Manjunatheshwara Souharda Sahakari Sangha Niyamitha Vs ITO (Karnataka High Court)
No Deposit Challan, No Addition Automatically: Karnataka HC Orders Bank Verification of ₹24.05 Lakh Cash Deposit
Cash Deposit Cannot Be Treated as Unexplained Without Examining Cash Book and Bank Records
The Karnataka High Court has quashed an assessment order confirming an addition relating to a cash deposit of ₹24,05,000, allegedly consisting of 4,810 currency notes of ₹500 denomination, and restored the matter to the jurisdictional Assessing Officer for fresh examination.
The addition had been confirmed principally because the assessee could not produce the original bank challan establishing the denominations of the currency notes deposited with its banker. The High Court observed that if the assessee, being a cooperative society and not a cooperative bank, was not legally required to maintain denomination-wise particulars before demonetisation, that circumstance would be relevant while examining its explanation.
More importantly, the Assessing Officer could obtain the necessary information directly from the banker to verify whether the cash deposited by the assessee consisted of 4,810 notes of ₹500 denomination.
Facts of the Case
Sri Manjunatheshwara Souharda Sahakari Sangha Niyamitha was a cooperative society registered under the Karnataka Souharda Sahakari Act, 1997.
An addition was made in its assessment for Assessment Year 2017-18 concerning a cash deposit made around the demonetisation period. The controversy was whether the deposited cash represented ₹500 currency notes received and held by the society before demonetisation came into effect on November 8, 2016.
In the first round of appeal, the appellate authority passed an order dated October 17, 2024, under Section 250 of the Income-tax Act and restored the assessment proceedings to the Assessing Officer. The Assessing Officer was required to examine whether the society could establish that the cash represented receipts in ₹500 denominations accumulated before demonetisation.
During the remand proceedings, the assessee claimed to have filed a detailed reply along with its cash book. However, the assessment order dated February 13, 2026, was passed under Sections 144, 250 and 144B, stating that the assessee had not furnished any reply and had failed to produce the bank challan indicating the denominations of the cash deposited.
The assessee challenged the assessment order as well as the consequential penalty notice issued under Section 274 read with Section 271AAC(1).
Cash Book Reflected 4,810 Notes of ₹500
Before the High Court, the assessee submitted that its cash book clearly reflected the availability of ₹24,05,000, represented by 4,810 notes of ₹500 each.
The society contended that the cash was available with it before demonetisation and that the relevant cash book had been furnished during the remand proceedings. Nevertheless, the assessment order proceeded on the basis that no reply had been filed.
The assessee admitted that it did not possess the bank challan demonstrating that the cash deposited with the bank comprised the very same ₹500 notes reflected in its cash book. It, however, argued that the absence of such a challan could not justify complete rejection of the regularly maintained books.
It was further contended that the assessee was a cooperative society and not a cooperative bank. Therefore, before November 8, 2016, it was not under any statutory mandate to record the denomination of every currency note received in the ordinary course of its activities.
Absence of Denomination Details Was a Relevant Consideration
The High Court found that the assessee’s legal obligation to maintain denomination-wise particulars was a relevant matter requiring examination.
If the cooperative society was not required to record the denominations of cash receipts before demonetisation, its explanation could not be rejected merely because it was unable to produce a denomination-wise bank challan.
The absence of a challan might affect the evidentiary strength of the assessee’s claim, but it could not substitute a proper inquiry into the cash book, the nature of the receipts and the availability of independent verification.
The Court also identified a direct method of verifying the assessee’s explanation. The Assessing Officer could call for information from the banker and ascertain whether the cash deposited by the society consisted of 4,810 currency notes of ₹500 denomination.
Thus, the disputed fact was capable of verification through an independent third-party source.
Assessment Order and Penalty Notice Quashed
The High Court held that the circumstances warranted interference under Article 226 of the Constitution.
Accordingly, the assessment order dated February 13, 2026, and the consequential penalty notice issued under Section 274 read with Section 271AAC(1) were quashed.
The proceedings were restored to the jurisdictional Assessing Officer for proper reconsideration. The Court specifically directed that an opinion or confirmation be obtained from the assessee’s banker in the light of the society’s claim regarding the deposit of 4,810 notes of ₹500 denomination.
The High Court did not finally delete the addition on merits. It restored the matter for factual verification and a fresh decision after considering the relevant evidence.
Author’s Comments
The decision is significant in demonetisation-related assessments where additions are made mainly because the assessee is unable to produce old bank deposit slips containing denomination-wise particulars.
Absence of a denomination-wise challan does not automatically establish that the cash deposit is unexplained. The Assessing Officer must examine the cash book, opening cash balance, daily receipts, nature of the assessee’s activities and the records that the assessee was legally required to maintain at the relevant time.
At the same time, the judgment does not hold that a cash book entry conclusively proves the source of the cash. The assessee must still establish that the books were regularly maintained, that the cash balance arose from genuine and identifiable receipts, and that the recorded balance was sufficient to support the deposit.
The most practical feature of the ruling is the direction to obtain confirmation from the banker. Where material evidence is available from an independent third party, an addition should not be confirmed merely because the assessee does not possess a particular historical document.
The ruling also underlines that a remand assessment must genuinely comply with the appellate directions. If a detailed response and cash book were filed, the assessment could not proceed on the assumption that no reply was furnished. Evidence submitted by the assessee must be considered, verified and dealt with through a reasoned order.
FULL TEXT OF THE ORDER OF KARNATAKA HIGH COURT
The petitioner is aggrieved by the impugned Assessment Order dated 13.02.2026 whereby an addition has been made on account of the cash deposit made on 05.11.2016 with the petitioner’s Banker. The impugned Assessment Order is on remand under the Order–in-Appeal under Section 250 of the Income Tax Act, 1961 [for short, ‘the Act’], dated 17.10.2024.
2. In the appeal, the assessment proceedings are restored to the third respondent to consider whether the petitioner can justify cash receipts in denominations of Rupees Five Hundred prior to demonitisation with effect from 08.11.2016 and the Assessing Officer has confirmed the addition even on remand observing that the petitioner has not produced the bank challan to establish the denominations in which the deposit is made on 05.11.2016.
3. Sri Ravishankar S V, while arguing for a remand submits the following in support of an intervention by this Court.
- After the order dated 17.10.2024, the petitioner has filed a detailed reply enclosing Cash Book, but the Assessment Order is completed observing that the petitioner has not produced any reply.
- The petitioner, a Cooperative Society, unlike a Cooperative Bank, was not under any mandate to disclose the denominations of the deposits until 08.11.2016.
- The Cash Book maintained by the petitioner demonstrates that it held a sum of Rs.24,05,000/- in cash in 4,810 Five Hundred Rupees Notes. The petitioner held these 4,810 Notes even as of 05.11.2016 and continued until the date of deposit with the bank viz., 15.11.2016.
- The petitioner does not have a challan to demonstrate that these are the very notes that are deposited with its bankers on 15.11.2016 but the authorities cannot dispute the entries in the Cash Book.
Sri M.Thirumalesh, a learned Senior Standing Counsel, supported by Sri Nirmal Mathew, a learned Standing Counsel for the respondent, is heard on whether this Court must interfere for restoring the proceedings.
4. If indeed the petitioner, as a Cooperative Society, was not required to declare denominations, that would be a relevant consideration as also would be the fact that during the assessment proceedings, information can be called from the Bankers to verify that the petitioner did indeed deposit 4,810 Five Hundred Rupees Notes. The afore reasons warrant this Court’s interference to exercise jurisdiction under Article 226 of the Constitution for restoration of the proceedings. As such, the following,
ORDER
The petition is allowed in part. The impugned Assessment Order dated 13.02.2026 [Annexure-A] and the Penalty Notice dated 13.02.2026 [Annexure-B] are quashed restoring the proceedings for due consideration by the jurisdictional first respondent. These proceedings are being restored to the first respondent because a specific opinion will have to be obtained from the petitioner’s bankers in the light of this Court’s observation based on the petitioner’s case as captured in this appeal.
