ITAT allows NBFC appeal on Section 36(1)(viia)(d) provision and Section 68 demonetization cash deposits

The ITAT PUNE allowed the appeal on two issues. First, regarding addition under section 36(1)(viia)(d) for contingent provision against standard assets, the tribunal found that both AO and CIT(A) failed to consider the Finance Act 2016 provisions effective from 01.04.2017, which allows NBFCs to make provisions for bad debts up to 5% of total income. The matter was remanded to AO for fresh adjudication. Second, concerning addition under section 68 for cash received during demonetization, the tribunal held that since AO did not challenge the identity, genuineness, or creditworthiness of depositors despite assessee maintaining KYC documents, no addition was warranted. Both issues were decided in favor of the assessee.

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ISSUES PRESENTED AND CONSIDERED

1. Whether deduction of Rs. 6,66,151 by way of contingent provision against standard assets is allowable where section 36(1)(viia)(d) (as amended w.e.f. 01.04.2017) permits NBFCs deduction for provision for bad and doubtful debts up to prescribed limit.

2. Whether amounts of Rs. 12,34,000 received in old currency during the demonetisation period and credited as loan instalments can be taxed as unexplained cash credit under section 68 where the assessee produced names of depositors and maintained KYC records but was not legally authorised under the government notification to accept old currency.

3. Whether the assessing officer properly invoked section 68 in circumstances where identity, genuineness and creditworthiness of depositors were not challenged and supporting KYC documentation existed but was not examined by the AO.

ISSUE-WISE DETAILED ANALYSIS - Issue 1: Allowability of contingent provision against standard assets under section 36(1)(viia)(d)

Legal framework: Section 36(1)(viia) permits deduction for provision for bad and doubtful debts and when amended by Finance Act, 2016 introduced clause (d) effective 01.04.2017 to allow NBFCs deduction for such provision subject to statutory limits (explanatory memorandum accompanying the Finance Bill recited in the judgment).

Precedent treatment: No specific precedent of higher courts is relied upon by the Tribunal in the text; the Tribunal notes that both lower authorities failed to consider the statutory amendment.

Interpretation and reasoning: The Tribunal observed that the Assessing Officer and the CIT(A) did not consider section 36(1)(viia)(d) which came into effect 01.04.2017 and which, per the explanatory memorandum, specifically affords NBFCs a deduction for provisions for bad and doubtful debts up to a prescribed percentage of total income. Given that the authorities omitted consideration of this statutory provision and the assessee furnished additional evidence to substantiate the claim, the Tribunal concluded that substantial justice required remand for de novo adjudication by the AO with opportunity to the assessee.

Ratio vs. Obiter: Ratio - failure to consider a statutory amendment affecting allowability of deduction mandates remand for fresh adjudication where relevant evidence is filed; Obiter - none stated beyond commentary on the explanatory memorandum.

Conclusion: The addition of Rs. 6,66,151 is set aside and remitted to the Assessing Officer for fresh adjudication in light of section 36(1)(viia)(d); Ground No.1 allowed for statistical purpose.

ISSUE-WISE DETAILED ANALYSIS - Issues 2 and 3 (grouped): Applicability of section 68 to cash receipts in demonetised currency and evidentiary burden where KYC and depositor identities are disclosed

Legal framework: Section 68 permits taxation of unexplained cash credits where identity, genuineness or creditworthiness of the depositor are not satisfactorily explained. Separately, government notifications related to demonetisation (S.O. 3407(E) dated 08.11.2016 and corrigendum) set out entities authorised to accept old currency after 08.11.2016; NBFCs were not among the authorised entities per the notifications reproduced by the AO.

Precedent treatment: The Tribunal relied on a co-ordinate Bench decision (ITA No.561/PUN/2022) as support for deletion where identity and genuineness are not in issue and KYC exists. No binding higher-court precedent overruling or distinguishing the notifications was cited.

Interpretation and reasoning: The Tribunal accepted the factual position that the assessee: (a) furnished names of the persons from whom cash was received, (b) maintained KYC documents for those persons, and (c) was not asked by the AO to produce the KYC documents nor was the identity, genuineness or creditworthiness of depositors challenged. The Tribunal emphasised that to invoke section 68 the AO must prove failure of the assessee to explain identity, genuineness or creditworthiness; where these elements are satisfied through disclosure and available records, section 68 is not attracted merely because the receipts were in demonetised currency or because the assessee may not have been authorised by government notification to accept such currency. The Tribunal noted the AO's and CIT(A)'s reliance on the notifications to assert illegality of acceptance, but held that illegality under RBI/government notifications, without challenge to identity/genuineness/creditworthiness and absent inquiry into and rejection of available KYC, cannot substitute for the statutory tests under section 68.

Ratio vs. Obiter: Ratio - section 68 cannot be invoked where identity, genuineness and creditworthiness of depositors have been satisfactorily disclosed and the AO has not challenged or disproved such aspects, even if the payments were made in demonetised currency; Obiter - observations on the AO's reliance on notification prohibiting NBFCs from accepting old currency are explanatory and not treated as a separate ground to sustain section 68 addition absent further inquiry.

Conclusion: The addition of Rs. 12,34,000 made under section 68 is deleted because the statutory prerequisites for applying section 68 were not established by the AO; Grounds No.2 and No.3 are allowed.

ADDITIONAL PROCESSUAL FINDINGS

Admission of additional evidence: The Tribunal accepted that additional evidence was filed and, in the interest of substantial justice, directed remand on the deduction issue. The Tribunal ordered that the Assessing Officer shall give the assessee opportunity to be heard on remand.

Scope of remand and finality: The remand directs de novo adjudication by the AO on the provision-deduction issue (section 36(1)(viia)(d)); the deletion under section 68 is definitive in the appellate order.

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