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Facts
The assessee, a credit cooperative society, deposited Rs. 17,16,500 in demonetized currency during the 2016 demonetization period. The Assessing Officer (AO) treated these deposits as unexplained money under Section 69A and taxed them under Section 115BBE. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the cash deposits were explained as loan repayments from members and were properly recorded in the society's audited books. The Tribunal found no law prohibiting cooperative societies from accepting demonetized notes before December 31, 2016, and thus the AO's reliance on Section 69A and Section 115BBE was misplaced.
Key Issues
Whether cash deposits made in demonetized currency by a cooperative society during the demonetization period, explained as loan repayments from members, can be treated as unexplained money and taxed under Section 115BBE.
Sections Cited
142(1), 69A, 115BBE, 144, 68, 147, 148, 133A, 132, 80P
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi vide order dated 16/08/2024 in DIN No. ITBA/NFAC/S/250/2024-25/1067697472(1) for the assessment year 2017-18.
The assessee has raised following grounds of appeal:
Page 2 of 11 “1. That the order of the lower authorities in so far it is prejudicial to the interests of the appellant is bad, erroneous in law and against the facts and circumstances of the case.
2. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in adding a sum of Rs.17,16,500/- as unexplained cash credits u/s 68 of the Act even though the source of such cash was explained with supporting evidences.
That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the appellant cannot transact in Specified Bank Notes after 09.11.2016.
4. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in levying tax under amended provisions of section 115BBE of the Act for the transaction made before 15.12.2016. Each of the above grounds is without prejudice to one another and the appellant craves leave of the Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal.”
2.1 At the outset, it is seen that there is a delay of 125 days in filing the appeal. The assessee has filed an affidavit requesting condonation of delay. In the affidavit, it is stated that the assessee, being a credit cooperative society, received the CIT(A)'s order on 16.08.2024. The Board President, who is also the deponent, forwarded the order to a known local consultant. However, the consultant could not provide proper legal advice and asked the assessee to contact a professional Chartered Accountant. Due to administrative work and lack of access to immediate legal support, the assessee took some time to find a competent Chartered Accountant. Eventually, M/s MSSV & Co., Chartered Accountants, Bangalore, were contacted. Upon their advice, the appeal was filed with a delay of 125 days, along with a request for condonation. It is submitted that the delay was not intentional or deliberate and occurred due to genuine circumstances beyond the control of the assessee.
2.2 The learned Departmental Representative opposed the condonation. He submitted that the delay is excessive and not sufficiently explained. He argued that lack of knowledge or delay in getting advice cannot be considered a reasonable cause. He prayed that the condonation may be rejected.
2.3 We have considered the rival submissions. We have also perused the affidavit filed by the assessee. The reasons stated in the affidavit appear to be genuine and reasonable. The delay was due to lack of legal guidance and administrative constraints. There is no evidence of negligence or deliberate delay. Considering the facts and in the interest of justice, we are satisfied that the assessee was prevented by sufficient cause in not filing the appeal within the prescribed time. Accordingly, we condone the delay of 125 days in filing the appeal and proceed for hearing on merits.
3. The effective issue raised by the assessee is that the revenue authorities erred in holding that the assessee could not transact in Specified Bank Notes (SBNs) and further erred in treating the cash deposits made during the demonetization period as unexplained credits.
3.1 The relevant facts are that the assessee is a co-operative society and engaged in the business of providing credit facilities to its members. The assessee did not file its return of income for the year under consideration within the due date though substantial cash deposits amounting to ₹ 17,16,500/- were made during the demonetization period. Accordingly, a notice under section 142(1) of the Act dated 27th December 2017 was issued requiring the assessee to file its return of .
Page 4 of 11 income, followed by subsequent notices dated 18th April 2019 and 07th May 2019 requiring the assessee to furnish various details such as bank accounts held, cash book, cash deposits, deposits in SBNs, and other relevant information.
In response, the assessee furnished the required details vide letter dated 14th June 2019 and filed its return of income on 01st August 2019, declaring income of ₹ 4,78,669/- only. However, the return was treated as invalid since it was filed after 31st March 2018. Nonetheless, the information provided therein was considered by the AO for the purpose of assessment.
The AO further asked the assessee to provide the monthly breakup of cash receipts, cash deposits, cash withdrawals, and closing cash balances for the period from 1st April 2015 to 31st July 2017. The assessee submitted this information vide letter dated 05th September 2019.
However, the AO issued a show cause notice dated 05th 6. September 2019 proposing to treat the cash deposits as unexplained money under section 69A of the Act.
In response to the show cause notice, the assessee submitted that the deposits were made out of cash received from members. To support this claim, it furnished a list of members who had availed loans along with their outstanding balances as on 8th November 2016 (i.e., the evening of demonetization), a list of members who had repaid loans between 9th November and 31st December 2016 (demonetization . period), and a list of members to whom new loans were sanctioned during the same period.
The AO rejected the assessee’s explanation and held that SBNs ceased to be legal tender for general transactions from 9th November 2016, except for deposit or exchange with the RBI, banks, post offices, or other institutions authorized by the RBI. The AO observed that the assessee, being a co-operative society, was not authorized to accept SBNs. He further noted that the assessee deposited the demonetized currency into its bank accounts but failed to satisfactorily explain the source of the cash. The AO emphasized that the burden of proving the genuineness of the cash credits lies with the assessee. Since the entries were made in the bank passbook, which is not considered a book of account maintained by the assessee. Accordingly, the AO treated the cash deposits as unexplained money under section 69A of the Act. Consequently, he taxed the amount under the provisions of section 115BBE of the Act and completed the assessment under section 144 of the Act.
Aggrieved by the order, the assessee filed an appeal before the learned CIT(A). Before the learned CIT(A), it was submitted that the assessee had filed its return of income for A.Y. 2017–18 belatedly on 01- 08-2019, declaring a total income of ₹4,78,669/- only. The AO treated the return as invalid and passed an order under section 144 of the Act. He further added ₹17,16,500/- as unexplained money under section 69A of the Act, treating it as unaccounted deposits during the demonetization period, and computed tax at a special rate accordingly.
The assessee contended that it had maintained proper books of account, duly audited under the Co-operative Societies Act. It had submitted all relevant details, including bank accounts, opening and closing cash balances, deposits in demonetized currency, sources of such deposits, and corresponding entries in the cash book. A list of borrowers and repayments by the members during the relevant period was also submitted. The society explained that it lends money to its members, and the recovered loan amounts were deposited in the bank accounts. All transactions were recorded and verifiable from the books of accounts.
It was argued that the AO failed to appreciate that the cash deposits were duly recorded and supported by documentary evidence. Moreover, the AO overlooked the assessee’s status as an Association of Persons (AOP), entitling it to a basic exemption of ₹2,50,000/- and deduction under section 80P of the Act, which were not granted.
The assessee further submitted that section 69A of the Act applies only when ownership of unaccounted money is not explained. In this case, the cash was recorded in the books of account, and no survey or search was conducted under section 133A or 132 to justify the invocation of section 69A of the Act. Therefore, the AO’s reliance on this provision was unjustified. It was also argued that the proper course would have been to assess the income under section 147 of the Act after issuing notice under section 148 of the Act, since the return was belated but disclosed all income. However, the learned CIT(A) confirmed the addition made by the AO by observing as under: 4.3 It was noted by the AO during the year under consideration that the assessee society has deposited cash, in banned SBN currency notes of 500/- & 1,000/- to the tune of Rs. 17,16,500/- only, during the period of demonetization in the accounts maintained by it with IDBI Bank Ltd, bearing .
Page 7 of 11 account no. 364104000101349 and Shiva Sahakari Bank Niyamitha bearing account no. 2020000221 respectively. The AO observed that the society filed its Return of Income for the year under consideration in response to notice u/s 142(1) on 01.08.2019 only. As the Return of Income was filed after 31.03.2018 for the A.Y. 2017-18, the same was treated as invalid return. However, the AO took consideration information available from this Return for the purpose completing assessment. On enquiry made by the AO about the source of such huge deposits, as noted above, the assessee submitted the details of members who had outstanding balance as on 08.11.2016, and details of members who have repaid loan during the period of demonetization i.e. 09.11.2016 to 30.12.2016, and members whom loan sanctioned during the period 01.11.2016 to 31.03.2017 and list of members with share amount. The AO observed that the Central Government announced demonetization on 8.11.2016 and thereby declared that existing currency notes of Rs.1,000/- & Rs.500/- cannot be regarded as valid legal tender, henceforth. SBN currency notes in circulation lost their value forthwith from the date of declaration of demonetization and all persons in possession of such old SBN, currency notes were advised to exchange such banned currencies within 31.12.2016. In view of the facts narrated above the AO concluded that the assessee has received and collected the noted amount in contraband currency after 8.11.2016, which was not permitted to accept. Accordingly, the AO took the view that the noted amount represents unexplained money of the assessee and assessed the same u/s 69A of the I.T. Act. Consequently, the AO charged income tax on the said deposit of Rs.17,16,500/-, as per provisions of section 115BBE of the Act.
Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
The learned AR before us filed a paper book running from 1 to 105 pages and submitted that the assessee had provided full details and documentary evidence to explain the source of cash deposits made into its bank account during the demonetization period. It was pointed out that the AO did not dispute the fact that the money was received from the members of the society and had accepted the explanation. However, the AO made the addition under section 68 r.w.s. 115BBE of the Act, assuming that acceptance of Specified Bank Notes (SBNs) after 08th November 2016 was illegal. The AR argued that there was no law or notification that prohibited the acceptance of demonetized notes between 09th November 2016 and 30th December 2016. The SBN Act, .
The learned AR further referred to various RBI notifications and circulars to show that while the exchange of notes was restricted, there was no specific ban on accepting or depositing SBNs until 30th December 2016. It was also explained that the assessee acted as a conduit, collecting SBNs from its members and crediting them to their respective accounts. Since the identity of the members and the source of money were explained, the provisions of sections 68, 69, or 69A of the Act could not be invoked.
The ld. AR emphasized that even if there was a technical breach of any RBI guideline, it would not amount to unexplained income under the Income Tax Act. The assessee had properly recorded the transactions in its books of account, and therefore, the source of the deposit was fully explained.
In support, the ld. AR relied on various decisions including the ITAT Visakhapatnam Bench in the case of Sri Tatiparti Satyanarayana (ITA No. 76/Viz/2021, the ITAT Bangalore Bench in Bhageeratha Pattina Sahakara Sangha Niyamitha, and Prathamika Krushi Pattina vs ITO (ITA No. 646/Bang/2021, where additions under section 68 of the Act for deposit of demonetized notes were deleted. The ld. AR also submitted that section 115BBE of the Act is prospective and cannot apply to transactions before 15th December 2016, as clarified by the Hon’ble Madras High Court in S.M.I.L.E Microfinance Ltd vs ACIT in WP 2078/2020 dated 19th November 2024. The Hon’ble Court had held that .
60% tax rate under section 115BBE of the Act is applicable only for transactions after 01.04.2017. In conclusion, the AR submitted that the deposits were made legally, the source was explained, and there was no justification for the addition made by the AO. It was prayed that the appeal be allowed and the addition be deleted.
On the other hand, the learned DR vehemently supported the findings of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available on record. The main issue in this case is whether the cash deposits made by the assessee during the demonetization period, amounting to ₹17,16,500/-, can be treated as unexplained money under section 69A of the Act and taxed under section 115BBE of the Act. The assessee is a Co-operative Credit Society, and the cash deposits in question were made between 09th December 2016 to 30th December 2016. The assessee has explained that these deposits represent amounts collected from its members as loan repayments. Detailed records, including names of members, outstanding balances, repayment details, and entries in the cash book, were provided. These transactions were properly recorded in audited books maintained under the Co-operative Societies Act and supported by documentation. The AO rejected the explanation, holding that demonetized notes ceased to be valid legal tender and therefore could not be accepted by the assessee. However, we find that there was no law prohibiting the acceptance of demonetized notes by co-operative societies before 31.12.2016. The Specified Bank Notes (Cessation of Liabilities) Act, 2017, which prohibits holding and transacting in such .
Page 10 of 11 notes, came into effect only from 31.12.2016. Till then, accepting such notes, especially from members in discharge of liabilities, cannot be treated as illegal. Furthermore, it is pertinent to mentioned that the issue on hand is covered in favour of the assessee by the order of coordinate bench of this tribunal in the case of Anantpur Kalpana v. ITO reported in 138 taxmann.com 141. The relevant finding of the Tribunal is reproduced as follows: 9." I have carefully considered the rival submissions. Both the AO and CIT(A) accepted the fact that the cash receipts are nothing but sale proceeds in the business of the assessee. The addition has been made only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender. Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added under section 68 of the Act that will amount to double taxation once as sales and again as unexplained cash credit which is against the principles of taxation. It is also on record that the assessee was having only one source of income from trading in beedi, tea power and pan masala and therefore provisions of section 115BBE of the Act will have no application so as to treat the income of the assessee as income from other sources. Hon'ble Kolkata Tribunal in the case of CIT v. Associated Transport Pvt. Ltd. reported in 84 Taxman 146 on identical facts took the viewthat when cash sales are admitted and income from sales are declared as income, wherein the Hon'ble Tribunal found that the assessee had sufficient cash in hand in the books of account of the assessee, that there was no reason to treat the cash deposits as income from undisclosed sources. The Hon'ble Vishakapatnam Tribunal in the case of ACIT v. Hirapanna Jewelers in on identical facts held that when cash receipts represent the sales which the assessee has offered for taxation and when trading shows sufficient stock to effect the sales and when no defects are pointed out in the books of account, it was held that when Assessee already admitted sale proceeds as revenue receipts . Therefore there is no case of addition u/s 68"
19.1 Coming to the case on hand, the assessee has clearly shown that the identity of the depositors (i.e., its members), the genuineness of the transactions, and the source of cash were all explained. The mere fact that the money was deposited in the bank account does not make it unexplained, especially when it is backed by verifiable records and cash books.
19.2 Further, the reliance placed by the AO on section 69A of the Act is misplaced. In our considered view the provisions of section 69A of the Act is invoked only when the source of money is not explained. In this case, the assessee has explained the source as loan repayments from members. Therefore, we hold that the addition under section 69A of the Act is not justified. In view of the above facts, legal position, and judicial precedents, we are of the considered opinion that the cash deposits made by the assessee during the demonetization period are properly explained and recorded. Therefore, the addition made under section 69A of the Act and taxed under section 115BBE of the Act is not sustainable. Thus, we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.