M/S RENUKAMATA MULTI STATE CO-OP. URBAN CREDITN SOC. LTD.,MUMBAI vs. THE ASSTT. CIT, CC-4(4), MUMBAI

Date of Hearing – 11/12/2023 Date of Order – 31/01/2024

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 O R D E R PER BENCH

The present batch of cross-appeals have been filed by the assessee and the Revenue challenging the separate impugned orders of even date 30/03/2023, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)–52, Mumbai, [“learned CIT(A)”], for the assessment year 2012–13 to 2015-16.

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 established under the Multi-State Co-operative Societies Act, 2002 and is involved in the facility of providing credits and other banking facilities to its members. The assessee is also providing ATM card facility and RTGS facility to its members. The assessee has operations in Maharashtra, Gujarat, Madhya Pradesh, Andhra Pradesh, Karnataka, and Delhi and has around 100 branches across the country and is covered under the provisions of the Multi-State Co- operative Societies Act, 2002 and the byelaws framed by it. The assessee has two types of members, namely, ordinary and nominal members. The ordinary members have the right to vote and are subscriber to the shares of the assessee. On the other hand, nominal members are admitted on payment of fees of Rs. 100 and don’t have voting rights. The assessee operates different types of accounts, such as savings account, current account, recurring deposit account, loan account, daily collection account, and FDR account. As per the assessee, in order to open and operate any of the above accounts, a person has to first become a member of the society, either ordinary or nominal. Further, the main source of income is interest on loans advanced to its members.

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 under section 132 of the Act on 09/02/2016 by executing the warrant on the assessee on 09/02/2016. Subsequent to the search assessment conducted on the assessee on 09/02/2016, a second search action under section 132 of the Act was also carried out on the assessee on 26/05/2017 at the head office of the assessee at Ahmednagar along with branch offices at Mumbai, Ulhasnagar, and residences of key persons of the assessee, who handled the business affairs of the assessee. Simultaneously, survey actions under section 133A of the Act were also carried out at the branch offices of the assessee at Ahmedabad, Chennai, and Hyderabad. In response to the notice issued under section 153A of the Act, the assessee filed its return of income on 02/10/2018 declaring a loss of Rs. 26,82,099. Thereafter, notice under section 143(2) as well as notice under section 142(1) of the Act along with a detailed questionnaire were issued and served on the assessee. On the perusal of the documents found during the course of the search, the Assessing Officer (“AO”) vide show cause notice dated 03/12/2019 noted that there is non-compliance in maintaining proper KYC documents, non-compliance in collecting KYC details from the depositors, irregularities found in account opening forms of society, and non-compliance of Rule 114B in respect of cash deposits. Accordingly, the assessee was asked to show cause as to why the total case deposited in its books should not be considered and taxed as unexplained cash credit under section 68 of the Act. In response thereto, the assessee filed its detailed submission before the AO on 18/12/2019. During the assessment proceedings, the AO also directed a special audit under section 142(2A) of the Act in the case of the assessee.

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 6. The AO on the basis of the details provided by the assessee and various evidences gathered during the search and seizure action as well as the report of the Special Auditor, vide order dated 07/05/2021 passed under section 143(3) read with section 153A of the Act, came to the conclusion that the assessee is not a bank within the provisions of the Banking Regulation Act and therefore is not empowered to carry on the business of banking. It was further held that the assessee is a credit co-operative society, which is empowered to mobilise deposits and grant loans to its members only. The AO held that the assessee has indulged in the gross violations of not only the Co-operative Society Act, 2002 but also its own byelaws by deviating from the core principles and as asked in its Memorandum. The AO held that on perusal of documents found during the search and furnished during the assessment proceedings, it was found that the majority of the members of the assessee have not submitted their PAN cards and in numerous cases, photo identities are also not present in these documents. Further, the addresses that have been provided are incomplete in most of the cases, while there was no information regarding the source of income, contact details, status of income tax return, etc. in the account opening form. The AO further held that there are several instances where the amount of cash deposits exceeded Rs. 50,000 by the depositor in a single day. However, the assessee has collected neither the PAN nor Form 60 from such depositor, which is a clear violation of Rule 114B of the Income Tax Rules, 1962. It was further held that the assessee has neither furnished any details regarding the identity, creditworthiness, and genuineness of its regular or nominal members nor produced any of them. Therefore, it was held that the assessee has failed to explain the source of Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 credit entries contained in its books of account. Accordingly, the AO made an addition of the amount credited in the books of the assessee under section 68 of the Act. As regards, the at-par cheques/demand draft issued by the assessee, the AO held that the same have not been routed through the member’s account, therefore it is not possible to identify the source of these cash receipts credited in the bank account. Accordingly, the AO held that the assessee has failed to explain the source of aforesaid credit entries contained in its books of account along with the identity, genuineness, and creditworthiness of the persons who claim to have given cash to the assessee society for the issue of at-par cheques/demand draft. Accordingly, the amount was added to the total income of the assessee under section 68 of the Act. Apart from the above, the AO also made the addition on account of provision for standard assets, provision for gratuity, prior period expenses, and disallowances under section 40A(3) and section 40(a)(ia) of the Act as well as the disallowance of deduction claimed under section 80P of the Act.

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 its books of account. The learned CIT(A) further held that as regards the deposit slips it is quite inconceivable that the assessee, which claims to be a co-operative society, is unable to pinpoint the person making such deposits. After taking into consideration the discrepancies in KYC documentation as noted by the AO on the basis of the Special Auditor’s report, the learned CIT(A) held that the assessee has not shifted the onus placed on it under section 68 of the Act. The learned CIT(A), drawing the analogy with Rule 114E, held that the assessee has failed to collect the PAN or report such transactions and therefore there is a failure on the part of the assessee to discharge its onus or shift its onus to the depositor, as regards the requirement of section 68 of the Act. It was further held that it would be unwise to hold that all such deposits are income of the assessee by considering the nature of business of the assessee. After considering various factors as noted in paragraph 7.43 of its order, the learned CIT(A) held that there is culpability on the part of the assessee but nothing to warrant addition under section 68 of the entire transactions. By taking into consideration the commission charged by the assessee for collecting the cash deposit in its home branch and the commission charged for demand draft/at-par cheques, the learned CIT(A) came to the conclusion that it would be reasonable to estimate the income of the assessee @ 0.15% of such deposits for which no such commission has been charged. As regards the demand draft/at-par cheques, since the assessee has already recognised income @ 0.05%, the learned CIT(A) computed the income @0.10%. As far as the failure to comply with the membership requirements, violation of byelaws, etc., the learned CIT(A) came to the conclusion that they do not impinge on the taxation aspect per se. As a result, the learned CIT(A)

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 granted partial relief to the assessee. On the issue of disallowance of provision for standard assets and provision for gratuity, the learned CIT(A) dismissed the appeal filed by the assessee. As regards the disallowance of prior period expenses, the learned CIT(A) granted partial relief to the assessee and directed the AO to allow the claim of the assessee that expenses for the specific years should be allowed in the preceding year to which such expenditure relates to, as such appeals are pending. As regards other issues, the learned CIT(A) granted partial relief to the assessee. However, on the issue of deduction claimed under section 80P of the Act, the learned CIT(A) dismissed the appeal filed by the assessee. Being aggrieved, the assessee is in appeal before us.

“14. In view of the above and for the reasons stated above, it is concluded as under: Page | 8

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 i) to iii) …….. iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under Sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved.”

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 by the assessee, it is firstly relevant to examine whether the material/evidence found during the course of the search action under section 132 of the Act is incriminating in nature.

“25. Before we look into the relevant 'incriminating material' referred to by the Ld. CIT(A), it is first necessary to understand the meaning of the expression Page | 10

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 "incriminating material" or evidence. It is noted that there is no definition set out in the Act and therefore meaning of this term has to be discerned from its judicial interpretation made by different judicial forums. We understand that there can be several forms of incriminating material or evidence. In order to constitute an incriminating material or evidence, it is necessary for the AO to establish that the information, document or material, whether tangible or intangible, is of such nature which incriminates or militates against the person in relation to whom it is found. Some common forms of incriminating material are for instance, where the search action u/s 132 of the Act reveals information (oral or documented) that the assets found from the possession of the assessee in the form of land, building, jewellery, deposits or other valuable assets etc. do not corroborate with his returned income and/or there is a material difference in the actual valuation of such assets and the value declared in the books of accounts. Further, incriminating evidence may also constitute of information, tangible or intangible which suggests or leads to an inference that the assessee is carrying out certain activities outside books of accounts which is not disclosed to the Department. Incriminating material also comprises of document or evidence found in search which demonstrates or proves that what is apparent is not real or what is real is not apparent. In other words, if an assessee has recorded transactions in his books or other documents maintained in the ordinary course, then in order to hold the material or evidence found in the course of search to be incriminating in nature, the seized documents / evidences should lead to the conclusion that the entries made in the books of the assessee do not represent the true and correci state of affairs of the assessee. Rather the evidence unearthed or found in the course of search should establish that the real transaction of the assessee was something different than what was recorded in the regular books and therefore the entries in the books did not represent true and correct state of affairs i.e. the assessee has undisclosed income/expense outside the books or that the assessee is conducting income earning activity outside the books of accounts or all the revenue earning activities are not disclosed to the tax authorities in the books regularly maintained or the returns filed with the authorities from time to time, etc. The nature of the evidence or information gathered during the search should be of such nature that it should not merely raise doubt or suspicion but should be of such nature which would prima facie prove that real and true nature of transaction between the parties is something different from the one recorded in the books or documents maintained in the ordinary course of business. In some instances, the information, document or evidence gathered in the course of search, may raise serious doubts or suspicion in relation to transaction reflected in regular books or documents maintained in the ordinary course of business, but in such case the AO is not permitted to straightaway treat such material to be 'incriminating' in nature unless the AO thereafter brings on record further corroborative material or evidence to substantiate his suspicion and conclude that the transaction reflected in regular books or documents did not represent the true state of affairs. Until these conditions are satisfied, it cannot be held that every seized material or document or information is incriminating in nature, capable of justifying the additions in unabated assessments.”

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 documents, non-compliance in collecting KYC details from the depositors, irregularities found in account opening forms of society, and non-compliance of Rule 114B in respect of cash deposits. We are of the considered view that none of the aforesaid observations of the AO with regard to various deficiencies would tantamount to “incriminating material”. However, even then, the AO made the addition under section 68 of the Act on the basis that the assessee has failed to prove the identity of the creditors, genuineness of the transaction, and creditworthiness of the depositors. It is pertinent to note that the learned CIT(A), after agreeing with various factors in favour of the assessee as noted in para 7.43 of its order, came to the conclusion that addition under section 68 of the Act of the entire transaction is not warranted.

Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 opening form and violation of society byelaws by the assessee, without reference to any material which could lead to the conclusion that the amount deposited in member’s account or amount received for the issuance of at-par cheques/ demand drafts belongs to the assessee. In the present case, it is not the plea of the Revenue that the credit in books of account or bank accounts of the assessee came to its knowledge pursuant to the material/documents found during the course of the search. For discrepancies in maintaining KYC documentation, account opening form, and violation of society byelaws, action can be taken against the assessee under the relevant statute or by the concerned authority, such as RBI, however, the same cannot lead to an addition in the hands of the assessee under the Act. Therefore, in view of the aforesaid findings, we are of the considered view that the material/documents found during the course of the search are not of such a nature which incriminates or militates against the assessee. Further, we are of the view that the material/documents found during the course of search also do not raise any doubt or suspicion against the assessee, and if at all the material/documents may only incriminate against the members in whose account the money was deposited. We find that in certain cases proceedings under the Act were initiated against the members on the basis of material/documents found during the course of the search and survey at assessee’s premises. Thus, from the above, it is established that the material/documents found during the course of search are not incriminating in nature. Therefore, the AO could not have made any addition under section 153A of the Act in respect of concluded/unabated assessments for the assessment years 2012-13 to 2015-16. Accordingly, the additions made by the Shri Renukamata Multi–State Co–operative Society Ltd. A.Ys. 2012-13 to 2015-16 AO for the assessment years 2012-13 to 2015-16 are deleted. Since the relief has been granted to the assessee on this short issue, the other grounds raised in the assessee’s appeals are rendered academic and therefore are left open.