AI Drafter 
TaxTMI 
TaxTMI 
2024 (10) TMI 248
X X X X Extracts X X X X
X X X X Extracts X X X X
....e action of the A.O in denying the deduction of Rs. 36,50,389/- claimed by the assessee u/s 80(P) of the Act. 2. For that on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the action of the A.O in treating the interest income from FDs etc. as unqualified for deduction 80P(2)(a)(i) of the Act. 3. For that on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the additions made by the A.O to the tune of Rs. 1,46,74,500/- being cash deposits during the demonetization period, by wrongly treating the same as unexplained cash credits u/s 68 of the Act. 4. For that on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the addition of Rs. 1,01,718/- made by the A.O on account of contingent liabilities. 5. The appellant craves leave to add further grounds of appeal or alter the grounds at the time of hearing." 4. Ground No.1 - The assessee vide Ground no.1 has agitated against the non-grant of benefit of deduction u/s 80P of the Act in respect of income earned from deposits with bank. The assessee claimed deduction in respect of interest i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities, the assessee has failed to give the specific details of financials, members wise and non members wise and further has not confirmed that the transactions are not done with non-members. 3.9 The Hon'ble Supreme Court in the case of The Citizen Co-operative Society Limited 397 ITR 1 (SC) has held that "the assessee was engaged in the activity of granting loans to members of the general public as well and this was done without approval from Registrar of Societies and that therefore, the activity of the assessee was in violation of the Co-operative Societies Act and that it was a Co-operative Credit Society which was not entitled to deduction under section 80P(2)(a)(i) of the Act. A specific finding was also rendered that the assessee failed to satisfy the test of mutuality. These findings of fact remained undisturbed. Therefore, the assessee could not be treated as a co-operative society meant only for its members and providing credit facilities to its members. Such a society could not claim the benefit of section 80P of the Act." 3.10 In the instant case, the assessee has failed to prove that the business transactions of lending loans and advances, acceptance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r income" and not as "business income". (iii) The words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Sec.80P(2(a)(i) mean that the source of income is relevant and that the income must be operational income" 3.12 Though the assessee has submitted that the cooperative society is required to keep certain portion of their deposits with mother bank, etc., no evidence in support of the same has been furnished. In view of the above, the interest income on FDs, etc., is assessable as Income from Other Sources and does not qualify for deduction u/s. 80P." 5. The ld. CIT(A) has upheld the order of the Assessing Officer finding no infirmity in the same. 6. We have heard the rival contentions. The main contention of the ld. Counsel for the assessee has been that the assessee-society is engaged in the business of banking and that the aforesaid income was earned by the assessee by accepting deposits from its members and further reinvesting the same in cooperative banks and other commercial banks. It has been further pleaded that the assessee has taken loans from the cooperative banks and other commercial ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the meanings as assigned to Part V of the Banking Regulation Act, 1949. The 'primary agricultural credit society' has been defined as a cooperative society, the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for the purposes connected with agricultural activities including marketing of crops. Admittedly, the major loans were granted by the assessee-society for non-agricultural purposes, therefore, the assessee-society's primary activity is not for granting loans for agricultural purposes or purposes connected with agricultural activities. Therefore, the Assessing Officer held that since the primary purposes of the assessee-society was not for loans and credits given for agricultural purposes, therefore, the assessee-society would not fall in the definition of primary agricultural cooperative society and therefore, could not be eligible for deduction u/s 80P(2)(a)(i) of the Act. Moreover, it is the own case of the assessee that the assessee-society had received cash in demonetized currency (Specified Bank Notes) during demonetization period and had deposited the same in cooperative bank/schedule bank an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenditure/interest incurred by the assessee-society for getting deposits in respect of such income, the Assessing Officer would accordingly allow deduction in respect of the said amount out of total interest income u/s 80P(2)(a)(i) of the Act and further the Assessing Officer will also bifurcate the income earned by the assessee-society from the purchase, sale and agricultural implements intended for agriculture for the purpose of supplying them to its members and will allow deduction on such income u/s 80P(2)(iv) of the Act. Needless to say that the assessee-society will promptly supply the necessary details and information as and when called for by the Assessing Officer and the Assessing Officer will also give reasonable time and opportunity to the assessee to furnish the necessary details, thereafter, the Assessing Officer will pass a speaking order on this issue. This Ground of the appeal of the assessee is partly allowed. 7. Ground No.2- Vide Ground No.2, the assessee-society has agitated against the action of the ld. CIT(A) in confirming the disallowance in respect of cash deposits in demonetized currency accepted during the demonetization period. In the alternative, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts repayment. The allied Acts which come in to picture in this context are the Indian Contracts Act 1872, and the Reserve Bank of India Act 1934. As per Section 23 of Indian Contracts Act 1872, which defines what considerations and objects are lawful, and what not - The consideration or object of an agreement is lawful, unless- it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. As per Section 26 of the Reserve Bank of India Act 1934, which defines Legal tender - character of notes - (1) Subject to the provisions of subsection (2), every bank note shall be legal tender at any place in India in payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government. (2) On recommendation of the Central Board, the Central Government may, by notification in the Ga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oods / services at designated places like petrol bunks etc., in all other cases such SBNs are no longer legal tender w.e.f.09-11- 2016. Coming to the present issue on hand, it is not in dispute that the assessee has carried on his business operations, accepted cash deposits/loan repayments during the demonetization period. As already discussed above, in a concluded and valid Contract, consideration shall only be the receipt of money in legal tender. Once the assessee says that he has carried out business operations, even during demonetization period, it has to be understood that he has received the money in legal tender only but not in SBNs, because from 09-11-2016 onwards, the SBNs are no longer money but a mere piece of paper as between the seller and the buyer, and do not constitute money in legal tender. The assessee cannot take a contradictory stand that he received price in SBNs. Thus, a valid contract during demonetization period and SBNs are mutually exclusive, and the assessee cannot be permitted to club both of them. Hence, if any one says that he has received price in SBNs as a part of contract, such contract itself is void and non-est in the eyes of law, becaus....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... status of SBNs w.e.f 09-11- 2016 but permitted the deposit of such SBNs held by a person in to his bank account, the SBNs deposited in bank during demonetization period by the assessee represents the SBNs held by him as on 08-11-2016, and the onus is on the him to prove the sources for such SBNs, failing which it may have to be treated as unexplained cash credits u/s. 68 and brought to tax accordingly. 3.16 In view of the above, the explanation of the assessee is not found to be satisfactory and hence, the amounts deposited in SBNs during the demonetization period are held to be unexplained. The total cash deposited in SBNs during the demonetization period was Rs. 1,46,74,500/-. Hence, the total cash deposits in SBNs during the demonetization period of Rs. 1,46,74,500/- are treated as unexplained and brought to tax u/s. 68 of the Act." 8. The ld. CIT(A) has confirmed the order of the Assessing Officer finding no infirmity in the same. 9. We have heard the rival contentions and gone through the record. Before us, the ld. Counsel for the assessee has submitted that the assessee-society has accepted the Specified Bank Notes during demonetization period from its members....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to the Assessing Officer. If the assessee society proves the source, no addition shall be made u/s 68 of the Act. The assessee-society will not be eligible for deduction in the form of interest paid on such deposits to the members. The Assessing Officer will also give proper opportunity to the assessee to furnish necessary details and thereafter to decide the issue afresh as directed above. 10. Ground No.3- Vide Ground No.3, the assessee-society has agitated against the action of the ld. CIT(A) in confirming the addition of Rs. 1,01,718/- made by the Assessing Officer on account of contingent liability. 11. The ld. counsel for the assessee in this respect made the following submissions: "Normally, the method of accounting which is followed by the assessee- PACS is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realized. A mixed method of accounting is thus followed by the assessee-Society. This method of accounting adopted by the assessee is in accordance with accounting practice. Here, Assessee created a provisio....