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Facts
The assessee, a credit co-operative society, deposited Rs. 27,12,500/- during the demonetization period, of which Rs. 13,69,500/- were in Specified Bank Notes (SBNs). The assessee explained these deposits as loan repayments and PIGMY deposits from its members. The Assessing Officer (AO) treated these deposits as unexplained cash credit under Section 68 of the Income Tax Act, as the society was allegedly not authorized to accept SBNs after the demonetization cut-off date.
Held
The Tribunal held that there was no prohibition for co-operative societies to accept demonetized notes before December 31, 2016. The Specified Bank Notes (Cessation of Liabilities) Act, 2017, which prohibited such transactions, came into effect later. The Tribunal noted that the AO made the addition without verifying the details provided by the assessee explaining the nature and source of the credit.
Key Issues
Whether cash deposits made in demonetised currency notes during the demonetisation period by a co-operative society from its members can be treated as unexplained cash credit under Section 68 of the Income Tax Act.
Sections Cited
68, 269SS, 115BBE
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The present appeal has been instituted by the assessee against the order of the office of the Commissioner of Income – Tax (Appeal), Addl/JCIT – 4, Chennai dated 21.10.2025 for the assessment year 2017- 18.
The only issue raised by the assessee is that the revenue authority erred in taxing the cash deposit made in demonetised note under section 68 of the Act.
The relevant facts are that the assessee society during the demonetisation (9th November 2016 to 31st December 2016) made cash deposit for a sum of Rs. 27,12,500/- out of which a sum of Rs.13,69,500/- was in specified banking note-SBN (old, demonetised currency note of Rs. 500 and Rs. 1000). The assessee submitted that the deposit of SBN represent amount received and collected from members during the demonetisation period towards deposits into saving bank, loan repayment and pigmy deposit. In support of its claim the assessee furnished list of members from whom SBN was received during demonetisation and date wise deposit of SBN.
3.1 However, the AO did not accept the explanation of the assessee. The AO held that as per the Government Notifications and RBI circulars issued on 08.11.2016, the legal tender character of ₹500 and ₹1,000 notes stood withdrawn from midnight of that date. It was clearly provided that such demonetised notes could be deposited or exchanged only through authorised banks and not through societies or other financial institutions like the assessee. The AO noted that the assessee was neither a public sector bank nor a State Co-operative Bank and therefore was not authorised to accept SBNs from its members during the demonetisation period.
3.2 The AO further observed that members from whom the assessee admitted having received SBN, ought to have deposited the same in their bank account with authorised bank and only then they should have withdrawn new currency from bank account to make deposits with the assessee society. By directly accepting SBNs from members till 30.12.2016, the assessee had acted in violation of the demonetisation .
Page 3 of 10 scheme and RBI instructions, and such transactions were held to be illegal and void.
3.3 The AO also relied on the RBI FAQs and Notifications, which clarified that demonetised notes could not be used for normal business transactions and could not be treated as money for accounting purposes after 08.11.2016. According to the AO, SBNs accepted after the cut-off date had zero value in law, and therefore any cash deposits represented by such notes could not be explained as legitimate business receipts.
3.4 On these facts, the AO concluded that the assessee failed to satisfactorily explain the nature and source of the cash deposits of ₹ 13,69,500. Accordingly, the said amount was treated as unexplained cash credit under section 68 of the Act and brought to tax.
The aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the addition made by the AO by observing as under: The assessee has deposited cash of Rs. 27,12,500/- during demonetization out of which Rs. 13,69,500/- were received in SBNs. Out of this SBN receipts, Rs. 2,27,500/- was already available as cash balance as on 08/11/2016 and hence, the remaining cash deposited in SBNs is Rs. 11,42,000/-. The assessee stated that he had received the cash in SBNs from its members as deposits in their accounts maintained with the assessee and for repayment of loans taken from the assessee. The assessee was prohibited from collecting payments in the demonetised currency as his nature of business does not come under exempted category under which, businesses were allowed to receive payments. But despite the ban on transacting in SBNs, the assessee received payments in SBNs and since the deposit of cash in SBNs is to the extent of Rs.13,69,500, it can be ascertained that Rs. 11,42,000/- was received by the assessee in SBNs after 08.11.2016 considering that the cash-in-hand of the assessee was Rs.2,27,500. Further, the assessee has not established that these payments were indeed from its members as deposits in their accounts maintained with the assessee or for repayment of loans taken from the assessee. It has to be also noted that, .
Page 4 of 10 making payments of loans in cash above Rs. 20,000 is prohibited u/s 269SS of the Act whereas the assessee has stated that it has received loan repayments in cash which in contravention to the provisions of Sec 269SS of the Act. The assessee has stated that the addition should not have been u/s 68 of the Act. But the assessee has accepted SBNs which is illegal tender and hence, the cash credits in its books are unexplained. Hence, the AO has rightfully made the addition u/s 68 of the Act. Hence, the ground of the assessee is dismissed.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us submitted that the assessee is a credit co-operative society dealing only with its members and that during the demonetisation period, the cash deposited in the society’s accounts represented repayments of loans and PIGMY deposits made by members. It was argued that the assessee had placed on record a complete list of such members along with their PAN and Aadhaar details and the amounts deposited by each of them. These details had already been filed before the AO and formed part of the paper book. Therefore, according to the ld. AR, the identity of the depositors and the nature of the transactions stood clearly established.
6.1 The learned AR further contended that once the assessee had furnished the names, PANs and other particulars of the members from whom the money was received, the initial burden cast upon it under section 68 of the Act stood discharged. It was submitted that merely because the deposits were made in demonetised currency notes could not, by itself, justify treating the same as unexplained cash credits, when the source was fully explained as coming from known members of the society.
6.3 Reliance was placed on a decision of the Tribunal in the case of Sri Bhageeratha Pattina Sahakara Sangha Niyamitha in wherein under similar circumstances additions made on account of cash deposits during demonetisation were deleted. The learned AR submitted that the facts of the present case were identical and therefore the ratio of that decision is squarely applicable to the facts of the present case.
On the contrary, the learned DR supported the orders of the lower authorities and contended that the assessee had not satisfactorily discharged the burden under section 68 of the Act. It was submitted that merely furnishing names, PAN and Aadhaar details of members was not sufficient to prove the creditworthiness of the depositors and the genuineness of the transactions. The learned DR further argued that the deposits were made during the demonetisation period in SBNs and therefore required strict verification. In the absence of supporting evidence such as loan repayment records or confirmations from members, the AO was justified in treating the deposits as unexplained cash credits.
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 demonetisation period, amounting to ₹ 13,69,500/-, can be treated as unexplained credit under section 68 of the Act and taxed under Section 115BBE of the Act.
Page 6 of 10 8.1 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 and deposits. Detailed records, including list of members from cash received, entries in the cash book and bank book were provided. These transactions were properly recorded in audited books maintained under the Co-operative Societies Act and supported by documentation.
8.2 The AO rejected the explanation, holding that demonetised notes/SBN 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 demonetised 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 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 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 .
Page 7 of 10 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" We also find support from the decisions of coordinate benches of the Tribunal in Sri Bhageeratha Pattina Sahakara Sangha Niyamitha (ITA No.646/Bang/2021), where it was held as under: 14. I heard Ld. D.R. on this issue and perused the record. I notice that the A.O. has not doubted the submissions of the assessee that the above said amount of Rs.24,47,500/- represents collection of money in the normal course of carrying on of business of the assessee, i.e., it represents money remitted by the members of the assessee society towards repayment of the loan taken by them and also towards pigmy deposits, etc. The Ld A.R submitted that the assessee has duly recorded in its books of account the transactions of collections of money as well as deposits made into bank account. Thus, I notice that the assessee has explained the nature and source of the above said amount of Rs.24,47,500/-, which was in-turn deposited by the assessee society in its bank account and further, all these transactions have been duly recorded in the books of account. Hence, the above said deposits cannot be considered as “unexplained money” in the hands of the assessee.
The case of the A.O is that the assessee has collected the demonetized notes after 8.11.2016 in violation of the notifications issued by RBI. Accordingly, he has taken the view that the above said amounts represents unexplained money of the assessee. I am unable to understand the rationale in the view taken by A.O. I noticed that the AO has invoked the provisions of sec.68 of the Act for making this addition. I also noticed that the assessee has also complied with the requirements of sec.68 of the Act. The AO has also not stated that the assessee has not discharged the responsibility placed on it u/s 68 of the Act. Peculiarly, the AO is taking the view that the assessee was not entitled to collect the demonized notes and accordingly invoked sec.68 of the Act. I am unable to understand as to how the contraventions, if any, of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act. In any case, I notice that the assessee has also explained as to why it has collected demonetized notes after the prescribed date of 8.11.2016. The assessee has explained that it has stopped collection after the receipt of notification dated 14.11.2016 issued by RBI, which has clearly clarified that the assessee society should not collect the demonetized notes. Accordingly, I am of the view that the deposit of demonetized notes collected by the assessee from its members would not be hit by the provisions of section 68 of the Act in the .
facts and circumstances of the case. Accordingly, I set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete this disallowance.
8.3 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.
8.4 Further, reliance placed by the AO on section 68 of the Act is misplaced. In our considered view the provision of section 68 of the Act is invoked only when the source of credit is not explained. In this case, the assessee claimed that it has explained the source as amount collected from members towards deposit into saving bank, loan repayment and pigmy deposit and provided the list of the members who deposited the SBN along with other necessary details. However, the AO without going into the explanation furnished along with the relevant details, proceeded to make addition under section 68 of the Act on the ground that the assessee cannot receive the SBN after 8th November 2016.
8.5 We further note that the learned AR rightly placed reliance on the decision of coordinate bench of this Tribunal in the case of Sri Bhageeratha Pattina Sahakara Sangha Niyamitha (supra), wherein in identical facts and circumstances, it was held that the addition under section 68 of the Act cannot be made merely on the ground that the SBN received by the assessee society from its member on account of . deposits and loan repayment during the demonetisation period which subsequently deposited into the bank.
8.6 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 demonetisation cannot be treated as unexplained credit under section 68 of the Act merely on the grounds that assessee was not authorised to receive SBN during the demonetisation. We are also conscious to facts that the AO proceeded to make addition without verifying the details provided by the assessee explaining the nature and source of the credit. Therefore, we in the interest of justice and fair play are inclined to set aside the issue to the file of the AO to decide the issue afresh after verification of the details provided by the assessee in order to establish the identity, credit worthiness and genuineness of the transactions. The AO will provide proper opportunity to the assessee, and the assessee is directed to provide all the necessary details and document to the AO. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in court on 17th day of March, 2026