SUNDAR RAM SHETTY NAGAR CREDIT SOUHARDA SAHAKARI LIMITED,BANGALORE vs. ITO, WARD-4(3)(1), BANGALORE

The first interconnected issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of deduction under section 80P of the Act claimed on interest income.

Briefly stated facts are that the assessee, a cooperative society, registered under the Karnataka Souharda Sahakari Act, 1997 is engaged in the activities such as accepting deposits, providing credit facilities to its members. During the year under consideration, the assessee earned interest income of ₹ 24,59,101/- from deposits made with banks which are detailed as under: S.No. PARTICULARS AMOUNT 1 Vijya Bank RS Nagar 17,15,308.00 2 Vijya Bank Bilekahlli 4,61,695.00 3 BDCC Term Deposit 2,82,108.00 Total

1 The impugned interest income was included in the total income of ₹29,03,885/- which was claimed as deduction under section 80P(2)(a)(i) of the Act.

2 The AO found that the impugned interest income was not from the business of providing credit facilities to the members of assessee. Accordingly, the AO was of the opinion that such interest income is not eligible for deduction under section 80P(2)(a)(i) of the Act. The AO in holding so referred the judgment of Hon’ble Karnataka High Court in case of PCIT vs. Totagars Co-Op Sales Society reported in 83 taxmann.com 140 and the judgment of Hon’ble Gujarat High Court in the case of State Bank of India vs CIT 389 ITR 578. Thus, the AO made addition of ₹ 24,59,101/- to the total income of the assessee.

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before me.

The learned AR for the assessee before me argued that contended that the interest income should be eligible for deduction under Section 57 of the Act, as the funds deposited in banks were sourced from members' interest-bearing deposits, and the interest paid to members on these deposits was a legitimate business expense. The learned AR in this regard provided specific details, citing a deposit of Rs. 2,86,46,933/- with Vijaya Bank, where the funds came from members' interest-bearing deposits. Since, the interest rate paid to members was 8% per annum, the total interest paid amounted to Rs. 22,91,755/- (8% of Rs. 2,86,88,995/-).

On the contrary, the learned DR before me vehemently supported the finding of the authorities below.

I have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, the primary issue before me is whether the interest income of ₹24,59,101/- earned by the assessee on deposits with Vijaya Bank and BDCC Term Deposit is eligible for deduction under Section 80P(2)(a)(i) of the Act. In this regard, I find that the Hon’ble Karnataka High Court in the case of PCIT vs. Totagars Co-Op Sales Society (83 taxmann.com 140) and the Hon’ble Gujarat High Court in State Bank of India vs. CIT (389 ITR 578) have categorically held that interest income earned from deposits in banks does not constitute income from the business of providing credit facilities to members. Rather, such interest is income from "other sources" and does not qualify for deduction under Section 80P(2)(a)(i) of the Act.

1 Further, the learned CIT(A) has correctly observed that the principal business of the assessee is to provide credit facilities to its members and that depositing surplus funds in banks is a secondary activity. The interest earned from these bank deposits does not directly arise from providing credit to members but represents incidental income. Thus, the disallowance made by the AO and upheld by the CIT(A) is found to be legally justified.

2 However, the plea regarding deduction under Section 57 of the Act merits consideration. The assessee has demonstrated that the deposits in banks were sourced from members' interest-bearing deposits, and the interest paid to members constitutes a legitimate expense incurred to earn the interest income. The financial records,

The next issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 11,56,000/- made by treating the cash deposit during the demonetization as unexplained cash credit under section 68 of the Act.

During the assessment proceedings, the AO observed that the assessee had made cash deposits amounting to ₹11,56,000 in Specified Bank Notes (SBNs) during the demonetization period (8th November 2016 to 31st December 2016). When questioned about the source of these cash deposits, the assessee submitted that the SBNs were received from its members as loan repayments and deposits into their accounts during the demonetization period. These amounts were subsequently deposited into the assessee’s bank account. The assessee further stated that it maintained records, including names, addresses, PANs, and other details of the members who deposited the cash in SBNs.

1 However, the AO rejected the assessee’s explanation, asserting that the assessee was not authorized to accept SBNs from the public or ITA No.2391 & 2392/Bang/2024

Aggrieved by this decision, the assessee filed an appeal before the learned CIT(A), who upheld the addition made by the AO.

Being aggrieved by the order the learned CIT(A), the assessee is in appeal before us.

The learned AR for the assessee before us argued that the source of the deposits was duly explained, yet the amount was treated as unexplained money under Section 68 of the Act merely on the ground that the SBNs were accepted after 8th November 2016, when they were no longer legal tender. The ld. AR also contended that in similar facts, various Tribunals had deleted such additions made by the revenue authorities.

On the other hand, the learned DR strongly supported the orders of the lower authorities.

We have heard the arguments from both parties and carefully examined the materials available on record. In the present case, the ITA No.2391 & 2392/Bang/2024

1 It is an admitted fact that the Specified Bank Notes (Cessation of Liabilities) Act, 2017 explicitly prohibits any person from knowingly or voluntarily holding, transferring, or receiving SBNs on or after the appointed date, i.e., 31st December 2016. However, before this date (i.e., between 9th November 2016 and 30th December 2016), certain entities such as banks, petrol pumps, hospitals, and Government departments were permitted to accept SBNs under specific restrictions. This implies that until 30th December 2016, the Government of India and the RBI were obligated to accept and exchange SBNs tendered for deposit. Therefore, contrary to the revenue’s argument, SBNs could not be treated as mere worthless paper immediately after 9th November 2016. 15.2 Furthermore, we find that in the case of Anantpur Kalpana v. ITO (138 taxmann.com 141), this Tribunal has ruled on similar facts and circumstances in favour of the assessee 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 ITA No.2391 & 2392/Bang/2024

3 In view of the above and after considering the facts in totality, I hold that the Specified Bank Notes (SBNs) deposited by the assessee during the demonetization period cannot be treated as unexplained money under Sections 68/69A of the Act solely on the ground that they were accepted after the announcement of demonetization.

4 However, it is important to note that the assessee has an obligation to substantiate the source of the money received during the demonetization period. In the present case, the assessee has claimed that the cash in SBNs were received from its members as loan repayments or deposits, and it has maintained all necessary records to support this claim. Notably, the lower authorities have not pointed out any specific defects or discrepancies in the assessee’s records. Accordingly, I find merit in the assessee’s contention. But I find that there was no verification carried out by the Revenue about explanation furnished by the assessee. I, therefore, set aside the findings of the learned CIT(A) and direct the Assessing Officer verify the source of cash

In the result, the appeal of the assessee is hereby partly allowed for the statistical purposes.

At the outset, I note that the issue raised by the assessee in its grounds of appeal for the AY 2018-19, is identical to the issue raised by the assessee in ITA No. 2391/Bang/2024 for the assessment year 2017- 18. Therefore, the findings given in ITA No. 2391/Bang/2024 shall also be applicable for the assessment years 2018-19. The appeal of the assessee for the A.Y. 2018-19 has been decided by me vide paragraph No. 8 of this order partly in favour of the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2017-18 shall also be applied for the assessment years 2018-19. Hence, the ground of appeal filed by the assessee is hereby partly allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed for statistical purposes.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file