2024 (9) TMI 1756 - AT - Income Tax

Addition u/s 69A - assessee society has collected cash from its members which were deposited in its bank accounts - cash deposits made by the assessee society during the demonetization period have been collectively treated as unexplained money by the Ld. AO for the reason that the assessee is not an authorized person to collect the SBN after 08.11.2016 - HELD THAT - As perused decision of Tribunal in the case of Ambika Gramin Bigarsheti Sahakari Patsanstha 2024 (6) TMI 1470 - ITAT PUNE wherein under the similar set of the facts to that of the assessee in the present appeal the Tribunal deleted the addition in respect of cash deposited during the demonetization period u/s 68 held that to invoke section 68 of the Act the AO has to prove that assessee failed to file identity of the depositors genuineness of the transaction and creditworthiness. In this case the assessee had submitted the names of the persons from whom cash was received during the demonetization period in the form of demonetized currency. Assessee also submitted that assessee maintains all KYC documents of all these persons. AO had not asked the assessee to produce the said KYC Documents. Rather AO has not challenged the identity of the depositors genuineness of the transactions and creditworthiness of the depositors. In these facts and circumstances of the case we are of the opinion that no addition can be made u/s 68 - Assessee appeal allowed.

Summary

Issues presented and considered in the appeal primarily revolve around the tax treatment of cash deposits made by the assessee during the demonetization period, specifically:

1. Whether the addition of Rs. 12,47,000 made under section 69A of the Income Tax Act, 1961 ("the Act") by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] is justified.

2. Whether the assessment completed under section 144 of the Act is valid.

3. Whether the assessee has satisfactorily explained the nature and source of the cash deposits, thereby negating the applicability of section 69A.

4. Whether the assessee was denied effective opportunity of hearing by the CIT(A) due to issues with virtual hearing notices.

5. An additional ground regarding the non-issuance of notice under section 143(2) of the Act before assessment was raised but not pressed and hence not adjudicated.

The core legal question ultimately focuses on the applicability of section 69A (and section 68 by implication) to cash deposits of Specified Bank Notes (SBNs) during the demonetization period, and whether such deposits can be treated as unexplained money leading to addition to income.

Issue-wise detailed analysis:

1. Applicability of Section 69A to Cash Deposits of Specified Bank Notes During Demonetization

Relevant legal framework and precedents: Section 69A of the Act applies where the assessee is found to be owner of money or valuables not recorded in books of account and fails to satisfactorily explain the nature and source thereof, deeming such money as income. Section 68 deals with unexplained cash credits where the assessee fails to satisfactorily explain the nature and source of credited sums in books of account.

Judicial precedents relied upon include decisions of Mumbai and Bangalore ITAT Benches which held that additions under section 69A cannot be sustained where the money is recorded in books of account and the source is satisfactorily explained. Notably, in Dy. CIT vs. Karthik Construction Co. and Smt. Teena Bethala vs. ITO, it was held that section 69A additions require the money to be unrecorded in books.

Court's interpretation and reasoning: The Tribunal observed that the assessee had recorded all cash deposits in its books of account, supported by cash books, counter slips, rent agreements, and other documents. The AO accepted the source for Rs. 1,14,080 but disallowed Rs. 12,47,000 solely because the latter was deposited in demonetized currency (SBNs) after 8.11.2016, which the AO and CIT(A) held was not legal tender for societies to accept post that date.

The Tribunal noted that section 69A requires the money to be unrecorded in books, which was not the case here. The assessee had explained the source and nature of the deposits, and the money was recorded in books. Thus, the legal precondition for invoking section 69A was not fulfilled.

Regarding section 68, the Tribunal referenced coordinate Bench decisions which held that if identity, genuineness, and creditworthiness of creditors (members) are proved, no addition under section 68 is sustainable. The assessee had furnished detailed member information, ledger extracts, PANs, and offered to produce members for verification, satisfying the three limbs of section 68.

Key evidence and findings: The assessee produced cash books, counter slips, rent agreements, member details including PAN and addresses, ledger extracts, and audit reports. No contrary evidence was brought by the Revenue to disprove the source or genuineness of the deposits.

Application of law to facts: Since the money was recorded in books and satisfactorily explained, section 69A was not applicable. The addition under section 69A was therefore unwarranted. Similarly, under section 68, the assessee discharged the onus of proving identity, genuineness, and creditworthiness, negating the Revenue's case.

Treatment of competing arguments: The Revenue argued that the society was not authorized to accept SBNs after 8.11.2016 and thus the deposits were unexplained money. The CIT(A) upheld the addition on this ground. The assessee contended that though SBNs ceased to be legal tender from 8.11.2016, they were not illegal to possess or deposit until 31.12.2016 as per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, and the deposits were made from members' funds in the ordinary course of business.

The Tribunal agreed with the assessee, holding that the cessation of RBI liability and government guarantee on SBNs was effective only from 31.12.2016, and mere acceptance of SBNs by the society did not amount to unexplained income. The illegality of accepting SBNs post 8.11.2016 was a regulatory or penal matter outside the scope of the Income Tax Act and did not justify additions under sections 68 or 69A.

Conclusions: The addition of Rs. 12,47,000 under section 69A was not sustainable as the money was recorded in books and satisfactorily explained. The deposits represented genuine business receipts from members. The Tribunal deleted the addition.

2. Validity of Assessment Completed Under Section 144 of the Act

Relevant legal framework: Section 144 allows best judgment assessment where the assessee fails to file return or comply with notices. The assessee challenged the validity of assessment under this section.

Court's reasoning and findings: The Tribunal noted that the assessee did not press the additional ground regarding non-issuance of notice under section 143(2), and the assessment under section 144 was not challenged on procedural grounds before the Tribunal. The focus remained on the merits of the addition.

Application of law to facts: Since the procedural challenge was not pressed, the Tribunal did not adjudicate on the validity of assessment under section 144.

Conclusion: The issue was not considered.

3. Alleged Denial of Effective Opportunity of Hearing by CIT(A)

Relevant legal principles: Principles of natural justice require effective opportunity of hearing, including proper service of notices and communication.

Court's reasoning: The assessee contended that the CIT(A) did not grant effective virtual hearing opportunity as notices were sent to an incorrect email ID. However, the Tribunal did not find merit in this contention as the CIT(A) had proceeded with the appeal and the assessee had ample opportunity to present its case.

Conclusion: The ground was dismissed.

4. Legality and Effect of Depositing Specified Bank Notes During Demonetization

Relevant legal framework: The Specified Bank Notes (Cessation of Liabilities) Act, 2017 provides that the RBI's liability for SBNs ceased on 31.12.2016. Prior to that date, SBNs were not legal tender but were not illegal to possess or deposit. The demonetization notification dated 8.11.2016 declared SBNs ceased to be legal tender from 9.11.2016.

Court's interpretation and reasoning: The Tribunal observed that though SBNs ceased to be legal tender from 9.11.2016, they were not illegal to possess or deposit until 31.12.2016. The assessee society was not authorized to accept SBNs after 8.11.2016 as per regulatory notifications, but this regulatory violation does not convert the deposits into unexplained income under the Income Tax Act.

The Tribunal emphasized that the Income Tax Act is a self-contained code and the AO must invoke relevant provisions to justify additions. The AO and CIT(A) failed to establish that the deposits were unexplained under the Act, relying solely on regulatory non-compliance.

Key evidence: The assessee submitted detailed records of deposits, member identities, and explanations for the source of funds. The Tribunal relied on coordinate Bench decisions where similar facts led to deletion of additions.

Application of law to facts: The deposits, though in SBNs, were sourced from members and recorded in books. The regulatory prohibition on accepting SBNs does not affect the taxability under sections 68 or 69A.

Conclusions: The Tribunal held that the addition on account of depositing SBNs during demonetization was not justified under the Income Tax Act.

5. Reliance on Coordinate Bench Decisions

The Tribunal extensively relied on recent coordinate Bench decisions in similar cases involving cooperative societies and demonetization period deposits:

• ITO vs. Ambika Gramin Bigarsheti Sahakari Patsanstha (ITA No. 1104/PUN/2023)
• M/s. Bhagur Urban Co-operative Society Ltd. vs. ITO (ITA No. 561/PUN/2022)
• Sri Bhageeratha Pattina Sahakara Sangha Niyamitha vs. ITO (ITA No. 646/Bang/2021)
• Prathamika Krushi Pattina vs. ITO (ITA No. 593/Bang/2021)
• Shrijeet Finance (P) Ltd. vs. ACIT [2024] 162 taxmann.com 243 (Pune-Tribu.)

These decisions consistently held that when the assessee satisfactorily explains the source, identity, genuineness, and creditworthiness of deposits, additions under sections 68 or 69A cannot be sustained merely because deposits were made in demonetized currency during the demonetization period.

Significant holdings:

"Section 69A will get triggered only if the money is not recorded in books of accounts of the assessee. In the instant case, since all the cash deposits are duly forming part of books of accounts of the assessee and properly accounted, the provisions of section 69A do not apply."

"The cessation of liability of RBI and guarantee of Central Government in respect of Specified Bank Notes is effective only from 31st December 2016. Therefore, till that date, SBNs were not illegal to possess or deposit."

"The addition under section 68 requires the Revenue to disprove the identity, genuineness, and creditworthiness of the creditors. The assessee having discharged this onus, the addition is not sustainable."

"The contravention of RBI notifications or regulatory provisions regarding acceptance of SBNs post 8.11.2016 does not convert the deposits into unexplained income under the Income Tax Act."

"The Income Tax Act is a self-contained code and additions under sections 68 or 69A must be supported by relevant provisions and evidence. Regulatory violations alone do not justify additions."

"The assessee's explanation that the cash deposited was received from its members in the ordinary course of business and recorded in books of account is accepted."

"Appropriate legal action may be initiated under relevant laws with respect to acceptance of SBNs post 8.11.2016, but such non-compliance does not warrant additions under the Income Tax Act."

The Tribunal ultimately deleted the addition of Rs. 12,47,000 made under section 69A and upheld by the CIT(A), allowing the appeal of the assessee.