2025 (11) TMI 220 - AT - Income Tax

Section 68: Cooperative society's explanation that SBN deposits were member deposits and loan repayments accepted

ITAT deleted addition under s. 68 where a cooperative society explained deposits of SBNs as member deposits and loan repayments, supported by cash books ... Addition u/s. 68 - unexplained cash credit - assessee has deposited SBNs into his bank account - assessee is a cooperative society which has deposited cash during the demonetisation period with 3 banks - HELD THAT:- AO has merely on the basis that when the assessee was not authorised to collect SBNs and same were deposited in the bank account of the assessee with 3 other banks which is not a valid tender, made the addition. The above amount is deposited in the bank account and the bank with whom it has deposited have also accepted the same and given the assessee credit of the same amount. Thus, the banks where the money is deposited have also accepted the same valid tender and giving full credit to the assessee. Admittedly assessee may not be authorised to collect the same, but this is not in the realm of taxation u/s. 68 of the Act. The provisions of section 68 says that if the nature and source of the sum deposited in the books of account of the assessee is not explained to the satisfaction of the ITO, then it can be added as unexplained cash credit in the hands of the assessee. In the present case, the nature of the cash deposit is explained to be receipt of deposits from the members and repayment of loan by those members. The source is also the members only, supported by cash book. The list of members are furnished to the AO which was neither examined nor doubted. CIT(A) has held that the members of the society got undue benefit of enrichment by depositing the illegal tender with the assessee and in turn the assessee deposited the same with the bank cannot be considered as legal and genuine transaction. This argument is not sustainable for the reason that if it is non-genuine or illegal transaction, there are respective authorities who would have taken action against the society. In this case, the assessee has explained wherefrom the SBN notes have come and such notes have been deposited in the respective banks. Addition made by the ld. AO and confirmed by the CIT(A) is not sustainable for the reason that assessee has given the list of members whose KYC is not doubted or examined and further it is not the case of the ld. AO that the members are non-existent or it is unaccounted money of the assessee which has been deposited in the bank account. The money is deposited from the books of the assessee. Thus AO is directed to delete the addition u/s 68. Accordingly ground of the appeal of the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts of Specified Bank Notes (SBNs) deposited by a cooperative society into bank accounts during the demonetisation period, recorded in the society's books as receipts from members (deposits/loan repayments) and supported by cash books and a list of members, can be treated as unexplained cash credit and added to the assessee's income under section 68. 2. Whether the fact that the cooperative society was not authorised to collect SBNs (i.e., acceptance of SBNs may have been procedurally improper or illegal) renders those receipts unexplained or non-genuine for the purposes of section 68, notwithstanding that banks accepted and credited the deposited SBNs. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 68 to challenged SBN deposits recorded as member receipts Legal framework: Section 68 treats sums found credited in an assessee's books as 'cash credits' which may be assessed as income if the assessee does not satisfactorily explain the nature and source of such entries to the satisfaction of the assessing officer. The statutory test focuses on explanation of nature and source, identity and creditworthiness of the persons from whom funds originate. Precedent treatment: No earlier judicial authority was cited or relied upon by the Tribunal in the impugned order; the Tribunal proceeded on statutory principles and the factual matrix presented. Interpretation and reasoning: The Court examined documentary records furnished to the AO - cash book, profit & loss account, balance sheet, day book, particulars of cash receipts/deposits/withdrawals, and a list of members from whom SBNs were accepted. The deposits appeared in the society's books as member deposits or loan repayments, and the banks where SBNs were lodged accepted and credited the sums. The AO's addition under section 68 rested on the premise that SBNs were not a 'valid tender' for collection by the society and therefore the society could not explain the receipts. The Tribunal rejected that premise for taxation purposes: since the assessee explained the nature (member deposits/loan repayments) and source (identified members) of the amounts and produced contemporaneous books and member lists which were neither disputed nor shown to be fictitious or non-existent, the statutory test under section 68 was satisfied. The fact that banks accepted the SBNs and gave credit was taken as corroborative evidence that the amounts were funds received and accounted for by the society and not unrecorded or unexplained receipts of the assessee itself. Ratio vs. Obiter: Ratio - where a taxpayer has recorded cash receipts in its books and furnishes contemporaneous books, particulars of receipts, and an identifiable list of persons from whom cash was received, the assessing officer cannot treat such amounts as unexplained cash credits under section 68 merely because the form of tender (SBNs) was subject to statutory limitation; absent specific evidence that the persons are non-existent or that the receipts are fabricated, the statutory requirement of explanation is met. Obiter - observations on corroborative weight of bank acceptance of SBNs as 'valid tender' are contextual to the facts and were not treated as a general rule applicable to all demonetisation-period deposits. Conclusion: Addition under section 68 of Rs. 31,10,500 was unsustainable and directed to be deleted because the assessee satisfactorily explained the nature and source of the deposits with documentary support and identified payors whose existence/creditworthiness were not impugned by the AO. Issue 2 - Effect of procedural illegality/unauthorised collection of SBNs on taxability under section 68 Legal framework: Section 68 addresses unexplained cash credits for taxation; separate statutory or regulatory schemes govern the legality of collecting certain tender (e.g., restrictions during demonetisation). The test for section 68 is whether the nature and source of the credited sum are explained to the satisfaction of the assessing officer. Precedent treatment: No distinct precedents were advanced to equate procedural or criminal/administrative illegality in receipt-collection with failure of explanation under section 68. Interpretation and reasoning: The Tribunal distinguished the domain of tax assessment from regulatory/penal consequences arising from accepting prohibited or unauthorised tender. Even if the society may not have been authorised to accept SBNs, that procedural/administrative question falls within the purview of relevant enforcement/regulatory authorities and does not ipso facto convert recorded receipts into unexplained income under section 68. The Court noted absence of findings or material before the AO that members were non-existent or that the amounts represented the society's unaccounted funds. The possibility that an act could be procedurally improper does not negate an otherwise satisfactory explanation of source and identity for tax purposes unless the explanation is shown to be false or the payors fictitious. Ratio vs. Obiter: Ratio - procedural impropriety in acceptance of a particular form of currency does not by itself render a contemporaneously recorded and evidenced receipt 'unexplained' for section 68 purposes; material positive disproof of the explanation must be shown to sustain an addition. Obiter - suggestion that other authorities may take action on illegality; the Tribunal did not adjudicate any regulatory or penal liability. Conclusion: The fact that the society may not have been authorised to collect SBNs does not justify invoking section 68 to treat the deposited amounts as unexplained cash credits where source and identity are adequately explained and not shown to be fictitious; accordingly the addition based on that premise was deleted. Cross-references and final disposition The Tribunal's conclusions on both issues are interlinked: because the nature and source (member deposits/loan repayments) were satisfactorily explained with books and member lists (Issue 1), the Tribunal rejected the AO's reliance on the unauthorised acceptance of SBNs (Issue 2) as a basis for treating the entries as unexplained cash credits. The deletion of the addition under section 68 followed and resulted in allowing the appeal.