Elahi Credit Co-Operative Society Vs ITO (ITAT Bangalore)
Deposit of Specified Bank Notes Does Not Automatically Attract Section 68 When Members and Sources Are Identified: Bangalore ITAT
The assessee, a cooperative credit society, claimed a deduction of ₹19,55,438 under section 80P(2)(a)(i). The AO denied the deduction on the ground that the society had nominal members and had earned interest from banks. He also treated deposits made in Specified Bank Notes (demonetised currency) as unexplained cash credits under section 68.
The CIT(A) allowed the section 80P deduction to the extent of ₹16,19,215 and directed that the cost of funds and administrative expenses be allowed against the remaining interest income of ₹3,36,223. However, the addition relating to Specified Bank Notes was confirmed.
Before the ITAT, the society produced details of the members who had deposited the Specified Bank Notes towards their loan accounts and other accounts maintained with the society.
The Tribunal held that the mere receipt or deposit of demonetised currency cannot automatically result in an addition under section 68 when the assessee has satisfactorily identified the members and explained the source of the deposits. It was not the AO’s case that the source remained unidentified.
The ITAT further observed that although the RBI had prohibited receipt of Specified Bank Notes after 8 November 2016, any violation of that prohibition would not, by itself, convert the amount into unexplained income under the Income-tax Act. The Tribunal also questioned the contradictory stand of the AO in treating the notes as having nil value while simultaneously taxing their value as unexplained income.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 11/07/2025 in respect of the A.Y. 2017-18.
2. The brief facts of the case are that the assessee is a co-operative society registered under the provisions of the Karnataka Co-operative Societies Act. The assessee filed their return of income on 30/10/2017 in which they claimed a deduction of Rs. 19,55,438/- u/s. 80P(2) (a)(i) of the Act. The case of the assessee was selected for complete scrutiny and the AO had denied the deduction on the basis that the assessee is having nominal members and the interest income earned from the banks are not eligible for deduction u/s. 80P(2) (a)(i) of the Act. The AO also added the deposits in the SB notes as unexplained cash credit u/s. 68 of the Act.
3. As against the assessment, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) allowed the deduction in respect of the income earned at Rs. 16,19,215/- and grant the cost of funds and administrative expenses from the balance interest income of Rs. 3,36,223/-. The Ld.CIT(A) had confirmed the deposits made in SB notes as addition u/s. 68 of the Act.
4. As against the said order, the assessee filed this appeal before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that the addition u/s. 68 of the Act is not correct when the assessee had furnished the details of the members from whom the SB notes were collected towards their loan account and etc. and therefore the addition u/s. 68 of the Act could not be made as unexplained. The Ld.AR also filed a compilation of case laws in which it was held that the deposits of SB notes could not be a reason for making the addition u/s. 68 of the Act. The Ld.AR also submitted that, the assessee is not pressing ground nos. 6 to 11 and also made an endorsement to that effect.
6. The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal.
7. We have heard the arguments of both sides and perused the materials available on record.
8. The only dispute to be decided in this appeal is whether the cash deposits in SB notes could be treated as unexplained cash credit u/s. 68 of the Act, in the facts and circumstances of the case.
9. Admittedly the assessee had given the details of the members who have deposited the SB notes towards their various accounts maintained with the assessee. Therefore, the mere deposits of SB notes could not be treated as unexplained. The AO was of the view that the SB notes are not to be treated as a valid tender from 09/11/2016 and therefore the cash received in SB notes are unexplained. This view is not correct, when the assessee is able to explain the source for such cash deposits. It is not the case of the AO that the source for the said deposits are not explained. Therefore, we are of the view that the deposits in SB notes would not automatically attract section 68 of the Act.
10. No doubt the RBI had prohibited the receipt of SB notes after 08/11/2016 but the violation would not constitute the same as unexplained money u/s. 68 of the Act. Further the AO alleged that the value of the SB notes are to be taken as Nil and in such circumstances how the deposit of the said notes could be taken as unexplained income of the assessee by the AO u/s 68 of the Act.
11. We have also gone through the various orders of the Coordinate Benches of this Tribunal in which the similar addition was deleted by the Tribunals. Following the said orders, we are also setting aside the addition made u/s. 68 of the Act and allow the grounds raised by the assessee. We are not adjudicating ground nos. 6 to 11 since the same were not pressed. Ground no. 12 raised by the assessee would become infructuous since the addition made u/s. 68 was deleted by us.
12. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 18th August, 2026.
