Prathamika Krishi Pattina Sahakari Sangh Niyamit Vs ITO (ITAT Bangalore)
Bangalore ITAT: Demonetised Notes Received Towards Recovery of Members’ Loans Cannot Be Taxed u/s 68 Merely Because Co-operative Society Was Not Authorised to Accept SBNs
Prathamika Krishi Pattina Sahakari Sangh Niyamit v. ITO, ITA No. 2038/Bang/2025, AY 2017-18, order dated 10.08.2026 – Bangalore ITAT
The Bangalore ITAT allowed the appeal of a Primary Agricultural Credit Co-operative Society and deleted an addition of ₹38.21 lakh under Section 68 read with Section 115BBE arising from deposit of Specified Bank Notes (SBNs) during the demonetisation period.
During 09.11.2016 to 31.12.2016, the Society deposited ₹46.77 lakh in old ₹500/₹1,000 notes. Since the cash balance as on 08.11.2016 was only ₹8.56 lakh, the AO treated the balance ₹38.21 lakh as unexplained cash credit. The Society explained that these amounts had been received from its members, mainly towards recovery of crop loans and tractor loans, and furnished its books and a list of the members from whom the SBNs were received. The AO rejected the explanation principally because co-operative societies were not permitted to accept demonetised notes after 08.11.2016.
The ITAT found that the nexus between amounts received from members towards loan recoveries and the deposits in the bank was clearly established. The Society maintained day-to-day books, and even the AO acknowledged that the bank deposits formed part of those books. Thus, the assessee had satisfactorily explained the nature and source of the cash deposits.
Importantly, the Tribunal held that even if the Society was not authorised under RBI directions to receive SBNs, that issue was “not in the dominion of taxation under section 68.” Section 68 is concerned with whether the nature and source of the credit are satisfactorily explained. Once the Society demonstrated where the notes came from and established their nexus with loan recoveries, an addition under Section 68 was unwarranted.
The Tribunal also referred to the Specified Bank Notes (Cessation of Liabilities) Act, 2017, noting that the statutory “appointed day” was 31.12.2016. It rejected the AO’s characterization of SBNs received during the demonetisation period as merely worthless pieces of paper having zero value, particularly when the notes were actually deposited and accepted by the bank for full credit.
The ITAT further made an important observation that once the receipts had already been recorded as gross receipts in the books and were not doubted by the AO, taxing the same amount again under Section 68 would result in double taxation. It therefore deleted the Section 68 addition, directed the AO to treat the amount as business receipts and allow the deduction claimed under Section 80P in accordance with law.
Key principle
Violation of RBI/demonetisation restrictions on accepting SBNs and taxability under Section 68 are separate issues. Once the identity/source and nexus of the SBN receipts are satisfactorily established from the books and supporting records, the receipt cannot be treated as unexplained merely because accepting such currency may have been prohibited under another law.
Cases Discussed:
- Prathamika Krishi Pattina Sahakari Sangh Niyamit Vs ITO (ITAT Bangalore), ITA No. 2038/Bang/2025, AY 2017-18
- Collector, Land Acquisition v. Mst. Katiji and Ors. (Apex Court), 167 ITR 471
- People Education & Economic Development Society Vs/ ITO (ITAT Chennai), 100 ITD 87 (TM) (Chen)
- CIT vs. K.S.P. Shanmugavel Nadai and Ors. (Madras High Court), 153 ITR 596
- People Education and Economic Development Society (PEEDS) v. ITO (ITAT Chennai), 100 ITD 87 (Chennai) (TM)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
