Case Law Details
The SomavamshaSahasrarjuna Vs ITO (ITAT Bangalore)
Demonetisation Deposits in Co-operative Society: Bangalore ITAT Says SBN Receipts Before 31.12.2016 Cannot Be Treated as Unexplained Cash Credits Merely Because They Ceased to Be Legal Tender
The Bangalore ITAT granted relief to a co-operative credit society by holding that acceptance of Specified Bank Notes (SBNs) from members during the demonetisation period cannot automatically result in an addition under section 68 merely because the notes ceased to be legal tender after 08.11.2016.
The assessee, a co-operative society engaged in accepting deposits and granting loans to its members, had received SBNs aggregating to ₹22.08 lakh from members towards deposits and loan repayments during the demonetisation period. The Assessing Officer treated the amount as unexplained cash credits under section 68 on the reasoning that SBNs had no value after 08.11.2016 and that the entries created by the assessee in its books therefore represented unexplained credits. The CIT(A) affirmed the addition.
The Tribunal disagreed with the approach of the lower authorities. It observed that under the Specified Bank Notes (Cessation of Liabilities) Act, 2017, the prohibition on holding, transferring or receiving SBNs came into effect only from the appointed date of 31.12.2016. Therefore, receipt of SBNs prior to that date and subsequent deposit of such notes into scheduled bank accounts could not, by itself, justify an addition under section 68.
At the same time, the Tribunal held that the society must establish the identity of the members from whom the SBNs were received by furnishing complete KYC particulars. Accordingly, the matter was restored to the Assessing Officer with a direction to delete the addition in respect of those members whose identity and KYC details are satisfactorily established. The appeal was therefore allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. The assessee has filed the present appeal against the impugned order dated 01/09/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017-18.
2. In this appeal, the assessee has raised the following grounds: –
1. The order of the learned CIT(A) concluded under the provisions of section 250 of the Act to the extent is against the Appellant, is opposed to law, weight of evidence, natural justice, probabilities on facts and circumstances of case.
2. The Appellant denies itself liable to the assessed in excess of the returned income of Rs.5,30,410/- under the facts and circumstances of the case.
3. The learned CIT(A)-NFAC erred in law in upholding the action of the learned Assessing Officer w.r.t invoking of provisions of section 68 of the Act against the demonetization deposits of Rs.22,07,991/- under the absence of mandated precedent conditions as enumerated in the said provision under the facts and circumstances of the case.
4. The learned CIT(A)-NFAC erred in law in not holding that the appointed date w.r.t demonetization was 31.12.2026 under the facts and circumstances of the case.
5. The learned CIT(A)-NFAC erred in law in rejecting the claim of the appellant that, the said act of acceptance of the Specified Bank Notes post 08.11.2016 by the appellant, was perfectly intact as the said SBN’s were measured in monetary terms including and upto 31.12.2016 under the facts and circumstances of the case.
6. The learned CIT(A)-NFAC erred in law in upholding the act of the learned Assessing Officer in levying interest under the provisions of section 234B and 234C of the Act at Rs.84,76,710/- and Rs.7,121/-respectively under the facts and circumstances of the case. The levy is bad both on the extent levied and the rate levied which are not discernible from the order. Without prejudice to the quantification of the extent of interest it appears to be excessive and requires to be corrected.
7. Without prejudice to the right to seek waiver with the Hon’ble CCIT/ DG the Appellant denied itself liable to be charged to interest under section 234B and 234C of the Act, which under the facts and circumstances of the case of the Appellant deserves to be cancelled.
8. The Appellant crave leave to add, alter, amend, substitute, change and delete any of the grounds of appeal.
9. For 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 and justice rendered.
3. The solitary issue that arises for our consideration pertains to the addition made under section 68 of the Act on account of acceptance of Specified Bank Notes (“SBN”) during the demonetization period.
4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 and is engaged in extending credit facilities to its members. For the year under consideration, the assessee filed its return of income on 30/10/2017, declaring a total income of Rs. 5,30,410 after claiming a deduction under section 80P of the Act. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee had received a deposit of SBN from its members during the demonetisation period totalling Rs. 22,07,991. As the SBN ceased to be a legal tender, the Assessing Officer (“AO”), vide order dated 18/12/2019 passed under section 143(3) of the Act, held that even though SBN has no value after 08/11/2016, a value has been created by the assessee by making an entry in the cash book and corresponding ledger account, which becomes unexplained and therefore section 68 squarely applies in the case of the assessee and all the amount received by way of SBN after 09/11/2016 become unexplained. The AO further held that, since the assessee deposited SBN into its bank account on account of collections from the members of the society, the said cash deposits also needed to be treated as unexplained. Accordingly, the AO made an addition of Rs. 22,07,991 under section 68 of the Act.
5. The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the addition made by the AO under section 68 of the Act. Being aggrieved, the assessee is in appeal before us.
6. Having considered the submissions of both sides and perused the material available on record, in the present case, it is undisputed that the assessee is a co-operative society engaged in extending credit facilities to its members. Accordingly, the assessee, in the normal course of its business, collects deposits from its members and advances loans to its members. During the year under consideration, the assessee received SBN from its members during the demonetization period as deposits and as repayments of loans. The AO, as well as the learned CIT(A), on the basis that the SBN were not a legal tender from 09/11/2016, held that the assessee should not have transacted with them. Further, since the assessee created value for the SBN and made an entry in the cash book and the corresponding ledger accounts, the lower authorities held that the said entry is unexplained and that section 68 of the Act is squarely applicable.
7. At the outset, it is pertinent to note that as per section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017, only on and from the appointed date, i.e. 31/12/2016, holding, transferring or receiving of any SBN by any person, knowingly or voluntarily, was prohibited. In the present case, even if the assessee society received SBN from its members during the demonetization period, i.e. prior to the appointed date 31/12/2016, it is undisputed that the said money was deposited by the assessee in its bank account maintained with scheduled banks. Thus, the very fact that SBN ceased to be a legal tender from 09/11/2016 cannot lead to an addition in the hands of the assessee under section 68 of the Act. Further, since the assessee has received money from its members in the normal course of carrying on its business, which consisted of accepting deposits from its members and lending money to them, the assessee may not be required to prove their creditworthiness. However, at the same time, the assessee cannot be absolved from satisfactorily proving the identity of its members from whom the SBN was received and providing their complete KYC details. Therefore, for the limited purpose of granting the assessee an opportunity to provide the KYC details of the members from whom the SBN was received during the demonetization period, the matter is restored to the file of the jurisdictional AO. We further direct the AO to delete the addition made under section 68 of the Act in respect of SBN received from all those members in respect of whom the assessee provided the details. Needless to mention, no order shall be passed without affording reasonable and adequate opportunity of hearing to the assessee. With the above directions, the impugned order is set aside, and the grounds raised by the assessee are allowed for statistical purposes.
8. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 11th June, 2026.
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