2024 (2) TMI 1547 - AT - Income Tax

Addition u/s 68 of the assessee credit co-operative society - AO found that in the KYC records of such cash depositors neither the name PAN nature of business were mentioned completely and proof of identity was also not available completely. Thus it was impossible to make any enquiry with the depositors - HELD THAT - As accepted that out of the 40 cases 26 notices could be served on the parties therefore it cannot be said that the details with respect to these 26 accounts were not available with the AO. AO as well as the CIT-A did not delete the addition to the extent of at least these 26 accounts wherein the parties were identified as per the know your customer norms. The balances of 14 notices were received back. The learned AO did not say that whether the addresses to which this notices were served were not correct it has changed or the parties have left or for any other reasons. It is the claim of the assessee that the members of it are residing in rural areas and most of them are farmers having agricultural income some of them are small shopkeepers. It is also not the finding of the AO that that the members had only account for which the addition is made. Those members may also have the accounts in the nature of other deposits such as savings current deposits or fixed deposits. Further with respect to 26 accounts the addition is sustained by the CIT A in the hands of the assessee is also not justified. No reason is given by CIT A to confirm the action of the AO with respect to the full amount when those parties were served notices and 2 of them have replied to such notice. According to this the addition made by the AO and confirmed by CIT A cannot be sustained. AO further required to examine with respect to the balance 14 parties (members) who have not responded to his notices under section 133 (6) of the act by giving an opportunity to the assessee to identify those members by their other credentials of savings bank account current account agricultural loan accounts etc. Of course the addition with respect to those 26 parties deserves to be deleted. However as the amount pertaining to those 26 parties is not available so we set-aside ground number 2 6 of the appeal back to the file of the learned assessing officer (1) with a direction to the assessee to substantiate the identity of the members of the society. The AO may examine the same and decide the issue afresh with respect to those of 14 parties and after ascertaining the detail of amount involved (2) with respect to 26 parties delete the same. Accordingly ground number 2 6 of the appeal is allowed with above direction. Addition computed as a percentage of total deposit accepted from the members during the year as undisclosed commission income earned by assessee - We find that this addition cannot be made in the hands of the assessee because assessee has earned this commission income and has shown it into its profit and loss account. It is not the case of the AO or CIT A this commission income has not been credited in the books of assessee. The statement of the managing director and the chairman of the bank clearly shows that they have earned this commission income in the books of society. Accordingly we direct the learned assessing officer to delete the addition. Accordingly ground of the appeal is allowed. Cash deposited by 10 members of the society during a short span and the details furnished by the assessee of KYC norms is inadequate or incorrect - It was the claim of the assessee that amount of deposit made with this assessee has already been added in case of that assessee and assessee has been served notice u/s 226 (3) of the act. Similarly in case of other nine persons KYC documents are submitted but they are stated to be incomplete and incorrect in some cases. It is also a fact that such huge money cannot be the income of assessee but it is also apparent that the assessee s Hyderabad branch is also a party where this huge cash deposit has been made and the beneficiaries have been benefited by the exercise of deposit of cash through multiple layers of transactions. Thus whole issue is set-aside to the file of AO to conduct necessary enquiry covering all aspects including the beneficiaries also and decide whether addition can be made in the hands of the assessee or not. The assessee is also directed to submit the necessary details to the learned assessing officer for the above enquiry. Accordingly these grounds are allowed with above directions.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeals relate primarily to the validity and correctness of additions made under Section 68 of the Income Tax Act, 1961 ("the Act") regarding unexplained cash deposits accepted by the assessee, a multi-state cooperative credit society, from its members. The issues include:

• Whether the addition of Rs. 14,33,45,343/- under Section 68 on account of deposits accepted from members without proper identification and verification is justified.
• Whether the addition of Rs. 11,43,70,335/- on account of cash deposited in the assessee's bank accounts is warranted.
• The correctness of addition of Rs. 29,61,985/- computed as commission income on total deposits accepted.
• The legality and propriety of reassessment proceedings initiated under Section 147 of the Act, particularly whether there was sufficient new information to justify reopening of assessment.
• Whether the failure to provide copies of statements recorded under Section 131 to the assessee violates principles of natural justice.
• The applicability of Section 80P(2)(a) deduction on income added in reassessment.
• The adequacy and genuineness of KYC and other documentation submitted by the assessee in relation to deposits accepted, especially in the Hyderabad branch where large cash deposits were made.
• Whether the addition made in the hands of the assessee is sustainable when the same income has been assessed in the hands of the depositors.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 for deposits accepted from members without proper identification

Legal framework and precedents: Section 68 of the Act deals with unexplained cash credits and requires the assessee to satisfactorily explain the nature and source of such credits. The burden lies on the assessee to establish the genuineness of the transactions and identity of creditors. The Tribunal referred to a precedent where the Gujarat High Court held that when names and addresses of depositors are furnished and accepted as samples, and the Assessing Officer (AO) fails to make further inquiries, addition under Section 68 is not justified.

Court's interpretation and reasoning: The Tribunal found that in the present case, the assessee failed to furnish complete KYC details and proper verification was not carried out. Despite issuance of 40 notices under Section 133(6), only two replies were received and 14 notices were returned unserved. The AO and CIT(A) confirmed the addition of Rs. 14.33 crores. However, the Tribunal distinguished the present facts from the precedent because here, the AO had made extensive inquiries and the majority of notices were either unanswered or unserved. It was noted that for 26 accounts where notices were served, the AO had sufficient details, but the addition was not deleted for these accounts.

Key evidence and findings: The assessee's membership application process requires complete submission of details and payment of fees, but the actual KYC documents were incomplete or improperly filled. Many addresses were unverifiable, and the AO's efforts to trace depositors were unsuccessful. The assessee claimed members were rural farmers and small shopkeepers, but no evidence was furnished to substantiate the identity and genuineness of these depositors.

Application of law to facts: The Tribunal held that the addition with respect to the 26 accounts where notices were served and some replies received cannot be sustained as the AO had sufficient details to verify those depositors. However, for the 14 accounts where notices were unserved, the AO was justified in making additions. The matter was remanded for fresh consideration with directions to the AO to verify identity and genuineness of these 14 depositors, allowing the assessee to provide further evidence.

Treatment of competing arguments: The assessee argued that as a banking institution, addition under Section 68 cannot be made if details are provided. The Revenue contended that incomplete KYC and failure to verify depositors justified additions. The Tribunal balanced these views by allowing deletion for verified accounts and remanding the rest for further inquiry.

Conclusion: The addition under Section 68 is partly deleted (for 26 accounts) and partly restored for reassessment (for 14 accounts) with directions for further verification.

Issue 2: Addition of Rs. 11,43,70,335/- on account of cash deposited in the assessee's bank accounts

This issue was considered in conjunction with the above, as these cash deposits formed part of the unexplained credits. The AO found that cash deposits were made in ICICI Bank and Mahanagar Cooperative Bank accounts without proper KYC. The assessee failed to provide satisfactory explanations or documentation. The Tribunal upheld the addition subject to the directions given above for further inquiry.

Issue 3: Addition of Rs. 29,61,985/- as commission income on total deposits

Legal framework: Commission income earned by the assessee is taxable as business income and should be reflected in profit and loss accounts.

Findings and reasoning: The managing director admitted commission income at 0.10% on deposits. The assessee had already credited this commission income in its books. Neither the AO nor CIT(A) disputed this fact.

Conclusion: The Tribunal directed deletion of this addition as it was already accounted for in the returned income.

Issue 4: Legality and propriety of reassessment proceedings under Section 147

Legal framework: Reassessment under Section 147 requires existence of new information or material to justify reopening of assessment.

Findings: The reassessment was triggered by a survey and search in related entities revealing suspicious cash deposits of Rs. 296 crores including Rs. 164 crores in the Hyderabad branch. The AO found that KYC details were defective or incomplete, depositors were untraceable, and accounts were operated for short periods with subsequent transfers to other suspicious entities, including foreign remittances.

Reasoning: The AO issued summons under Section 131 to the managing director, chairman, and depositors, but responses were inadequate or absent. The managing director admitted fraud by employees and FIR was lodged. The reassessment was based on these new findings and evidence.

Conclusion: The Tribunal found that the reassessment was justified based on new information and evidence of dubious transactions and upheld the reopening in principle, but remanded the matter for further inquiry to determine the extent of addition justified.

Issue 5: Addition of Rs. 164,33,51,753/- on account of cash deposits by 10 members at Hyderabad branch

Findings: The AO identified 10 persons who deposited Rs. 164 crores in cash. The KYC documents were incomplete or incorrect, addresses unverifiable, mobile numbers inactive, and summons returned as persons not known. The managing director and chairman admitted lack of proper KYC and fraud by employees. FIR was lodged. One depositor, Shri Joshi Nandlal Ratanlal, was separately assessed for the amount deposited.

Reasoning: The Tribunal noted the suspicious nature of transactions, absence of proper KYC, and failure to trace depositors. It also observed that the assessee's Hyderabad branch was a party to the cash deposits and subsequent transfers. The Tribunal distinguished the Gujarat High Court precedent as facts here were different and more suspicious.

Application of law: Given the failure to verify identity and genuineness, the addition was prima facie justified. However, the Tribunal remanded the issue to the AO for detailed inquiry including identification of beneficiaries and allowed the assessee to submit further details.

Conclusion: The addition was restored for fresh consideration with directions.

Issue 6: Addition of Rs. 16,43,352/- as commission income on Hyderabad branch deposits

Similar to Issue 3, the commission income was recorded in the books and the Tribunal directed deletion of this addition.

Issue 7: Violation of natural justice by non-provision of copies of statements recorded under Section 131

Since the additions based on such statements were deleted or remanded, the Tribunal held this ground as infructuous and dismissed it.

Issue 8: Applicability of Section 80P(2)(a) deduction on income added

The assessee claimed deduction under Section 80P(2)(a) on the income added. The Tribunal did not explicitly decide this issue but allowed the appeal for statistical purposes, implying that this issue requires reconsideration after reassessment.

Issue 9: Whether addition in hands of assessee is sustainable when income is assessed in hands of depositors

The assessee argued that since the depositors have been separately assessed on the cash deposited, the same income cannot be taxed twice. The Tribunal acknowledged this contention but noted that the facts and identity of depositors were not fully established. The matter was remanded for further inquiry to determine the correct tax treatment.

3. SIGNIFICANT HOLDINGS

"It is apparent that in the present case the AO carried out the enquiry in the remand proceedings which showed the result. Therefore, the facts in this case are clearly distinguishable [from the precedent]. However, it is also to be accepted that out of the 40 cases, 26 notices could be served on the parties, therefore, it cannot be said that the details with respect to these 26 accounts were not available with the AO. The AO as well as the learned CIT - A, did not delete the addition to the extent of at least these 26 accounts wherein the parties were identified as per the know your customer norms. The balances of 14 notices were received back."

"The addition made by the learned AO and confirmed by the learned CIT - A cannot be sustained [with respect to the 26 accounts]. However, the learned assessing officer is further required to examine with respect to the balance 14 parties (members) who have not responded to his notices under section 133 (6) of the act by giving an opportunity to the assessee to identify those members by their other credentials."

"This addition [of Rs. 2,961,985/- commission income] cannot be made in the hands of the assessee because assessee has earned this commission income and has shown it into its profit and loss account."

"The reassessment was justified based on new information and evidence of dubious transactions and failure of the assessee to maintain proper KYC records and verify the identity of depositors."

"The assessee's Hyderabad branch is also a party where this huge cash deposit has been made and the beneficiaries have been benefited by the exercise of deposit of cash through multiple layers of transactions."

"The whole issue is set-aside to the file of the learned assessing officer to conduct necessary enquiry covering all aspects including the beneficiaries also and decide whether addition can be made in the hands of the assessee or not."