Discrepancies In Maintaining KYC Documentation Does Not Constitute Incriminating Material: ITAT Deletes Income Tax Addition

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that income tax addition cannot be made for discrepancies in maintaining KYC documentation, account opening forms, and violation of society bye-laws.

The bench of Sandeep Singh Karhail (Judicial Member) and B.R. Baskaran (Accountant Member) has observed that for discrepancies in maintaining KYC documentation, account opening form, and violation of society bye-laws, action can be taken against the assessee under the relevant statute or by the concerned authority, such as RBI, however, the same cannot lead to an addition in the hands of the assessee under the Income Tax Act.

The appellant/assessee is a co-operative credit society and is a registered Multi-State Co-operative Urban Credit Society established under the Multi-State Co-operative Societies Act, 2002, and is involved in the facility of providing credits and other banking facilities to its members. The assessee is also providing an ATM card facility and RTGS facility to its members. The main source of income is interest on loans advanced to its members.

For the assessment year 2012-13, the assessee filed its original return of income declaring a total income of Rs. Nil after claiming deduction under section 80P. The return filed by the assessee was selected for scrutiny and an assessment was completed assessing the total income of the assessee at Rs. 4,64,400. Subsequently, survey action under section 133A was conducted on the assessee, during which huge unexplained cash was found at the branch office at Raipur, therefore the survey was converted into a search by executing the warrant on the assessee.

Subsequent to the search assessment conducted on the assessee, a second search action under section 132 was also carried out on the assessee on 26/05/2017 at the head office of the assessee at Ahmednagar along with branch offices at Mumbai, Ulhasnagar, and residences of key persons of the assessee, who handled the business affairs of the assessee.

Simultaneously, survey actions under section 133A were also carried out at the branch offices of the assessee at Ahmedabad, Chennai, and Hyderabad. In response to the notice issued under section 153A, the assessee filed its return of income declaring a loss of Rs. 26,82,099. The notice under sections 143(2) and 142(1) along with a detailed questionnaire was issued and served on the assessee.

On the perusal of the documents found during the course of the search, the Assessing Officer (AO) noted that there is non-compliance in maintaining proper KYC documents, non-compliance in collecting KYC details from the depositors, irregularities found in account opening forms of society, and non-compliance of Rule 114B in respect of cash deposits.

The assessee was asked to show cause as to why the total case deposited in its books should not be considered and taxed as unexplained cash credit.

The AO held that there are several instances where the amount of cash deposits exceeded Rs. 50,000 by the depositor in a single day. However, the assessee has collected neither the PAN nor Form 60 from such depositors, which is a clear violation of Rule 114B of the Income Tax Rules, 1962. It was further held that the assessee has neither furnished any details regarding the identity, creditworthiness, and genuineness of its regular or nominal members nor produced any of them.

The assessee challenged the order before the CIT (A). The CIT (A) dismissed the ground challenging the additions made vide order passed under section 153A in the absence of incriminating material found during the course of the search on the basis that large no. of incriminating material in the form of KYC discrepancies, pay-in slips, and other evidence were found during the course of the search. The CIT(A) held that once it is accepted that the assessee is in the business of mobilization of savings and provision of credit facilities, the entire transactions cannot be added as income of the assessee.

The court noted that in respect of completed/unabated assessments, no addition can be made in the absence of any incriminating material found during the course of search and seizure action. In order to constitute incriminating material or evidence, it is necessary for the AO to establish that the information, documents, or material, whether tangible or intangible, is of such nature which incriminates or militates against the person in relation to whom it is found.

The court held that the material/documents found during the course of the search are not incriminating in nature. Therefore, the AO could not have made any addition under section 153A in respect of concluded/unabated assessments for the assessment years 2012-13 to 2015-16.

Counsel For Appellant: Dharmesh M. Kansara

Counsel For Respondent: Sanyogita Nagpal

Case Title: Shri Renukamata Multi–State Co-operative Versus Asstt. Commissioner of Income Tax

Case No.:  ITA no.1721/Mum./2023

Click Here To Read The Order