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
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 04.06.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1076706974(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:-
3. At the outset, the ld. A.R. of the assessee submitted that there is a delay of 15 days in filing the appeal before this Tribunal. The ld. A.R. of the assessee also drew our attention to an application for condonation of delay dated 15.09.2025 filed along with an affidavit sworn before the notary public dated 10.09.2025, stating the reasons for the delay, which are reproduced below for ease of reference and convenience:
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4. Before us, the ld. AR of the assessee reiterated the same as stated in the condonation application & vehemently submitted that the assessee could not file the appeal within the prescribed period for the reason that the assessee being a Co-operative society governed by the provisions of the Karnataka Co-operative Societies Act, 1959 and in accordance with the statutory requirements, the society is mandated to complete its statutory audit by 31stAugust of each year. Further, the Annual General Meeting (AGM), where audited accounts are approved and directions are taken from members, could be held only up to 25th In the present case, the society could finalize its audited accounts only by 31.08.2025, and subsequently placed the same before the AGM held in September, 2025. Only thereafter, the society was in a position to obtain approval and authorization from the members to proceed with the filing of appeal before this Tribunal. Consequently, the appeal could be filed only on 15.09.2025, resulting in a marginal delay of 15 days beyond the prescribed period. The ld. A.R. also submitted that the delay is unintentional and no benefit can be attributed to the assessee in filing the appeal belatedly. He thus prayed to condone the delay and requested to consider the issues raised by the assessee on merits.
5. On the contrary the ld. D.R. vehemently objected for granting the condonation of delay and submitted that the assessee failed to demonstrate the sufficient cause.
6. We have perused the details filed by the assessee to justify the delay and we are satisfied that there is no malafide intention on the part of the assessee in filing the appeal belatedly before us. In our considered opinion, the assessee has demonstrated sufficient cause in filing the appeal belatedly by 15 days. It is to be noted that u/s 253(5) of the Act the Tribunal may admit the appeal filed beyond the period of limitation where it has established that there exists a sufficient cause on the part of the assessee for not presenting the appeals within the prescribed time. The explanation therefore, becomes relevant to determine whether the same reflect sufficient and reasonable cause on the part of the assessee in not filing these appeals within the prescribed time. We have gone through the reasons explained by the assessee in which we noticed that the society could finalize its audited accounts only by 31.08.2025, and subsequently placed the same before the AGM held in September, 2025. Only thereafter, the society was in a position to obtain approval and authorization from the members to proceed with the filing of appeal before this Tribunal. Consequently, the appeal could be filed only on 15.09.2025, resulting in a marginal delay of 15 days beyond the prescribed period.
6.1 While considering a similar issue the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down six principles. For the purpose of convenience, the principles laid down by the Apex Court are reproduced hereunder:
(1) Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
(2) Refusing to condone delay can result in a meritorious matter being thrown at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.
(3) ‘Every day’s delay must be explained’ does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational, commonsense and pragmatic manner.
(4) When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a nondeliberate delay.
(5) There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.
(6) It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
6.2 When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right for injustice being done because of nondeliberate delay. Therefore, we have to prefer substantial justice rather than technicality in deciding the issue. As observed by Apex Court, if the application of the assessee for condoning the delay is rejected, it would amount to legalize injustice on technical ground when the Tribunal is capable of removing injustice and to do justice. Therefore, this Tribunal is bound to remove the injustice by condoning the delay on technicalities. If the delay is not condoned, it would amount to legalizing an illegal order which would result in unjust enrichment on the part of the State by retaining the tax relatable thereto. Under the scheme of Constitution, the Government cannot retain even a single pie of the individual citizen as tax, when it is not authorized by an authority of law. Therefore, if we refuse to condone the delay, that would amount to legalize an illegal and unconstitutional order passed by the lower authority.
6.3 Further, in the case of People Education & Economic Development Society Vs/ ITO reported in 100 ITD 87 (TM) (Chen), wherein held that “when substantial justice and technical consultation are pitted against each other, the cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of non-deliberate delay”.
6.4 The next question may arise whether delay was excessive or inordinate. There is no question of any excessive or inordinate when the reason stated by the assessee was a reasonable cause for not filing the appeal. We have to see the cause for the delay. When there was a reasonable cause, the period of delay may not be relevant factor. In fact, the Madras High Court in the case of CIT vs. K.S.P. Shanmugavel Nadai and Ors. (153 ITR 596) considered the condonation of delay and held that there was sufficient and reasonable cause on the part of the assessee for not filing the appeal within the period of limitation. Accordingly, the Madras High Court condoned nearly 21 years of delay in filing the appeal. When compared to 21 years, 15 days cannot be considered to be inordinate or excessive. Furthermore, the Chennai Tribunal by majority opinion in the case of People Education and Economic Development Society (PEEDS) v. ITO (100 ITD 87) (Chennai) (TM) condoned more than six hundred days delay. Therefore, in our opinion, by preferring the substantial justice, the delay of 15 days has to be condoned and accordingly, we condone the delay and admit the appeal for adjudication.
7. Now the brief facts of the case are that the assessee is a primary Agricultural credit co-operative society registered under the provisions of the Karnataka Co-operative Societies Act, 1959. The assessee society is engaged in the activities of carrying on the business of providing credit facilities to its members only. The assessee society filed its return of income for the AY 2017-18 declaring a loss of Rs. 3,58,132/-. Thereafter, the case of the assessee was selected for scrutiny through CASS & accordingly the notices u/s 143(2) as well as notice u/s 142(1) of the Act were issued calling for the details. The assessee had filed its submissions through e-filing portal on various dates.
7.1 During the course of the assessment proceedings, the AO observed that the assessee had made total cash deposits of Rs.46,77,000/- in its bank accounts during the demonetization period i.e. from 09/11/2016 to 31/12/2016 in Rs.1,000/- and Rs.500/- notes i.e. specified bank notes (SBNs). The AO noted that the cash balance as on 08/11/2016 was only Rs.8,55,587/- and therefore, in the opinion of the AO the balance amount of Rs.38,21,413/- were supposed to be collected after 08/11/2016. The assessee submitted that the above cash deposits in SBNs have been made out of the receipts of cash from the members of the society as per the list uploaded as annexure-1. The AO however, did not accept the claim of the assessee due to the followings:-
1. RBI had withdrawn legal tender character of old bank notes w.e.f. 08/11/2016.
2. The legal tender character of bank notes till 08/11/2016 was withdrawn.
3. The credit co-operative societies were not permitted to collect the demonetized currency of Rs.500/Rs.1000 in view of any transaction.
4. The demonetize currency during the demonetization period was to be transacted in the specified manner so that the value of tender remains intact after 30/12/2016 otherwise the value of the demonetized currency becomes zero after 30/12/2016 as it is no more a legal tender.
5. In the present case the assessee has submitted that the demonetize currency is out of amounts received from various persons. However, the assessee was not permitted by the RBI to accept these demonetized currency and hence the action of the assessee is against the law of country and the demonetized currency lost its legal tender status and is just a piece of paper having no value.
6. Since the demonetized currency if not used in the specified mode will lose its legal tender status, the claim of the assessee is that source of deposits made by it in its bank account out of the demonetized currency received from members cannot be accepted as a valid source.
7.2 Thereafter, the AO held that the assessee had deposited cash in its bank accounts which were part of its books of accounts but the assessee had failed to explain the nature and source of cash deposited and accordingly the entire sum of Rs.38,21,413/- [Rs.46,77,000/- (-) Rs.8,55,587/-] being amount credited to the bank accounts of the assessee by way of deposits of SBNs collected and deposited into bank after 08/11/2016 were brought to tax as unexplained cash credit u/s. 68 r.w.s 115BBE of the Act.
7.3 Since, the addition was made u/s. 68 of the Act and the income did not constitute regular income of the assessee, accordingly the AO also held that such income is not eligible for deduction u/s. 80P of the Act.
8. 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.
9. The ld.CIT(A)/NFAC dismissed the appeal of the assessee as the assessee neither filed any details nor availed any opportunity despite as many as 05 notices were issued by the ld.CIT(A)/NFAC. Even otherwise on merits of the case also the ld.CIT(A)/NFAC did not see any reasons to differ with the findings of the AO as no attempt had been made by the assessee to discharge its onus.
10. Again aggrieved by the order of the ld.CIT(A)/NFAC dated 04/06/2025, the assessee has filed the present appeal before this Tribunal.
11. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee is a primary agricultural credit co-operative society providing credit facilities only to its members. Further, ld. A.R. of the assessee submitted that during the course of assessment proceeding, the assessee contended 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 recovery of crop loans and M.T. Tractor loans. However, the AO merely by stating that “the demonetized currency received during the specified period i.e. between 08/11/2016 to 30/12/2016 lost its legal tender status and is just a piece of paper having no value” had treated the sum of Rs.38,21,413/- as unexplained cash credits u/s. 68 of the Act even after categorically observing the fact that the cash deposited in the bank accounts were part of books of accounts maintained by the assessee and accordingly prayed to allowed the appeal of the assessee.
12. The ld. D.R. on the other hand heavily relied on the order of the AO 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. Further, the ld. D.R. submitted that the credit co-operative societies were not permitted to collect the demonetized currency in lieu of any transactions and accordingly prayed to dismiss the appeal of the assessee.
13. 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 KCC Bank Limited, Dharawad Branch, Shiggaon during the demonetization period i.e. between 09/11/2016 to 30/12/2016 amounting to Rs.46,77,000/-. The AO noted that the cash balance as on 08/11/2016 was Rs.8,55,587/- only and accordingly treated the balance amount of Rs.38,21,413/- as unexplained cash credit u/s. 68 of the Act. It is also an undisputed fact that the assessee during the course of assessment proceeding had submitted the books of accounts along with the list of members from whom cash deposits in SBNs were received in cash which were mainly towards recovery of crop loans and M.T. Tractor loans. However, the AO merely on the ground that the assessee was not permitted by the RBI to accept these demonetized currency and hence the action of the assessee is against the law of country and the demonetized currency lost its legal tender status and is just a piece of paper having no value had rejected the contention of the assessee and treated the same as unexplained cash credit. Therefore, in our considered opinion the nexus of the amount of cash received from members towards recovery of crop loans and M.T. Tractors loans & deposit of the same into the bank accounts during the demonetization period is clearly established. The assessee also maintains books of accounts on day-to-day basis and the AO had categorically observed in the assessment order that the assessee had deposited cash in its bank accounts which are part of its books of account. Thus, in our considered opinion the assessee had also furnished the complete and satisfactory explanations regarding the nature and sources of cash deposits into the bank account.
13.1 In our considered view the banks where the money were deposited have also 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 crop loans & Tractor loans 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 AO as well as learned DR that the receipt of SBNs on account of recovery of crop loans & tractor loans during the demonetization period were just worthless pieces of paper having zero value cannot be accepted. Admittedly, the assessee may not be authorized to receive the SBNs, but this is not in the dominion of 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 crop loans & tractor loans 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 was not authorized to accept the SBNs in view of RBI guidelines. 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. We also failed to understand when the AO on the one hand held that the demonetized currency accepted after 08/11/2016 lost its legal tender & it is just a piece of paper having no value, then on the other hand how the same pieces of paper obtain the value of Rs.38,21,413/- for making the additions u/s 68 the Act. 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.
14. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 10thAug, 2026
