ITAT Deletes ₹2.94 Crore s.68 Addition on Explained SBN Deposits

Udaya Souhara Co-operative Society Limited Vs ITO (ITAT Bangalore)

Regulatory Wrong Is Not Unexplained Money—ITAT Deletes ₹2.94 Crore s.68 Addition on Explained SBN Deposits

Summary:

The controversy

The assessee, Udaya Souharda Co-operative Society Ltd., was registered under the Karnataka Souharda Sahakari Act, 1997. It provided credit facilities to its members by accepting deposits and granting loans.

During the demonetisation period between 9 November & 30 December 2016, the Society deposited Specified Bank Notes comprising old ₹500 & ₹1,000 currency notes aggregating to ₹2,94,47,900. Of this, ₹2,84,41,400 was deposited with IDBI Bank and ₹10,06,500 with Axis Bank.

The AO treated the entire amount as an unexplained cash credit u/s 68 r.w.s. 115BBE, principally on the ground that the Society was not a bank authorised to accept SBNs during demonetisation.

The CIT(A) deleted a separate disallowance of deduction u/s 80P(2)(a)(i) amounting to ₹2,21,05,217 but sustained the addition relating to the SBN deposits. The Society therefore approached the Bangalore ITAT.

Members repaid loans & deposited savings

The Society explained that cash handling was an integral part of its regular business. It accepted deposits from members, maintained their savings accounts & recovered loans granted to them.

According to the Society, the SBNs deposited in its bank accounts represented two identified streams: repayment of loans by members & deposits made by members into their savings accounts.

The transactions were recorded in books maintained on a day-to-day basis. The Society furnished the names of depositors, the amounts deposited and PAN details of a majority of the members.

The CIT(A) acknowledged that the Society had furnished details of the members who made the deposits. He also accepted that receiving member deposits and granting loans formed part of the Society’s business model. Nevertheless, the addition was sustained because the Society had allegedly failed to prove that the receipts were accepted in compliance with the demonetisation guidelines.

Revenue questioned legality, not source

The Revenue argued that various Government notifications & RBI directions prohibited Souharda co-operative societies from collecting demonetised currency in the manner permitted to authorised banks.

Therefore, even if the entries appeared in the Society’s books, their acceptance violated the applicable legal and regulatory framework. According to the Revenue, this violation undermined the genuineness of the transactions for purposes of s.68.

The Tribunal, however, identified a fundamental distinction between the two enquiries.

Whether the Society was legally authorised to accept SBNs was one question. Whether the nature & source of cash credited in its books stood explained was another. Section 68 dealt with the latter.

The source trail was established

The ITAT found that the Society had established a nexus between the cash received from members and the amounts deposited into its bank accounts.

The deposits were reflected in members’ savings accounts or against outstanding loans in the regular books. The Society had produced member-wise details, amounts & PAN particulars of most depositors. The CIT(A) himself had acknowledged the availability of such information.

The banks had also accepted the currency and granted full credit in the Society’s accounts. The AO did not bring any material on record to demonstrate that the cash originated from undisclosed sources or that the member-wise records were fictitious.

His sole objection was that the Society was not an authorised bank permitted to accept SBNs.

The Tribunal held that the Society had satisfactorily explained where the notes came from and why they were received. Therefore, the primary burden imposed by s.68 stood discharged.

Possible violation falls outside s.68

The ITAT referred to the Specified Bank Notes (Cessation of Liabilities) Act, 2017. It observed that the “appointed day” under s.2(1)(a) was 31 December 2016 and that the statutory prohibition under s.5 upon knowingly or voluntarily holding, transferring or receiving SBNs operated from that appointed day.

The Revenue relied upon the Central Government notifications dated 8 & 9 November 2016 and the RBI circular dated 14 November 2016 to contend that the Society’s handling of SBNs was contrary to the demonetisation framework. TaxGuru’s contemporaneous material records the legal framework concerning specified bank notes and the subsequent statutory prohibition. Implications of deposit of Specified Bank Notes vis-à-vis Section 69A

The Tribunal held that, even assuming the Society was not authorised to receive SBNs, the consequence of such regulatory violation did not automatically fall within the domain of s.68.

Section 68 could be invoked where a credit appeared in the books and the assessee failed to satisfactorily explain its nature & source. It could not be used merely as a punishment for an alleged violation of RBI or demonetisation directions after the source had been established.

No second tax on recorded business receipts

The Society had already recorded the amounts as part of its gross receipts. The AO neither rejected the books nor doubted the corresponding member transactions through any adverse enquiry.

Taxing the same receipts again as unexplained cash credits would therefore result in double taxation of an amount already accounted for.

The ITAT accordingly deleted the addition of ₹2,94,47,900 u/s 68 and directed the AO to treat the amount as business receipts. The AO was further directed to allow deduction u/s 80P in accordance with law.

The appeal was allowed.

Author’s comments

The ruling lays down a vital principle: illegality of the mode of receipt does not establish unexplained ownership of money. Section 68 is an evidentiary provision, not a general penalty for every breach of another statute.

However, the decision should not be understood as approving acceptance of SBNs by an unauthorised entity. Regulatory consequences under the RBI framework or other applicable law may survive independently.

For s.68, the decisive factors were the Society’s regular books, member-wise loan & savings entries, names, PAN details and direct correlation with bank deposits. The AO produced no evidence showing accommodation entries, bogus members or unaccounted money introduced under the cover of demonetisation.

The further finding against double taxation is equally significant. Once an amount is accepted as recorded business receipt, it cannot ordinarily be taxed again as an unexplained credit without evidence establishing a separate unexplained source.

The legal takeaway is crisp: questionable acceptance may invite regulatory action; explained money cannot be converted into unexplained income merely because its receipt was allegedly prohibited.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH

1. This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 25.09.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1081158498(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.

2. The assessee has raised the following grounds of appeal:-

1. The order passed by the learned Commissioner of Income Tax (Appeals) – NFAC (“CIT(A)”) under section 250 of the Act insofar as it is against the Appellant, is opposed to law, weight of evidence, natural justice and probabilities on the facts and circumstances of the Appellant’s case.

2. The Appellant denies itself liable to be assessed at Rs. 2,94,47,900/- as against the returned income of NIL for the assessment year 2017-18, on the facts and circumstances of the case.

3. The learned authorities below erred in making an addition of Rs. 2,94,47,900/- as unexplained cash deposits under section 68 r.w.s. 115BBE of the Act on the facts and circumstance of the case.

4. The learned authorities below were not justified in making addition of Rs.2,94,47,900/- when the Appellant had discharged its primary onus explaining the details of deposits and by giving the details of the depositors and consequently no addition could have been made under section 68 / 69A of the Act, on the facts and circumstances of the case.

5. The authorities below were not justified in stating that for the mere reason that the appellant had collected demonetised currency, the said credits were unexplained, on the facts and circumstances of the case.

6. The Appellant denies the liability to pay interest under section 234 of the Act in view of the fact that there is no liability to additional tax as determined by the learned Assessing Officer on the facts and circumstances of the case.

7. The Appellant craves to add, alter, modify, substitute, change and delete any or all of the grounds and to file a paper book at the time of hearing the appeal.

8. In the view of the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.

3. In the present appeal, before us the assessee has raised the sole issue of addition made amounting to Rs.2,94,47,900/- on account of cash deposited during the demonetization period as detailed below-

The AO had added the entire cash deposited during the demonetization period on the sole ground that as per the notifications issued from time to time by the Government of India/Reserve Bank of India, the assessee is not a Bank to accept the cash in Specified Bank Notes (SBN) & hence added the same to the total income as unexplained cash credits u/s 68 r.w.s. 115BBE of the Act.

4. Aggrieved by the assessment order passed u/s. 143(3) of the Act dated 20/12/2019, the assessee preferred an appeal before the ld.CIT(A)/NFAC.

5. The ld.CIT(A)/NFAC allowed the grounds with respect to the disallowance of deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.2,21,05,217/- as made by the AO, however dismissed the grounds raised relating to the addition made by the AO u/s 68 of the Act r.w.s. 115BBE of the Act amounting to Rs.2,94,47,900/- on account of cash deposited during the demonetization period on the following grounds-

a) Legal Prohibition: The RBI notifications during demonetization specifically prohibited non-banking entities from accepting deposits of Specified Bank Notes beyond the prescribed limits & periods.

b) Burden of Proof: The assessee has failed to conclusively establish that the cash deposits were legitimate business receipts within the permissible framework during the demonetisation.

c) Inadequate Documentation: The quality & verifiability of the evidences provided by the assessee has not been established.

d) Violation of Demonetisation Guidelines: The acceptance of large amounts of cash during the prohibited period raises legitimate suspicions about the source and legitimacy of such deposits. The assessee has failed to discharge the onus of proving that the cash deposits were legitimate business receipts obtained in compliance with demonetisation guidelines.

Thus, the ld.CIT(A)/NFAC partly allowed the appeal.

6. Again aggrieved by the order of the ld.CIT(A)/NFAC dated 25/09/2025, the assessee has filed the present appeal before this Tribunal.

7. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee is a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997 providing credit facilities only to its members. Further, before both the Authorities below, the assessee submitted that the entire cash deposits in SBNs were made out of the receipts of cash from the members of the society which were mainly towards the repayments of loans or deposits in their savings accounts maintained with the assessee by providing complete details of depositors including their names, PAN details & amounts deposited. However, the AO merely by stating that “the assessee is not a bank to accept the cash in SBNs” had treated the entire sum of Rs.2,94,47,900/- as unexplained cash credits u/s. 68 of the Act. The ld. AR of the assessee also submitted that the ld.CIT(A)/NFAC although accepted the fact that the assessee had provided details of members who made deposits but dismissed on the ground that cash deposits were not legitimate business receipts and accordingly prayed to allow the appeal as the assessee had properly explained the nature & source of the transactions.

8. The ld. D.R. on the other hand heavily relied on the order of the authorities below and vehemently submitted that the assessee was prohibited to accept the old bank notes in the denomination of Rs.500/- and Rs.1,000/- with effect from 08/11/2016 in view of the various notifications/binding RBI circular. Further, the ld. D.R. submitted that during the demonetisation period, the Souharda Sahakari were not permitted to collect the demonetized currency like a bank and accordingly prayed to dismiss the appeal of the assessee. Lastly the ld. DR also submitted that the transactions were undertaken contrary to the applicable legal & regulatory framework & therefore the essential requirement of genuineness under section 68 of the Act remains unfulfilled.

9. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee society had deposited the SBNs in IDBI Bank Ltd & Axis Bank Ltd. during the demonetization period i.e. between 09/11/2016 to 30/12/2016 amounting to Rs.2,94,47,900/-. The AO observed that the assessee is not a bank to accept the cash in SBNs & hence added the entire cash deposits of Rs.2,94,47,900/-as unexplained cash credit u/s. 68 of the Act. It is also an undisputed fact that the assessee before both the authorities below submitted that the assessee in its regular course of business had collected the advances & also lent loans to its members which are recorded in the books of accounts maintained on a day to day basis. Further, it is also submitted that the assessee upon demonetization had received back certain loans lent and also members had deposited the cash into their respective savings account maintained with the assessee. We also take note of the fact that the ld. CIT(A)/NFAC after observing the fact that the assessee is engaged in accepting deposits from members & providing loans to the members & such cash handling is integral to the business model of the assessee had rejected the contention of the assessee and treated the same as unexplained cash credit solely on the ground that the assessee failed to discharge the onus of proving that the cash deposits were legitimate business receipts obtained in compliance with demonetisation guidelines. We also take note of the fact that the ld. ld. CIT(A)/NFAC also observed that the assessee has provided details of members who made deposits. Therefore, in our considered opinion the nexus of the amount of cash received from members towards deposits in their savings accounts as well as recovery of loans and the deposit of the same by the assessee society into the bank accounts during the demonetization period is clearly established. The assessee also maintains books of accounts on day-to-day basis and such cash deposited were in respect of the advances and loans also reflecting in the books of accounts of the assessee. The assessee had in fact discharged the primary onus casted upon it by filing the name of all the depositors, PAN details of majority of depositors & the amounts deposited by them during the demonetization period. Thus, in our considered opinion the assessee had furnished the complete and satisfactory explanations regarding the nature and sources of cash deposits into the bank account.

9.1 In our considered view, the banks where the monies were deposited have accepted the same as valid tender by giving full credit to the assessee. We could not understand merely because the assessee had accepted the SBNs after demonetization, why these cash received from the members towards recovery of loans & savings bank deposits cannot be treated as part of Gross Receipts declared by the assessee especially when the said cash were undisputedly deposited into the bank accounts & accepted by the bank. Admittedly the Specified Bank Notes (cessation of liabilities) Act, 2017 defines “appointed day” vide Section 2(1)(a). As per Section 2(1)(a), “appointed day” means the 31st day December, 2016. Further, Section 5 of the Specified Bank Notes (cessation of liabilities) Act, 2017 also deals with prohibition on holding, transferring or receiving Specified Bank Notes. Section 5 states that “on and from the appointed day, no person shall, knowingly or voluntarily, holds, transfer or receives any specific bank note”. We therefore, finds that the Specified Bank Notes was cease to be liabilities of the Reserve Bank under section 34 and also was cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act only on and from 31/12/2016. In view of the above, the contentions of the ld. CIT(A)/NFAC as well as learned DR that the cash deposits were not from the legitimate business receipts cannot be accepted especially when the bank had accepted the same as valid tender by giving full credit to the assessee.

9.2 Before us, the ld. DR by way of written submission dated 01/07/2026 submitted that in view of the statutory demonetisation framework introduced by the Central Government vide Notification S.O. 3407(E) dated 08/11/2016 supplemented by Notification S.O. 3416(E) dated 09/11/2016 as well as statutory regulator RBI vide circular No. RBI/2016-17/130 dated 14/11/2016, the acceptance and handling of specified bank notes by the assessee directly or through such prohibited channels were clearly in violation of the aforesaid notifications and binding RBI directions. We are of the considered opinion that admittedly, the assessee may not be authorized to receive the SBNs, but this is not in the dominion of the taxation under section 68 of the Act. The provisions of section 68 of the Act says that if the nature & source of the sum credited in the books of accounts of the assessee is not explained to the satisfaction of the AO, then it can be added as unexplained cash credit in the hands of the assessee. In the present case, the assessee had appropriately explained from where the SBN notes have come and such notes have also been deposited in the respective banks & therefore additions under section 68 of the Act is unwarranted. The assessee has clearly demonstrated the nexus of recovery of loans & saving bank deposits with the amount of cash deposited into the bank accounts. The AO had also not brought any adverse material on record except by saying that the assessee is not a bank to accept the cash in SBNs. Thus, we are of the considered opinion that once the assessee had already declared the gross receipts in its books of accounts and the AO had also not doubted the same, taxing the same once again under section 68 of the Act as unexplained cash credit will amount to double taxation. In view of the above, the addition made by the AO u/s 68 of the Act is not sustainable and accordingly, we direct the AO to treat the same as business receipts. We also direct the AO to allow deduction as claimed by the assessee u/s 80P of the Act in accordance with law. It is ordered accordingly.

10. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 7th Sept, 2026