AO's section 68 addition for unexplained cash credit unjustified when co-operative society received money through normal business operations

ITAT Mumbai held that AO's addition under section 68 for unexplained cash credit in assessment under section 153A was unjustified. The assessee, a co-operative credit society, received money through normal business operations including loan repayments and member deposits, which were properly recorded in books. Despite KYC violations and non-compliance with RBI guidelines, the material found during search was not incriminating against the assessee but potentially against individual members. The tribunal concluded that KYC discrepancies cannot justify additions under the Income Tax Act, as such violations should be addressed by relevant authorities like RBI. Additions for assessment years 2012-13 to 2015-16 were deleted, deciding in favor of the assessee.

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Issues Involved:
1. Jurisdictional Issue regarding the abatement of assessment.
2. Validity of additions made under section 68 of the Income Tax Act.
3. Compliance with KYC norms and other regulations.
4. Disallowance of various provisions and expenses.
5. Deduction under section 80P of the Income Tax Act.

Summary:

1. Jurisdictional Issue:
The primary jurisdictional issue raised by the assessee was that since the assessments for the years 2012-13 to 2015-16 were concluded before the date of the search, they were not abated as per the second proviso to section 153A of the Income Tax Act. Hence, no additions could be made in the absence of any incriminating material found during the search. The Tribunal noted that the Hon'ble jurisdictional High Court in *CIT v/s Continental Warehousing Corporation (Nhava Sheva) Ltd.* and the Hon'ble Supreme Court in *PCIT v/s Abhisar Buildwell (P.) Ltd.* affirmed that no addition can be made in respect of assessments which have become final if no incriminating material is found during the search.

2. Validity of Additions under Section 68:
The Assessing Officer (AO) made additions under section 68 of the Act, citing non-compliance in maintaining proper KYC documents and other discrepancies. However, the Tribunal held that the materials found during the search, such as incomplete KYC documents, did not constitute "incriminating material." The Tribunal emphasized that incriminating material should prima facie prove undisclosed income, which was not the case here. Therefore, the additions made by the AO for the assessment years 2012-13 to 2015-16 were deleted.

3. Compliance with KYC Norms and Other Regulations:
The AO noted several discrepancies in KYC documentation and account opening forms, and non-compliance with Rule 114B regarding cash deposits. The learned CIT(A) also observed these discrepancies but concluded that the entire transactions could not be added as income of the assessee. The Tribunal agreed that the deficiencies noted did not amount to incriminating material against the assessee.

4. Disallowance of Various Provisions and Expenses:
The AO made additions on account of provision for standard assets, provision for gratuity, prior period expenses, and disallowances under section 40A(3) and section 40(a)(ia) of the Act. The learned CIT(A) granted partial relief to the assessee on these issues. The Tribunal did not delve into these matters as the primary jurisdictional issue was decided in favor of the assessee.

5. Deduction under Section 80P:
The AO disallowed the deduction claimed under section 80P of the Act, which was upheld by the learned CIT(A). However, the Tribunal did not address this issue separately as the primary jurisdictional issue rendered the other grounds academic.

Conclusion:
The Tribunal allowed the appeals by the assessee for the assessment years 2012-13 to 2015-16, deleting the additions made by the AO, and dismissed the appeals by the Revenue as infructuous. The order was pronounced in the open Court on 31/01/2024.

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