Case Law Details
Mudhol Pattina Sahakari Sangh Niyamita Vs ACIT (ITAT Bangalore)
In a significant judgment by the Income Tax Appellate Tribunal (ITAT) Bangalore, the case of Mudhol Pattina Sahakari Sangh Niyamita vs. Assistant Commissioner of Income Tax (ACIT) brought to light the critical interpretation and application of Section 68 of the Income Tax Act, 1961. This case revolved around the addition of income from undisclosed sources and underscored the necessity for thorough examination of the source of cash deposits post-demonetization. The ruling, dated 24.07.2023, for the Assessment Year 2017-18, provides essential insights into the handling of cash deposits during the demonetization period and its tax implications.
Detailed Analysis:
The core issue in this appeal was whether the addition of ₹18,33,678 as income from undisclosed sources under Section 68 of the Income Tax Act, 1961, by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], was justified without a detailed examination of the source of cash deposits made during the demonetization period.
The assessee, a cooperative society registered under the Karnataka Cooperative Societies Act, 1959, had its appeal partly allowed by the CIT(A). While the CIT(A) directed the AO to allow deduction under Section 80P, the addition made regarding the cash deposits during demonetization was confirmed.
The Tribunal’s decision hinged on whether the assessee had adequately demonstrated the source of these deposits as required under Section 68. The Tribunal noted that similar cases, such as the Merchants Credit Co-operative Society Ltd. vs. ITO, had seen the deletion of such additions, provided the assessee could satisfactorily establish the source of the deposits.
Ultimately, the ITAT Bangalore remanded the case back to the AO for a detailed examination of the source of cash deposits. This directive was to ensure compliance with Section 68, which mandates the identification and substantiation of the source of any credit appearing in the books of the assessee.
Conclusion:
The ITAT Bangalore’s decision in Mudhol Pattina Sahakari Sangh Niyamita vs. ACIT underscores the criticality of examining the source of cash deposits under Section 68 of the Income Tax Act. This ruling is particularly significant in the context of demonetization and its aftermath, where numerous taxpayers faced scrutiny over cash deposits. It sets a precedent that additions under Section 68 cannot be made without a thorough investigation into the source of such deposits. Taxpayers and practitioners alike must note the importance of substantiating the source of deposits to avoid unwarranted additions to their taxable income.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 24.07.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.
2. The grounds raised read as follows:
1. The learned Assessing Officer’s order is opposed to the Facts of the case and law.
2. Because, the learned Commissioner of Income Tax (Appeals) has overlooked the facts of the case and had confirmed the additions of 18,33,678/- as income from undisclosed sources u/s 68 of the Income Tax Act, 1961. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact the amount has been received by the appellant as part of the business receipts in the regular course of conducting the society activities. The source of the same was however explained before the lower authorities along with the KYC details, which has been discussed in the Assessment Order by the learned lower authorities as well as the learned Commissioner if Income Tax (Appeals).
3. Because, the learned lower authorities have erred in bringing to tax cash receipts under section 68 of the Income Tax Act, 1961, and charging it under section 115BBE at 60 percent tax with 25 percent surcharge, which was brought by amendment on 15.12.2016 (retrospective amendment – after commencement of Assessment Year 201 7-1 8) which is bad in law.
4. Because, the learned Commissioner of Income Tax (Appeals) erred in confirming the interest levied by the lower authorities u/s 234A of the Income Tax Act, 1961 for default in furnishing return of income which is against law and facts of the case.
5. Because, the learned Commissioner of Income Tax (Appeals) erred in confirming the interest levied by the lower authorities u/s 234B of the Income Tax Act, 1961 for default in advance payment of tax, which is against law and facts of the case.
6. The assessee craves leave to add / alter any of the grounds of appeal before or at the time of hearing.
3. Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Cooperative Societies Act, 1959. For the Assessment Year 2017-18, the return of income was filed on 27.03.20 18 declaring Nil income, after claiming deduction under section 80P of the Act, amounting to Rs.2,63,202/-. The assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 07.09.2018. Assessment was completed under section 143(3) of the Act vide order dated 05.12.20 19. In the assessment completed, the claim of deduction under section 80P of the Act was denied. The AO also made an addition of Rs.18,33,678/- as unexplained income with regard to cash deposits made during the demonetization period under section 68 r.w.s. 115BBE of the Act.
4. Aggrieved by the order of the assessment, assessee filed appeal before the First Appellate Authority. The CIT(A) partly allowed the appeal of the assessee. The CIT(A) following the judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT, reported in 431 ITR 1, directed the AO to allow deduction under section 80P(2)(a)(i) of the Act. As regards the cash deposits made, the CIT(A) confirmed the addition of Rs.18,33,672/- made by the AO. The relevant finding of the CIT(A) reads as follows:
“5.2. DECISION: I have gone through and considered the observation of AO, submission of the appellant and all the materials available on the record. The issue is deposit of demonetized specified bank notes(SBN) by the appellant in two authorized banks after 09.11.2016. Total of such deposits in the banks were Rs 43.3 7,000 as per page 5 of the assessment order. The learned AO has given credit to the cash balance in the appellant’s books as on 08.11.2016 of Rs 25,03,322 and treated the balance as unexplained credits. During the assessment proceedings, appellant took the defence that it was not aware of the fact that it was not authorized to accept demonetized SBNs. The government of India has widely publicized the modalities for exchange/deposit of such SBNs during the period after demonetization. So this argument is not acceptable. During the appellate proceedings, the appellant has stated that that it has received the amount from its members, but has not furnished any proof regarding their receipt before 08.11.2016,date of demonetization. It has also argued that it could accept the SBNs after 08.11.2016 as the word “May” and not “shall” is the word used in the government directive. Government’s directive has been very clear on the deposit and exchange of SBNs and the appellant need not portray it ambiguously.
Therefore the appellant’s arguments are not acceptable. The appellant’s explanations are not satisfactory. The AO, as a result of amended provisions of Section 115BBE, has rightly taxed the unexplained demonetized SBNs as per the amended provisions. Accordingly, these grounds of appeals are dismissed.”
5. Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed a Paper Book enclosing therein the case laws relied on, copies of the extracts of the cash books from 09.11.2016 to 11.2016. The learned AR submitted that during the demonetization period assessee had received cash from its members for depositing in loan account, SB account, etc. It is submitted that on identical facts in the case of Merchants Credit Co-operative Society Ltd., Vs. ITO in ITA No.329/Bang/2023 (order dated 24.08.2023), the Bangalore Bench of the Tribunal had deleted the addition under section 68 of the Act.
6. The learned Standing Counsel submitted that the impugned addition has been made solely for the reason that assessee was not authorized to accept SBNs subsequent to the demonetization date (i.e., 08.11.2016). Therefore, the matter needs to be examined afresh by the AO since the source of cash deposits was never the subject matter of examination by the AO nor the CIT(A).
7. I have heard the rival submissions and perused the material on record. The AO and the CIT(A) had made the impugned addition solely for the reason that assessee was not authorized to accept the SBNs (old notes of Rs.500/- and Rs.1000/-) subsequent to the demonetization since the SBNs were not legal tender. On identical facts, the Bangalore Bench of the Tribunal in the case of Merchants Credit Co-operative Society Ltd., Vs. ITO (supra) had deleted the addition made under section 68/69A of the Act. In the aforesaid case, since the assessee had satisfied the conditions as mandated under section 68 of the Act, addition made was deleted. The relevant finding of the Tribunal reads as follows:
“7. We have considered the rival submissions. The assessee is a credit cooperative society dealing with the members only. During the demonetisation period the members of the society have deposited cash in pygmie a/c, SB A/c, loan a/c. etc. The assessee has produced a list of depositors and the amount deposited by members with denominations of currency. The assessee has accepted the deposits from its members from 9.11.2016 to 14.11.2016. As per Gazette Notification of RBI & Govt. of India dated 08.11.2016, the assessee was not authorized to accept cash deposits in SBNs. The AO observed that the assessee was not authorized to receive or collect money in SBNs of Rs.1,000 and Rs.500 which were not in legal tender w.e.f. 09.11.2016 and such transactions on or after 09.11.2016 cannot be entered in cash book. The cash deposits made by the members of the society had no value as such. The Assessing Officer issued show-cause notice by observing that the impugned amount should be treated as income of the assessee u/s 69A of the Act., however the AO made addition u/s 68 of the I.T. Act. The assessee has satisfied the requirement of section 69A of the Act and the AO did not give further opportunity to the assessee for addition u/s 68 of the I. T. Act. During the assessment proceedings, assessee filed the details of list of depositors and loanees who made cash deposits. The AO accepted that it was money deposited by the members and noted that the assessee had brought the entries in its books of account, therefore section 68will apply and accordingly treated it as income u/s. 68. There is no doubt that the assessee has satisfied the identity of the deposits, who are members of the society and genuineness of the transactions because the amounts have been deposited in the members accounts only. If the AO had any doubts that the assessee has not satisfied the ingredients of section 68, he could have asked further details from the assessee, but the AO has not done the same, which clearly shows that the assessee has discharged its duty to satisfy the requirement of section 68. We further note that the SBNs have been deposited in the members accounts, accordingly, the assessee did not get any extra benefit as observed by the AO in his order at para No. 06 which was treated as income us 69A of the Act. In view of this, the provisions of section 68 is not applicable in the present facts of the case and the AO without discussing in detail has made addition u/s. 68 which is not proper. Therefore the addition is deleted.”
8. In the instant case, neither the AO nor the CIT(A) had examined the source of cash deposit. The sole reason for making the addition under section 68 r.w.s. 115BBE of the Act was that subsequent to 08.11.2016, SBNs of Rs.500/- and Rs.1000/- were not a legal tender and assessee was not authorized to collect the same. In the above over of Tribunal, it has been categorically held that addition under section 68 of the Act cannot be made without examining the source of cash deposit. Therefore, for the limited purpose of examining the source of cash deposit, the matter is remanded to the AO. Assessee is directed to produce the identity / source of cash deposit and shall satisfy the AO as regards the conditions that is mandated under section 68 of the Act. It is ordered accordingly.
9. In the result, appeal filed by the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page.
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