NBFC's demonetization cash EMI collections treated as unexplained cash credits u/s 68; addition deleted, Revenue appeal dismissed.

Cash deposits during the demonetization period were treated by the AO as unexplained u/s 68. The ITAT held that the deposits were regular business collections of pre-existing loan EMIs by an RBI-registered NBFC, supported by borrower-wise recovery particulars; the non-round-figure receipts indicated inclusion of non-SBNs, deposits across multiple banks/locations showed normal operations, and the AO gave no cogent basis for attributing "own money" or for ignoring bank reporting errors. Section 269T was held inapplicable as it governs the borrower's repayment restrictions, not the lender's receipts; the s. 68 addition was deleted and the Revenue's appeal dismissed. Separately, interest paid under an OTS was held deductible u/s 43B on payment basis to avoid double taxation; the assessee's appeal was allowed.

---

---

1. ISSUES PRESENTED AND CONSIDERED

(i) Whether cash deposits made during the demonetization period were liable to be treated as unexplained money under section 68, despite the assessee's explanation that the deposits represented cash recoveries of microfinance loan instalments from existing borrowers, and despite lack of enquiry by the Assessing Officer.

(ii) Whether section 269T was wrongly invoked to doubt/attribute illegality to such cash recoveries and bank deposits, where the assessee was the lender and not the borrower.

(iii) Whether interest amount actually paid during the year under a One Time Settlement, which had earlier been disallowed by the assessee under section 43B on account of non-payment, was allowable as deduction under section 43B in the year of payment to avoid double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) - Addition under section 68 for demonetization-period cash deposits

Legal framework (as discussed): The Tribunal proceeded on the basis that cash deposits can be brought to tax as unexplained only where the source remains unexplained under the Income-tax Act provisions invoked (the addition in the case having been made under section 68).

Interpretation and reasoning: The Court accepted that the assessee, a RBI-registered non-banking financial company engaged in microfinance, explained the source of cash deposits as recoveries of pre-existing loan dues (EMIs) from a large base of existing borrowers. It noted that detailed borrower-wise information (including loan and recovery particulars) was furnished, recoveries were nominal per borrower, and deposits were made periodically across multiple banks and locations, consistent with normal business operations. The Tribunal found the Assessing Officer failed to (a) address discrepancies in bank reporting highlighted by the assessee, (b) even perform a basic bifurcation between deposits in specified bank notes and non-specified notes, and (c) conduct any enquiry with borrowers despite having their details. The Tribunal treated these omissions as fatal to sustaining an addition merely on suspicion.

Conclusions: The deletion of the addition under section 68 on account of demonetization-period cash deposits was upheld; the deposits were accepted as explained recoveries from loan debtors and not unexplained money.

Issue (ii) - Application of section 269T to cash recoveries

Legal framework (as discussed): The Tribunal examined section 269T as applied by the Assessing Officer, noting it concerns restriction on repayment of loan in cash beyond the specified threshold by the borrower.

Interpretation and reasoning: The Tribunal held that section 269T had been "wrongly applied" because the assessee before it was the lender receiving repayments, not a borrower making repayment. Therefore, section 269T could not be used to discredit the assessee's receipts or to justify treating the deposits as unexplained.

Conclusions: Invocation of section 269T against the assessee (as lender) was held to be misconceived and could not support the addition.

Issue (iii) - Deduction under section 43B for interest paid pursuant to One Time Settlement

Legal framework (as discussed): The Tribunal applied section 43B on the basis that interest to banks/financial institutions becomes deductible on actual payment, and examined the consequence of earlier voluntary disallowance of unpaid interest under section 43B.

Interpretation and reasoning: The Tribunal found that in earlier years the assessee had disallowed unpaid interest under section 43B. During the relevant year, pursuant to a One Time Settlement, part of the settlement payment was specifically appropriated towards interest outstanding, and that interest component was actually paid during the year. The Tribunal accepted the assessee's position that allowing deduction on payment basis was necessary because the earlier disallowance meant the same interest should not be effectively taxed/added twice. It held that denying deduction would result in double taxation/double addition on the same interest component.

Conclusions: The interest portion of the settlement payment appropriated towards outstanding interest and actually paid during the year was allowed as deduction under section 43B; the disallowance by the first appellate authority was reversed.

---