Section 68 addition for unexplained demonetized cash deposits denied due to lack of proof of collection after 08.11.2016

ITAT Pune held that addition under section 68 for unexplained cash deposits during demonetization was not justified as the AO failed to prove that the assessee collected demonetized currency after 08.11.2016. The assessee provided a list of members with PANs, and there was no dispute regarding their identity. The appeal was allowed.

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ISSUES:

Whether addition under section 68 of the Income Tax Act, 1961 is justified for unexplained cash deposits made during the demonetization period.Whether cash deposits made from Specified Bank Notes (SBNs) deposited by members of a credit society can be treated as unexplained cash deposits in the hands of the society.Whether the credit society was authorized to accept old SBNs from its members during the demonetization period and the effect of any such authorization on the addition under section 68.Whether deposits made prior to 31.12.2016 violate the Specified Bank Notes (Cessation of Liability) Act, 2017.Whether the income represented by the deposits should be treated as business income eligible for deduction under section 80P(2)(a).

RULINGS / HOLDINGS:

The addition under section 68 of Rs. 23,78,500/- towards alleged unexplained cash deposits during the demonetization period was not justified as the assessee established the identity and genuineness of the depositors, who were members of the credit society.Cash deposits made out of SBNs deposited by members do not represent income of the credit society itself, and therefore, no addition under section 68 can be made in the hands of the society once the source is established.The Assessing Officer failed to produce evidence that the deposits were collected after 08.11.2016, and thus the claim that the society was unauthorized to accept demonetized currency was not substantiated.The restriction under the Specified Bank Notes (Cessation of Liability) Act, 2017, applied from 31.12.2016, hence acceptance of deposits prior to that date did not violate the law.Following precedents, the addition under section 68 was deleted, and the grounds of appeal were allowed.

RATIONALE:

The court applied the provisions of section 68 of the Income Tax Act, 1961, which requires unexplained cash credits to be added to income unless the assessee satisfactorily explains the nature and source of such credits.Reliance was placed on prior decisions of the Tribunal in similar cases involving cooperative credit societies where the genuineness and identity of depositors were established, leading to deletion of additions under section 68.The court noted the absence of evidence from the Assessing Officer to prove that deposits were made after the date when acceptance of demonetized currency was prohibited.The court interpreted the Specified Bank Notes (Cessation of Liability) Act, 2017 as restricting acceptance or transfer of SBNs only from 31.12.2016, thereby negating the basis for additions for deposits made before that date.No dissent or doctrinal shift was indicated; the decision followed existing precedents and statutory interpretation.

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