ITAT directs AO to verify Section 80P expenses; disallows Section 68 addition for accepted SBN currency during demonetization

The ITAT Ahmedabad restored the issue of deduction under section 80P(2)(a)(i) to the AO for verification of proportionate expenses claimed by the assessee. Regarding addition under section 68 for acceptance of SBN currency during demonetization, the tribunal held that no addition was warranted as the assessee provided a plausible explanation and complete details of the parties from whom SBNs were received. The AO did not doubt these details, and thus the addition under section 68 was disallowed. The assessee's appeal was allowed.

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ISSUES:

Whether interest earned on term deposits with nationalized banks can be treated as income eligible for deduction under Section 80P of the Income Tax Act or as income from other sources.Whether cash deposits in Specified Bank Notes (SBN) during the demonetization period can be treated as unexplained cash credit under Section 68 of the Income Tax Act.Whether the assessee was denied adequate opportunity of hearing in appellate proceedings, violating principles of natural justice.Whether tax under Section 115BBE can be validly charged on additions made as unexplained cash credit under Section 68.

RULINGS / HOLDINGS:

On the issue of interest income and deduction under Section 80P, the Court held that the matter requires verification of the proportionate expenses claimed by the assessee and accordingly restored the issue to the Assessing Officer for further examination, allowing the ground for statistical purposes.Regarding cash deposits in SBN during demonetization, the Court rejected the assessee's contention of a "genuine and bona fide belief" that acceptance was lawful but held that since the assessee had furnished "complete details" of members from whom cash was received and no independent inquiry was conducted by the Assessing Officer, no addition under Section 68 was justified; thus, the addition was deleted.The Court did not find merit in the claim of violation of natural justice due to lack of adequate opportunity to file submissions and produce additional evidence, but this ground was not separately dealt with as it was general/consequential in nature.The issue of tax charge under Section 115BBE was not separately addressed as it was consequential to the addition under Section 68, which was deleted.

RATIONALE:

The Court applied the statutory provisions of Sections 68 and 80P of the Income Tax Act. Section 68 requires that when any sum is credited in the books of the assessee and the explanation is not satisfactory, the sum may be charged as income.The Court emphasized the burden on the revenue to disprove the genuineness of cash credits once the assessee furnishes identity, genuineness, and creditworthiness of the parties, supported by documentary evidence, referencing precedents where similar additions under Section 68 were deleted in cooperative credit society cases involving SBN deposits during demonetization.The Court noted that the Assessing Officer failed to conduct independent inquiries or issue notices to the parties whose details were furnished, which is a necessary step if the explanation is doubted.The Court recognized that cooperative credit societies act as custodians of members' money and do not own the deposited cash, supporting the view that cash deposits by members during demonetization cannot be treated as unexplained income of the society.The Court did not accept the assessee's claim of lawful acceptance of SBN post-demonetization but distinguished that the issue was whether such acceptance warranted addition under Section 68, concluding it did not given the explanation and evidence provided.The Court referred to multiple ITAT decisions on similar facts that held additions under Section 68 for acceptance of SBN by cooperative societies during demonetization were not maintainable, thereby following established precedents.

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