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Facts
The assessee, a cooperative society, claimed deduction under Section 80P on interest income earned from bank deposits. The AO and CIT(A) disallowed the deduction, holding that such income was not from the core business activity of providing credit facilities to members. Separately, a sum of Rs. 11,56,000 deposited in Specified Bank Notes (SBNs) during demonetization was treated as unexplained cash credit.
Held
The Tribunal held that interest income from bank deposits is not eligible for deduction under Section 80P(2)(a)(i) as it is income from 'other sources' and not directly related to the business of providing credit facilities. However, regarding the demonetization deposits, the Tribunal held that SBNs deposited between November 9, 2016, and December 30, 2016, cannot be treated as unexplained solely on the ground of being accepted after the announcement. The AO was directed to verify the source of these deposits.
Key Issues
1. Whether interest income earned from bank deposits by a cooperative society is eligible for deduction under Section 80P. 2. Whether cash deposits made in SBNs during the demonetization period, after the cut-off date, can be treated as unexplained cash credit without proper verification of the source.
Sections Cited
80P, 80P(2)(a)(i), 57, 68, 69A, 115BBE
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
These are the appeals filed by the assessee against the order passed by the NFAC, Delhi dated 01/02/2024 and 30/09/2024 for the assessment years 2017-18 and 2018-19. First, we take up A.Y. 2017-18 as lead case.
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 24,59,101/- 3.1 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.
3.2 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.
The aggrieved assessee preferred an appeal before the Learned CIT(A). The learned CIT(A) after considering the facts in totality held that investing surplus funds in banks is not part of the business of the assessee. Consequently, interest income derived from the deposits made with the bank is not considered business income but rather income from other sources. The learned CIT(A) held that only interest earned from credit facilities provided to members qualifies for deduction under Section 80P(2)(a)(i) of the Act. Since, the assessee has earned interest income of Rs. 24,59,101/- from scheduled or nationalized banks, this amount is not eligible for deduction. Thus, the learned CIT(A) confirmed the disallowances made by the AO.
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.
8.1 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.
8.2 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, . including the balance sheet and profit and loss account, support this claim. However, it noted that this aspect has not been verified by the lower authorities. Therefore, for the sake of justice and fair-play, I hereby set aside the issue to file of the AO. The AO is directed to verify the claim of the assessee with respect to the allowances of cost against the earning of interest income in accordance with the provision of section 57 of the Act. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
9. 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.
10.1 However, the AO rejected the assessee’s explanation, asserting that the assessee was not authorized to accept SBNs from the public or . banks under the demonetization scheme. The AO emphasized that specified banknotes ceased to be legal tender effective from 9th November 2016, as per the Gazette Notification No. 2652 dated 8th November 2016. The AO also noted that the acceptance of SBNs by the assessee constituted a violation of the notification issued by the Reserve Bank of India (RBI) regarding demonetization. Consequently, the cash deposits were treated as unexplained under Section 68 of the Act and were added to the assessee’s total income.
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 . assessee claimed that the SBNs were received and deposited into its bank account during the demonetization period. The revenue, however, argued that since SBNs were no longer legal tender from 9th November 2016, they were essentially worthless paper. By accepting such SBNs and depositing them in its bank account, the assessee effectively converted them into valid currency, thereby benefited from unexplained money. As a result, the revenue authorities added the amount under Sections 68 and 69A of the Act.
15.1 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 .
Page 8 of 10 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"
15.3 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.
15.4 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 . deposits in the bank as discussed above. Consequently, the ground of appeal raised by the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is hereby partly allowed for the statistical purposes. for A.Y. 2018-19.
The 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.
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 2017-
18. Therefore, the findings given in 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.
In the combined result, both the appeals of the assessee are partly allowed for statistical purposes.