2025 (4) TMI 1203 - AT - Income Tax

Special audit direction upheld for transaction complexities while section 68 additions deleted for lack of evidence

Shri Renukamata Multi–State Co–operative Urban Credit Society Ltd Versus Asstt. Commissioner of Income Tax Circle–4 (4) (1), Central Range–4, Mumbai And Jt. Commissioner of Income Tax (OSD) Central Circle–4 (4), Mumbai Versus Shri Renukamata Multi–State Co–operative Urban Credit Society Ltd, Ahmednagar

ITAT Mumbai dismissed assessee's challenge to special audit direction under section 142(2A), finding it necessary due to transaction complexities. The ... Special Audit - Direction of AO to get the accounts audited u/s 142(2A) at the fag end of the assessment proceedings - HELD THAT:- We find that the assessee vide its reply dated 24/12/2019 though agreed that the examination of money trail is a complex investigation, however submitted that there are no complexities in its accounts which will require Special Audit. The assessee further submitted that it has provided various details to the Department during the ongoing assessment proceedings and has been fully co- operating with the Department. Accordingly, vide its reply the assessee prayed that no Special Auditor should be appointed. We find that after taking note of the assessee's submission, AO passed the necessary directions on 27/12/2019 for audit of the accounts of the assessee u/s 142(2A). From the careful perusal of the aforesaid documents, forming part of the paper book, we find no merits in the submission of the assessee that the direction to get the accounts audited u/s 142(2A) is mere tactics to extend the period of limitation and we find the same to be necessary due to multiplicity of transactions and complexities involved in assessee's accounts. Accordingly, ground no.2 raised in assessee's appeal is dismissed. Addition u/s 68 - cash deposits and credit transactions - HELD THAT:- As undoubtedly there may have been discrepancies in maintaining KYC documentation, account opening form, and violation of society bye-laws, however, the same does not substantiate any addition in the hands of the assessee under the Act, and for the same the remedial action needs to be taken in some other statute/regulations. Accordingly, in absence of any material to show that the cash deposited in the accounts of the members, maintained with the assessee society, belongs to the assessee, we do not find any basis in sustaining any addition in the hands of the assessee u/s 68. Accordingly, the addition made u/s 68 and also the commission income estimated by learned CIT(A) are directed to be deleted. Disallowance of provision for standard assets - HELD THAT:- As undisputed that the assessee is a co-operative credit society and is a registered Multi-State Co-operative Urban Credit Society established under the Multi-State Co-operative Societies Act, 2002 and is involved in the facility of providing credits and other banking facilities to its members. Therefore, assessee does not fall within the meaning of any category of assessee considered u/s 36(1)(viia). Accordingly, we find no infirmity in the findings of the CIT(A) in upholding the disallowance of provision for standard assets. As a result, ground raised in assessee's appeal is dismissed. Disallowance of prior period expenses - HELD THAT:- We find that it is a settled proposition that expenditure shall be allowable in the year of crystallisation of its liability, even though the said expenditure was related to an earlier period. The said expenditure is treated as current year's expenditure in the year of crystallisation and accordingly allowable as deduction in that year. In the present case, we find that the details of prior period expenses have not been examined in order to find out the year of crystallization of the liability. Accordingly, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication and to determine the allowability of expenses by applying principles as discussed above. With the above directions, ground raised in assessee's appeal is allowed for statistical purposes. Disallowance u/s 40A(3) - assessee has paid rental expenses to the parties, in excess of the prescribed limit - HELD THAT:- There cannot be any dispute regarding the identity of payee, i.e. the landlord members. Further, it is also not disputed that the payment was made on account of rent as per the rent agreement. There is also no allegation that the assessee has not deducted applicable TDS while crediting the rental payment to the account of the landlord members. Considering the fact that the activities of the assessee are akin to banking activities; and the landlords have opened savings/current accounts with the assessee, we are of the considered view that the rent payments so credited to the accounts of the landlords do not violate the objective of introducing section 40A(3) - Therefore, the disallowance of rental payment u/s 40A(3) of the Act is directed to be deleted. Disallowance of deduction u/s 80P - HELD THAT:- In the present case, it is evident from the record that the lower authorities also alleged that the assessee has earned income from providing services to non-members, i.e. by issue of 'at par cheques' in lieu of cash. However, it is pertinent to note that the demand draft or at par cheques are also issued at the instructions of the member and the amount is debited/credited from/to the member's account. Therefore, it was a transaction which was carried out at the behest of the member in the accounts of the member maintained with the assessee society. Thus, we are of the view that the same cannot be treated as providing services to non-members. We find that the assessee has exclusively made the transactions in the accounts of its members, i.e. ordinary members and nominal members, and the issuance of 'at par cheques' in lieu of cash was also at the behest of the members of the society. Hence the assessee society, herein, is eligible for deduction u/s 80P. Disallowance of provision for gratuity - HELD THAT:- As in the present case, there is no material available on record to show that the provision was made by the assessee for payment of a sum by way of contribution towards 'approved gratuity fund'. Therefore, section 40A(7)(b) of the Act is not applicable and under section 40A(7)(a) of the Act no deduction is allowable in respect of any provision made by the assessee for payment of gratuity. Further, under section 43B of the Act, the sum payable by the assessee as an employer by way of contribution to gratuity fund is allowable upon actual payment, therefore, even under section 43B of the Act the provision is not allowable. However, we direct that the gratuity payment be allowed in the year of payment. As a result, ground raised in assessee's appeal is dismissed. Addition u/s 68 - amount receivable from banks where appellant-society has maintained their bank accounts - HELD THAT:- It is not understandable as to how the assessee has credited 'Reserve account'. It is also not clear as to whether the assessee has claimed any deduction of the amount so illegally embezzled from the bank account. If that be the case, the recovery of part or whole of the amount would be taxable. On the contrary, if the assessee has not claimed any such deduction, then the recovery of part of whole of the amount is not taxable. However, we notice that the assessee has not clearly explained the nature of journal entries passed by it in the books of account, whether it has claimed any deduction of such embezzled amount etc. In the absence of any such details, we are also unable to express any concrete view on this matter. Accordingly as noted in the foregoing paragraph, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication, as per law and in terms of legal principles explained above, after examination of the details filed by the assessee. The assessee shall be at liberty to furnish further documents in support of its claim. The AO is also directed to call for any other information for complete adjudication of this issue. Issues Presented and Considered1. Validity and application of approval under section 153D of the Income Tax Act, 1961 ('the Act').2. Legality and propriety of the Assessing Officer's (AO) direction for Special Audit under section 142(2A) of the Act issued at the fag end of assessment proceedings.3. Additions under section 68 of the Act on account of unexplained cash deposits, credit transactions, and issuance of demand drafts/at par cheques by the assessee-society.4. Disallowance of provision for standard assets claimed by the assessee.5. Disallowance of prior period expenses debited in the relevant assessment years.6. Disallowance of rent expenses under section 40A(3) of the Act due to mode of payment.7. Disallowance of deduction claimed under section 80P of the Act by the assessee-society.8. Treatment of certain unilateral book entries relating to amounts receivable from banks maintained by the assessee.Issue-wise Detailed Analysis1. Approval under section 153D of the ActThe assessee challenged the approval granted under section 153D as mechanical and without application of mind. However, no material was placed on record supporting this contention. The Tribunal dismissed this ground, affirming the validity of the approval process.2. Direction for Special Audit under section 142(2A)The AO directed a Special Audit at the late stage of assessment proceedings, which the assessee contended was a tactic to extend limitation. The AO justified the direction citing the complexity of the assessee's operations involving multiple accounts and years. The Tribunal, after reviewing the show cause notice, assessee's reply, and the multiplicity of transactions, upheld the AO's direction as necessary and lawful, dismissing the assessee's objection.3. Additions under section 68 of the ActLegal Framework and Precedents: Section 68 deals with unexplained cash credits, placing the onus on the assessee to explain the nature and source of credited amounts. The legal fiction aims to curb unaccounted income. Precedents emphasize that the assessee must satisfactorily establish the identity, genuineness, and creditworthiness of the depositors.Facts and Findings: The assessee is a multi-state co-operative urban credit society engaged in accepting deposits and providing credit facilities to members. Search and survey actions revealed large-scale cash deposits and discrepancies in KYC documentation, non-compliance with Rule 114B (PAN/Form 60 collection), and violations of bye-laws. The AO held that the assessee was not a bank and was operating beyond its statutory powers, failing to verify the identity and creditworthiness of depositors, thus making additions under section 68 aggregating thousands of crores.CIT(A)'s Approach: The CIT(A) accepted the assessee's business nature and held that not all deposits could be treated as income of the assessee. However, due to failure in discharging the onus fully, the CIT(A) estimated income by applying a commission rate (0.15% on cash deposits and 0.10% on demand drafts/at par cheques) as a reasonable income from such transactions.Tribunal's Analysis: The Tribunal noted that the assessee received money from members in the ordinary course of business, with no evidence that the amounts belonged to the assessee. Statements during search and survey indicated members deposited cash on behalf of third parties, but the assessee was not involved in facilitating accommodation entries. The Tribunal emphasized that discrepancies in KYC and bye-law violations do not automatically attract section 68 additions; such issues are subject to regulatory action and not tax additions.The Tribunal relied on several co-ordinate bench decisions holding that co-operative credit societies receiving deposits from members and recording transactions in members' accounts are not liable to additions under section 68 merely due to procedural lapses or KYC deficiencies. The Tribunal further rejected the CIT(A)'s estimation of income by commission as baseless, especially since the commission rates were arbitrarily applied and no evidence of additional commission charged was found.Conclusion: The Tribunal deleted the additions under section 68 and dismissed the Revenue's appeals on this issue.4. Disallowance of Provision for Standard AssetsLegal Framework: Section 36(1)(viia) allows deduction for provision for bad and doubtful debts made by scheduled banks, co-operative banks, NBFCs, etc. The assessee claimed deduction for provision on standard assets.Findings: The assessee is a multi-state co-operative credit society but does not fall within the entities covered under section 36(1)(viia). The AO and CIT(A) held that provisions for standard assets are contingent liabilities and not allowable deductions. The Tribunal concurred, noting that the assessee is not a co-operative bank or NBFC as defined under the Act.Conclusion: The disallowance of provision for standard assets was upheld.5. Disallowance of Prior Period ExpensesLegal Framework: Expenses are allowable in the year of crystallization of liability, even if related to earlier periods. This principle is supported by judicial precedents.Findings: The AO disallowed prior period expenses debited in the current year without examining the year of crystallization. The CIT(A) granted partial relief, allowing expenses pertaining to years under appeal.Tribunal's Direction: The issue was restored to the AO for de novo adjudication to determine allowability based on the year of crystallization, applying settled legal principles.6. Disallowance under section 40A(3) of the Act (Rent Expenses)Legal Framework: Section 40A(3) disallows expenditure if payments exceeding Rs. 20,000 are made in a mode other than prescribed modes (e.g., account payee cheque). The provision aims to curb tax evasion through cash payments.Findings: The AO disallowed rent expenses paid by crediting accounts of landlords maintained with the assessee, considering it a non-compliant mode of payment. The CIT(A) upheld the disallowance.Tribunal's Analysis: The Tribunal noted that the payment was made to landlords who maintained accounts with the assessee, and the amounts were paid as per rent agreements with TDS deducted. The withdrawal of funds by landlords from their accounts does not violate section 40A(3), which restricts the payer's mode of payment, not the payee's subsequent withdrawal. The Tribunal emphasized that the assessee's activities resemble banking operations limited to members, and the identity and genuineness of payees were not in dispute.Conclusion: The disallowance under section 40A(3) was deleted.7. Disallowance of Deduction under section 80P of the ActLegal Framework: Section 80P grants deduction to co-operative societies on income from activities with their members. The term 'co-operative society' is defined under section 2(19) of the Act and relevant state laws. The Supreme Court has held that non-compliance with bye-laws or dealing with non-members may disentitle deduction.Findings: The AO and CIT(A) disallowed deduction on the ground that the assessee transacted with non-members and violated bye-laws. The assessee contended that its bye-laws permit nominal members and that loans to non-members secured by deposits are allowed under the Multi-State Co-operative Societies Act, 2002.Tribunal's Analysis: The Tribunal distinguished the facts from the Supreme Court decision in Citizen Co-operative Society Ltd, noting that the present assessee complied with the Multi-State Co-operative Societies Act, 2002 provisions, including admitting nominal members. The Tribunal relied on the Supreme Court decision in Mavilayi Service Co-operative Bank Ltd, which recognized nominal members as members for section 80P purposes. The Tribunal further held that issuance of at par cheques/demand drafts at members' instructions does not constitute dealing with non-members.Conclusion: The assessee was held entitled to deduction under section 80P, and the disallowance was deleted.8. Additions on Account of Amounts Receivable from BanksFacts: The Special Auditor observed that the assessee credited various amounts directly to reserves and surplus by debiting bank accounts, with discrepancies between book balances and bank statements. The AO treated these as unexplained credits under section 68, adding Rs. 48.16 crores to income.Assessee's Case: The assessee claimed these were unilateral book entries reflecting claims against banks (Axis Bank, etc.) for unauthorized debits. Civil suits and criminal writ petitions were filed. Some wrong entries were reversed by the bank.Tribunal's Analysis: The Tribunal found that the lower authorities did not adequately consider the assessee's submissions or grant opportunity to produce further evidence. The Tribunal explained that such entries, if not routed through profit and loss account, do not generate income. The Tribunal directed the AO to examine the issue de novo, allowing the assessee to furnish documents and ensuring opportunity of hearing.Conclusion: The matter was remanded for fresh adjudication.Other IssuesDisallowance of provision for gratuity was upheld due to non-payment and lack of evidence of approved fund contribution. Enhancement of income on account of cash expenses under section 40A(3) was restored to AO for re-examination with directions to consider breakup vouchers. Prior period expenses and disallowance of rent expenses for subsequent years were decided in line with the findings for assessment year 2016-17.Significant Holdings'The provisions of section 68 are attracted when the assessee is not able to discharge the primary burden placed on its shoulders to prove cash credits in terms of section 68, which is a legal fiction introduced by the Legislature in order to curb practice of introducing unaccounted income in the form of cash credits such as loans, gifts, advances etc.''Since the transactions of accepting deposits have been undertaken with the members of the assessee society only, the identity of the depositors and the genuineness of transactions cannot be doubted.''Discrepancies in maintaining KYC documentation, account opening form, and violation of society bye-laws do not substantiate any addition in the hands of the assessee under the Act, and for the same the remedial action needs to be taken in some other statute/regulations.''The provisions of section 40A(3) of the Act only impose restrictions on the payer while claiming deduction of expenditure incurred in a mode other than provided under the section and does not impose any impediment on the recipient.''Nominal members are members of the assessee society under the bye-laws of the society read with section 26 of the Multi-State Co-operative Societies Act, 2002.''The reliance placed by the lower authorities on the decision of the Hon'ble Supreme Court in Citizen Co-operative Society Ltd is completely misplaced, as the said decision was rendered on its own facts, which are different from the present case.''The assessee is entitled to claim deduction under section 80P of the Act.''In the absence of any material to show that the cash deposited in the accounts of the members, maintained with the assessee society, belongs to the assessee, we do not find any basis in sustaining any addition in the hands of the assessee under section 68 of the Act.''The AO and other authorities under the Act cannot go behind the registration of the co-operative society in order to discover as to whether it was conducting business in accordance with its bye-laws.''The assessee has failed to explain the reasons and rationale of crediting the reserve and surplus account. The cryptic reply of the assessee without any documents does not in any way support the case of the assessee but indicates that the assessee for reasons best known to him intends not to part with the information called for by the AO.''The issue relating to unilateral book entries and claims against banks is restored to the AO for de novo adjudication with liberty to the assessee to furnish further documents and for the AO to call for additional information, ensuring reasonable opportunity of hearing.'Final Determinations- The approval under section 153D is valid.- The Special Audit under section 142(2A) was justified and lawful.- Additions under section 68 on account of unexplained cash deposits and credit transactions were deleted as the assessee discharged its onus and no material showed that deposits belonged to the assessee.- Disallowance of provision for standard assets was upheld as the assessee does not fall within entities covered under section 36(1)(viia).- Prior period expenses require re-examination based on year of crystallization.- Disallowance of rent expenses under section 40A(3) was deleted as payments made by crediting accounts of landlords who are members do not violate the provision.- Deduction under section 80P was allowed as the assessee complied with statutory provisions and bye-laws, including admission of nominal members.- Additions relating to amounts receivable from banks were remanded for fresh adjudication.