Source Of Demonetized Notes Collected By Co-Operative Society Explained, ITAT Quashes Addition Made Under Section 68 Of Income Tax Act

The Single Member Bench of B.R. Baskaran (Accountant Member) held that the Assessee Co-operative Society had explained the nature and source of the demonetized notes deposited by it in its bank account and all the transactions had been recorded by it in its books of accounts, therefore the said deposits could not be considered as "unexplained money" in the hands of the Assessee.

The Assessee Souharda Credit Co-operative Society is engaged in providing credit facilities to its members. It filed its income tax return showing nil taxable income. The Assessing Officer (AO) noted that the Assessee society had deposited demonetized notes in its bank account. The AO noted that the government on 8.11.2016 had announced that the existing Rs. 1000 and Rs. 500 currency notes were no longer to be considered as legal tender. The AO ruled that the demonetized notes were collected by the Assessee after 8.11.2016, which was not permitted. The AO therefore held that the said amount represented unexplained money of the Assessee, and accordingly made additions to Assessee's income under Section 68 of the Act. The Assessee challenged the assessment order passed by the AO by filing an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)), which was dismissed by it. The Assessee filed an appeal before the ITAT against the order of the CIT (A).

The Assessee submitted before the ITAT that the Assessee had discharged its liability under Section 68 of the Income Tax Act of explaining the nature and source of money. The Assessee averred that it had explained to the AO that the demonetized notes deposited by it in its bank account were out of the collections received by it in its ordinary course of business and that it represented money deposited by its members towards repayment of loans. The Assessee contended that the said collections and deposits had been duly recorded by it in its books of account and hence, there was no reason to treat the same as unexplained money in the hands of the Assessee. The Assessee submitted that after the RBI, vide notification dated 14.11.2016, had prohibited District Central Co-operative Banks from providing exchange facility against demonetized notes or accepting the deposit of such demonetized notes, the Assessee had stopped collecting the demonetized notes from 14.11.2016. The Assessee added that since the demonetized notes were collected by the Assessee prior to 14.11.2016, the Assessee had not violated any legal provisions, and the AO was not justified in invoking the provisions of Section 68 of the Income Tax Act.

Section 68 of the Income Tax Act, 1961 provides that where any sum is found to be credited in the books of accounts of an assessee, maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged to income tax as the income of the assessee for that previous year.

The ITAT ruled that the Assessee had explained the nature and source of the demonetized notes deposited by it in its bank account and all the transactions had been duly recorded by it in its books of accounts. Therefore, the ITAT held that the said deposits could not be considered as "unexplained money" in the hands of the Assessee.

The ITAT noted that the AO had taken the view that since the Assessee had collected the demonetized notes in violation of the RBI notification, therefore the said amount collected by the Assessee represented unexplained money in its hands under Section 68 of the Income Tax Act. The ITAT held that there was no rationale in the view taken by the AO.

"Peculiarly, the AO is taking the view that the assessee was not entitled to collect the demonized notes and accordingly invoked sec.68 of the Act. I am unable to understand as to how the contraventions, if any, of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act."

The ITAT observed that the Assessee had explained why it had collected demonetized notes after the RBI notification dated 8.11.2016, as well as the fact that the Assessee had stopped collecting the amount after the RBI notification dated 14.11.2016.

Therefore, the ITAT held that the deposit of demonetized notes collected by the Assessee from its members would not be hit by the provisions of Section 68 of the Income Tax Act.

The ITAT thus allowed the Assessee's appeal and set aside the order passed by the CIT (A).

Case Title: Sri Bhageeratha Pattina Sahakara versus ITO, Davanagere

Dated: 18.02.2022 (Bangalore ITAT)

Counsel for the Appellant: Shri Sandeep Chalapathy

Counsel for the Respondent: Shri Ganesh R. Ghale, Standing Counsel for the Department

Click Here To Read/Download Order