the learned CIT(A) partly allowed the assessee’s appeal against the assessment order dated 16 December 2019 passed under section 143(3) of the Income-tax Act, 1961 by the Income-tax Officer, Ward-3, Devanagari [“the learned AO”].

2.

Aggrieved, the assessee preferred this appeal and raised the following grounds:

GROUNDS OF APPEAL 1. The orders of the authorities below, to the extent they are adverse to the appellant, are contrary to law, equity, evidence, probabilities, facts, and the circumstances of the case. 2. The learned ADDL/JCIT(A)-1, Visakhapatnam erred in upholding the denial of deduction under section 80P(2)(a)(i) of the Act on the ground that the principle of mutuality was violated, without appreciating that such denial was unsustainable in law on the facts and circumstances of the appellant’s case. 3. The learned ADDL/JCIT(A)-1, Visakhapatnam erred in directing the learned AO to verify the disallowance of provision for expenditure of Rs. 3,84,360/-, instead of allowing the appellant’s claim outright on the facts and circumstances of the case. 3.1 Without prejudice, if the provision for expenditure is disallowed, the resulting increase in business profits should also qualify for deduction under section 80P of the Act. 4. The learned ADDL/JCIT(A)-1, Visakhapatnam erred in sustaining the addition of Rs. 18,71,500/- under section 68 of the Act in respect of cash deposited in the bank account during demonetization by treating it as unexplained cash credit. 4.1 The learned ADDL/JCIT(A)-1, Visakhapatnam failed to appreciate that the cash deposits represented amounts collected from members towards loan recoveries and pigmy collections, all duly recorded in the cash book. The addition made solely on the ground that the appellant was not permitted to collect such cash is therefore contrary to law and the facts of the case. 4.2 The learned AO erred in invoking section 115BBE and taxing the said addition at the rate of 60% on the facts and circumstances of the case. 5. Without prejudice to its right to seek waiver from the Hon’ble CCIT/DG, the appellant denies liability for interest under sections 234A and 234B of the Act, which deserves to be cancelled on the facts and circumstances of the case. Page 2 of 5

6.

For the above and any other grounds that may be urged at the hearing, the appellant prays that the appeal be allowed, justice be rendered, costs be awarded, and the institution fee be refunded as part of such costs.

3.

Briefly stated, the assessee derives income from advances made to its regular, nominal, and associate members. It filed its return of income on 14 March 2018 declaring nil income. The return was selected for scrutiny, and statutory notices were issued.

4.

The Assessing Officer noted thatthe assessee had deposited cash during demonetization and had different classes of members, including nominal members who had no voting rights in elections to the governing committee. On that basis, the Assessing Officer held that the principle of mutuality was not satisfied and that deduction under section 80P(2)(a)(i)was not available for income earned from associate or nominal members. The Assessing Officer also disallowed provision for expenditure of Rs. 3,84,360/- and determined the profit for the year at Rs. 4,55,636/-. Further, after considering the opening cash balance of Rs. 1,09,330/- as on 9 November 2016, the balance cash deposits of Rs. 18,71,500/- out of total deposits of Rs. 19,81,000/- were treated as unexplained cash credit under section 68, despite the assessee’s explanation that the amount had been received from members. The assessment was accordingly completed at a total income of Rs. 23,27,136/-.

5.

Aggrieved, the assessee appealed before the learned CIT(A). The learned CIT(A) confirmed the addition of Rs. 18,71,500/- under section 68 and upheld the denial of deduction under section 80P. However, in respect ofthe disallowance of provision for expenditure of Rs. 3,84,360/-, the matter was restored to the Assessing Officer for verification, as the provision related to regular items such as interest, depreciation on movable and immovable property, and gratuity.

6.

We have considered the submissions of Shri Narendra Sharma, learned counsel for the assessee, and Shri Ganesh R. Ghale, learned Standing Counsel for the Department.

7.

The assessee is a primary agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959. It provides credit facilities to members and supplies items such as kerosene, fertilizers, and food grains. Such credit facilities are funded through loans from the District Central Co-operative Bank and members’ deposits. The assessee also acts as an intermediary between the Government of Karnataka and agriculturists in implementing loan schemes for farmers and members. It has stated that it does not deal with non-members and that its income is attributable to its business of providing credit facilities to members. In the absence of material showing transactions with non-members, the assessee is entitled to deduction under section 80P(2)(a)(i) on profits and gains attributable to its eligible business, notwithstanding transactions with nominal members. The Assessing Officer is therefore directed to grant the deduction. Ground No. 2 is allowed.

8.

On the provision for expenditure, we find no reason to interfere with the learned CIT(A)’s direction restoring the issue to the Assessing Officer for verification. If the provision of Rs. 3,84,360/- is found to be in accordance with law and consistent with the assessee’s regularly followed method of accounting, it shall be allowed. Ground No. 3 is allowed for statistical purposes.

9.

As regards Ground No. 4, relating to cash deposited during demonetization, the assessee submitted that it had furnished KYC details of the persons who deposited specified bank notes with it. If the assessee establishes that the deposits were made by its members and supports the same with adequate KYC details, the addition cannot be sustained merely because the assessee deposited specified bank notes received during demonetization. Although section 68 may apply where credits appear in the books of a members’ credit co-operative society and the nature and source are not satisfactorily explained, no addition can be made if the assessee proves that the money belonged to its members and is supported by proper KYC details. The matter is therefore restored to the Assessing Officer with a direction to verify the details furnished by the assessee and, if satisfied that the deposits belong to members and the KYC details are in order, delete the addition of Rs. 18,71,500/- under section 68. Ground No. 4 is allowed for statistical purposes.

10.

Ground No. 5, relating to interest, is consequential in nature. No other grounds were pressed.

11.

In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the open court on 22nd June, 2026

Sd/- (PRASHANT MAHARISHI) VICE PRESIDENT Bangalore, Dated, the 22nd June, 2026. *VM* Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. CIT(A)

By order

Assistant Registrar, ITAT, Bangalore

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