2025 (6) TMI 1828 - AT - Income Tax

Addition u/s 68 on account of current liabilities - CIT(A) accepted the assessee s contention that the said liabilities represent bona fide deposits and interest accrued payable to members and form part of the regular credit operations of the cooperative society - HELD THAT - Since the assessee is engaged in the business of mobilizing deposits and granting loans to its members the existence of liabilities in this form is inherent to its functioning. The details were part of the audited financials and there is no material brought by the AO to suggest that these amounts are unexplained credits. Therefore the CIT(A) rightly treated them as genuine liabilities not falling within the purview of section 68. Revenue Ground dismissed. Disallowance on account of personal expenditure - AO noted that the tax audit report referred to personal expenditure of Rs. 40, 00, 000/- while the return disclosed NIL - CIT(A) deleted addition - HELD THAT - CIT(A) verified from the computation of income that the above amount had been disallowed under item 23 of Part A P L in the return of income. The AO s addition amounted to duplication and the CIT(A) rightly deleted the same. No infirmity is found in the CIT(A) s reasoning. Ground (b) is dismissed. Addition u/s 68 - increase in loans and advances - CIT(A) deleted addition as accepted that these advances were part of the core activity of the co-operative society and the increase was normal and verifiable from the balance sheet - HELD THAT - Importantly in assessee s own case for A.Y. 2018 19 the Coordinate Bench dismissed Revenue s appeal on a similar addition made u/s 68 holding that such balances in the balance sheet arising from regular credit operations do not attract section 68. Respectfully following the said decision and in the absence of any fresh evidence brought by the Revenue we uphold the CIT(A) s deletion. Ground (c) is dismissed. Disallowance u/s 40A(7) - AO disallowed amount on the ground that it was not reported in the return although it was mentioned in the tax audit report - CIT(A) deleted addition - HELD THAT - CIT(A) has verified that the assessee had already disallowed this provision in its computation under Part A P L item 23. Since the amount stood already disallowed there was no cause for a further addition. The AO s action clearly results in duplication. Ground (d) is dismissed. Disallowance of deduction u/s 80P(2)(a)(i) - AO denied the claim for want of evidence - CIT(A) evaluated the components of income and held that the interest incomes were derived from members and hence eligible - HELD THAT - Out of Rs. 43, 13, 281/- of total bank interest income Rs. 41, 40, 282/- earned from investments with co-operative banks was held allowable u/s 80P(2)(d) as supported by the decision of Coordinate Bench in assessee s own case for A.Y. 2018-19 2023 (12) TMI 1418 - ITAT SURAT and Ashwinkumar Arban Co-op. Society Ltd. 2024 (11) TMI 971 - GUJARAT HIGH COURT . In absence of any contrary material we find no merit in the Revenue s challenge. Ground (e) is dismissed. Admitting additional evidence in violation of Rule 46A - CIT(A) adjudicated the appeal on the basis of explanations and reconciliations derived from the return and its annexures which were available to the Assessing Officer but were not examined by him due to lack of response from the assessee and the consequent best judgment nature of the assessment. It is also well settled that the first appellate authority is empowered under section 250(4) of the Act to make further inquiries or call for additional information as deemed necessary and is not constrained by the provisions of Rule 46A where the factual basis of adjudication is already present in the record and no new documentary evidence is relied upon. In these circumstances the action of the CIT(A) cannot be held to be in violation of Rule 46A as the explanations considered were contextual clarifications supported by existing financials and no factual prejudice has been demonstrated to have been caused to the Revenue - Ground (f) is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

• Whether the addition of Rs. 15,14,46,954/- under section 68 read with section 115BBE of the Income-tax Act, 1961 (the Act) on account of unverified current liabilities reflected in the balance sheet was justified.
• Whether the disallowance of Rs. 40,00,000/- on account of alleged personal expenditure was valid.
• Whether the addition of Rs. 19,39,776/- under section 68 on account of unexplained increase in loans and advances was sustainable.
• Whether the disallowance of Rs. 70,000/- under section 40A(7) on account of gratuity provision was appropriate.
• Whether the deduction claimed under section 80P(2)(a)(i) amounting to Rs. 89,91,830/- was rightly allowed.
• Whether the admission of additional evidence by the first appellate authority without remanding the matter to the Assessing Officer (AO) for verification violated Rule 46A of the Income-tax Rules, 1962.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 15,14,46,954/- under section 68 on account of current liabilities

Legal Framework and Precedents: Section 68 requires unexplained credits to be added to income if the assessee fails to satisfactorily explain the nature and source of such credits. The burden lies on the assessee to prove the genuineness of the liabilities. The provisions of section 115BBE impose tax on unexplained income credited in the books.

Court's Interpretation and Reasoning: The AO made the addition on the ground that the assessee failed to substantiate the current liabilities shown in the balance sheet, which comprised deposits and accrued interest payable to members. The CIT(A) held that these liabilities were bona fide deposits and interest accrued, forming part of the regular business of the credit co-operative society. The liabilities were duly disclosed in the audited balance sheet and were inherent to the society's functioning.

Key Evidence and Findings: The liabilities included various deposit accounts (current, recurring, fixed, and kayami fixed deposits) aggregating Rs. 14.20 crore, plus accrued interest of Rs. 94 lakh, totaling Rs. 15.14 crore. These were documented in audited financial statements and the balance sheet. No material was brought forward by the AO to suggest these were unexplained credits.

Application of Law to Facts: Given the nature of the assessee's business as a credit co-operative society, the deposits and accrued interest payable to members are regular business liabilities. The CIT(A) correctly applied section 68 by recognizing that the amounts were not unexplained credits but genuine liabilities.

Treatment of Competing Arguments: The Revenue contended non-compliance and lack of evidence, but failed to present any material contradicting the audited disclosures. The Tribunal found no merit in the Revenue's argument.

Conclusion: The addition under section 68 was rightly deleted. Ground (a) dismissed.

Issue 2: Disallowance of Rs. 40,00,000/- on account of personal expenditure

Legal Framework and Precedents: Personal expenditure is generally disallowed under the Act. However, provisions made for business-related funds and bad debts are allowable deductions subject to proper disclosure and treatment.

Court's Interpretation and Reasoning: The AO disallowed Rs. 40 lakh as personal expenditure based on the tax audit report. The CIT(A) scrutinized the breakup and found that the amount comprised provisions for bad and doubtful debts, sabhasad protsahan fund, sabhasad sahayak fund, and interest provision. These amounts were already disallowed in the computation of income filed by the assessee.

Key Evidence and Findings: The breakup of the Rs. 40 lakh was clearly shown and reconciled in the computation of income. No fresh or additional personal expenses were identified beyond the provisions already adjusted.

Application of Law to Facts: Since the provisions were disallowed in the income computation, the AO's addition was duplicative and unjustified.

Treatment of Competing Arguments: The Revenue relied on the tax audit report's mention of personal expenditure, but the CIT(A) and Tribunal emphasized the actual accounting treatment and disallowance in the return.

Conclusion: The disallowance was rightly deleted. Ground (b) dismissed.

Issue 3: Addition of Rs. 19,39,776/- under section 68 for increase in loans and advances

Legal Framework and Precedents: Section 68 applies to unexplained credits. Advances and loans given by the society to its members are part of its business operations. The Gujarat Cooperative Societies Act regulates such advances.

Court's Interpretation and Reasoning: The AO treated the increase in loans and advances as unexplained. The CIT(A) found the increase to be normal, verifiable from the balance sheet, and part of the society's core activity. The advances were made only to members after due formalities, with no indication of fictitious transactions.

Key Evidence and Findings: The audited balance sheet and audit reports supported the genuineness of the advances. The Tribunal relied on a Coordinate Bench decision in the assessee's own case for A.Y. 2018-19, which held similar additions under section 68 to be unsustainable.

Application of Law to Facts: The advances are genuine business transactions and not unexplained credits.

Treatment of Competing Arguments: The Revenue failed to produce fresh evidence or contradict the audited accounts.

Conclusion: The addition was rightly deleted. Ground (c) dismissed.

Issue 4: Disallowance of Rs. 70,000/- under section 40A(7) on gratuity provision

Legal Framework and Precedents: Section 40A(7) disallows provisions for certain employee benefits unless actually paid. However, if already disallowed in the return, further disallowance is duplicative.

Court's Interpretation and Reasoning: The AO disallowed the gratuity provision, but the CIT(A) found it was already disallowed in the return's computation of income.

Key Evidence and Findings: The return and computation clearly showed the disallowance.

Application of Law to Facts: The AO's addition was a duplication.

Treatment of Competing Arguments: The Revenue did not dispute the return's treatment.

Conclusion: Disallowance rightly deleted. Ground (d) dismissed.

Issue 5: Deduction under section 80P(2)(a)(i) of Rs. 89,91,830/-

Legal Framework and Precedents: Section 80P(2)(a)(i) allows deduction for income derived from cooperative societies engaged in credit facilities to members. Section 80P(2)(d) allows deduction for interest income from cooperative banks. Judicial precedents, including a Coordinate Bench decision in the assessee's own case and the Gujarat High Court ruling in Ashwinkumar Arban Co-op. Society Ltd., support such claims.

Court's Interpretation and Reasoning: The AO disallowed the deduction for lack of evidence. The CIT(A) analyzed the income components and found that interest income from various member loans and penalty income were eligible. Interest income from investments with cooperative banks was also allowed under section 80P(2)(d).

Key Evidence and Findings: The income was supported by audited financials and reconciled computations. No contrary evidence was presented.

Application of Law to Facts: The income arose from credit facilities to members and investments in cooperative banks, qualifying for deduction.

Treatment of Competing Arguments: The Revenue's challenge was unsupported by material.

Conclusion: Deduction rightly allowed. Ground (e) dismissed.

Issue 6: Admission of additional evidence without remand to AO (Rule 46A)

Legal Framework and Precedents: Rule 46A mandates that additional evidence furnished before the first appellate authority should be forwarded to the AO for verification, unless the evidence is already on record. Section 250(4) empowers the first appellate authority to make further inquiries or call for information.

Court's Interpretation and Reasoning: The Revenue argued that the CIT(A) admitted additional evidence without remanding the matter, violating Rule 46A. The Tribunal examined the record and found that the CIT(A) relied solely on documents already forming part of the return-audited financial statements, tax audit report, and computations. No new documentary evidence was admitted. The CIT(A)'s adjudication was based on clarifications and reconciliations of existing records, which were available to the AO but not examined due to non-compliance by the assessee.

Key Evidence and Findings: The record showed no fresh evidence was introduced at the appellate stage. The assessment was ex parte due to the assessee's failure to respond to statutory notices.

Application of Law to Facts: Since the evidence was not new and was already on record, Rule 46A was not attracted. The CIT(A) was within its powers under section 250(4) to consider explanations and clarifications without remand.

Treatment of Competing Arguments: The Revenue failed to demonstrate any factual prejudice or violation of procedure.

Conclusion: No violation of Rule 46A occurred. Ground (f) dismissed.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the reasoning of the first appellate authority and dismissed all grounds raised by the Revenue. The significant legal principles and final determinations include:

• On unexplained credits under section 68: "Since the assessee is engaged in the business of mobilizing deposits and granting loans to its members, the existence of liabilities in this form is inherent to its functioning... There is no material brought by the AO to suggest that these amounts are unexplained credits."
• On duplication of disallowance: "The AO's addition amounted to duplication, and the CIT(A) rightly deleted the same."
• On advances and loans: "Such balances in the balance sheet arising from regular credit operations do not attract section 68."
• On admission of evidence: "The explanations considered were contextual clarifications supported by existing financials, and no factual prejudice has been demonstrated to have been caused to the Revenue."
• On deduction under section 80P: "In absence of any contrary material, we find no merit in the Revenue's challenge."

The Tribunal concluded that the additions and disallowances made by the AO were either unsupported by evidence or were duplications of adjustments already made by the assessee. The CIT(A) correctly applied the law and facts, and the Revenue's appeal was dismissed in entirety.